Regulators seek Ontario hedge fund manager

Date: Thursday, June 30, 2005
Author: SHIRLEY WON AND ANDREW WILLIS- Globeandmail.com

By SHIRLEY WON AND ANDREW WILLIS

Thursday, June 30, 2005 Page B1 Globe & Mail

With files from Paul Waldie

An Oakville, Ont., man has been running a fake hedge fund, a U.S. regulator alleges, and stands accused of hiding $140-million (U.S.) in losses in two other funds.

A U.S. federal court has frozen the assets of Philadelphia Alternative Asset Management Co. LLC and its president, Paul Eustace. And yesterday, the Ontario Securities Commission sent a senior enforcement officer to his quiet neighbourhood in an attempt to serve legal papers.

Mr. Eustace was not at his home when the OSC official arrived. He could not be reached for comment by a reporter.

On the asset management firm's website, Mr. Eustace is described as having graduated from the Wharton School of Business in 1987. The site says he worked as a tax consultant and later for a $1-billion commodities fund.

Last month, the National Futures Association, a self-regulatory body for the U.S. commodities market, issued a notice to its members to contact the association if they have had any dealings with Mr. Eustace or several associates.

In its complaint filed in court, the U.S. Commodity Futures Trading Commission is seeking a permanent injunction prohibiting Mr. Eustace or any person connected with him from running commodity-related hedge funds, restitution to allegedly defrauded customers, disgorgement of the allegedly ill-gotten gains and a monetary penalty.

A hearing on a motion for a preliminary injunction will be held Aug. 16.

In a complaint filed in court, the commission alleges that Mr. Eustace and the Philadelphia-based company "fraudulently solicited" and accepted at least $680,000 from at least one investor at about March, 2003, for a purported hedge fund.

The complaint alleges that the defendants issued false statements to that investor, showing that, as of January, 2005, the fund was trading commodity futures and options, and that his share of the pool had increased in value to more than $1-million.

In fact, the defendants had not achieved those results and, Mr. Eustace "has admitted" the fund has never traded futures or options, the commission said in its filing.

According to the commission, the defendants also attempted to solicit another prospective investor by showing purportedly profitable trading results for the fund. That was false because the fund had not traded futures and options, and because Mr. Eustace later said that they were based on hypothetical trading only.

The commission further alleges that the defendants also posted false trading results on their website for two other funds they operated, including Philadelphia Alternative Asset Fund Ltd., and the Philadelphia Alternative Asset Feeder Fund LLC. The defendants began operating these funds in late 2004, eventually accepting $230-million from investors.

The funds suffered losses exceeding $140-million from February, 2005, to May, 2005, but the defendants posted trading results on their website that reflected that the fund was "trading profitably for those same months," the commission alleges.