Aren't Hedgies Supposed to Be Smarter Than Us?

Hedge fund are supposed to be financial know-it-alls. Isn't that the reason for 2-and-20 compensation?

But a new case from the Securities and Exchange Commission contends that even the sophisticated wealth managers can get caught up in investments that sound -- and are -- too good to be true.

That was the case for Directors Performance Fund, a now-defunct hedge fund in Lake Forest, Illinois. The S.E.C. contends that its chief compliance officer, William H. Eichengreen, and a bank promoter, David L. Myatt, defrauded the fund by convincing its adviser and manager, the Directors Financial Group, to invest $25 million in "prime bank" securities.

That program -- called A.T.I., after American Trade Industries -- allegedly traded discounted fixed income instruments on a secret European market sponsored by U.S. Federal Reserve. It claimed to generate a fabulous return -- 10 percent weekly and with no risk to the principal.

One tip-off should have been A.T.I.'s stated mission -- to "assist global financial markets and (the) social well-being of others."

In fact, according to the complaint in federal district court in Chicago, the A.T.I. program was "a sham" designed to defraud investors; no trades ever took place and no profits were generated. The Federal Reserve does not oversee any such trading programs or license anyone to conduct such trading, the S.E.C. warned.

Eichengreen, 60, of Highland Park, Illinois, is accused of having falsified the fund's financial statements to take profit-based fees -- which it had not earned -- and to defraud prospective investors by misrepresenting the fund's trading strategy, investment, and performance.

The Directors Financial Group's president was Sharon E. Vaughn, 63, of Lake Forest. She and Eichengreen ran the fund, which managed about $28 million, out of an office in Vaughn's home in the upscale Chicago suburb.

Vaughn had been providing investment advice and portfolio management services to wealthy people since 1992. She settled the S.E.C.'s claims against her.

But Myatt, 44, of Los Gatos, California, is currently serving 16 months in federal prison after he pleaded guilty to obstruction of justice in connection with the fraud scheme. And A.T.I.'s president, Richard E. Warren, was convicted by a jury last November on 11 counts of wire fraud in furthering the fake bank securities scheme and was sentenced to 16-and-a-half years in prison.

by Elizabeth Olson

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