Complaint: SEC v. Steven R. Hoover, et al.

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UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS

SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
v.
STEVIN R. HOOVER,
HOOVER CAPITAL MANAGEMENT, INC. and
CHESTNUT MANAGEMENT LLC,
Defendants.

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CIVIL ACTION
NO. 01-10751-RGS

SECOND AMENDED COMPLAINT

Plaintiff Securities and Exchange Commission ("Commission") alleges:

PRELIMINARY STATEMENT

1. This is an enforcement action arising from multiple violations of the federal securities laws by Stevin R. Hoover ("Hoover"), Hoover Capital Management, Inc. ("HCM"), a registered investment adviser Hoover controls, and Chestnut Management LLC ("Chestnut Management"), an unregistered investment adviser Hoover controls. Defendants have misappropriated client funds, obtained loans from clients under false pretenses, distributed materially false and misleading securities offering documents, fraudulently induced clients to invest in a hedge fund, distributed false account statements to clients, misrepresented the value of assets under management, failed to maintain accurate and complete books and records, and failed to disclose material information in investment adviser registration forms ("Forms ADV").

2. Between 1995 and 1998, Defendant Hoover misappropriated over $479,000 from his clients by making unauthorized withdrawals of $404,000 from client accounts and byoverbilling clients at least $75,166 in management fees. Defendant Hoover further solicited and obtained more than $1 million in personal loans from clients in 1998 and 1999, in breach of his fiduciary duty to his clients, by misrepresenting the purpose of the loans and by failing to disclose his actual personal and business financial status. At the same time, Defendants Hoover and HCM significantly overstated assets under management in materials provided to clients, the media, and entities that rank investment advisers.

3. After Hoover became aware, by the end of 1999, that the Securities and Exchange Commission was investigating the possible securities law violations described above, he began perpetuating his fraud through the use of a hedge fund that he created and controlled.

4. Specifically, in April 2000, Hoover established the Chestnut Fund LP (the "Fund") and Chestnut Management LLC ("Chestnut Management"), an unregistered investment adviser, to manage the Fund.¹ Hoover then began soliciting and obtaining investments in the Fund by making fraudulent misrepresentations to prospective investors, including:

that prominent accounting firms audited the Fund's financial statements, when in fact, the Fund's financial statements were never audited;
that the author of an investment research report was a portfolio manager and investment adviser to the Fund, when in fact, that individual was not affiliated with the Fund; and
that Hoover and his family had invested personal assets in the Fund, when in fact, neither Hoover nor his family invested any money in the Fund.

5. During the next eighteen months, Hoover misappropriated more than $625,000 ofinvestor monies from the Fund. Hoover used the misappropriated money to pay for such things as rent payments on his personal residence and repayment of funds Hoover owed to HCM clients. To hide his fraud, Hoover disseminated false account statements to investors purporting that the Fund was profitable. In fact, the Fund was not profitable, and by the end of October 2001, the Fund, which had taken in more than $3.3 million of investments, had a value of -- at most --$1.75 million.

6. At the same time he was depleting Fund assets, Hoover was also using his position as the investment adviser to the Fund for his own personal gain. In February 2001, Hoover agreed that the Fund would purchase up to $3 million, and no less than $1 million, of 9% Convertible Debentures in a privately held company. During negotiations over the terms of the debentures, Hoover, in breach of his fiduciary duties to the Fund, offered that the company could pay a lower interest rate on the Fund's investment in return for Hoover receiving both a higher "finder's fee," which was paid to a custodial account belonging to Hoover's daughter, and options to purchase common stock in the company.

7. Moreover, the Fund could not satisfy its obligation to purchase up to $3 million of Convertible Debentures because it did not have that much money. To satisfy the Fund's obligation, Hoover invested $700,000.00 that belonged to another client, a private charitable foundation. This investment was not disclosed to the foundation. Moreover, the foundation's investment management agreement with Hoover expressly prohibited investments in privately-held companies.

8. By engaging in the acts and practices alleged in this Amended Complaint, Defendants Hoover, HCM and Chestnut Management violated the federal securities laws. Specifically, Defendants Hoover, HCM and Chestnut Management, directly or indirectly, have engaged in acts, practices and courses of business that constitute violations of Section 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77q(a)], Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. 240.10b-5] and Section 206 (1) and (2) of the Advisers Act [15 U.S.C. §§ 80b-6 (1) and 80b-6 (2)] and Defendant Hoover aided and abetted such violations.2 In addition, Defendant HCM violated and Defendant Hoover aided and abetted violations of Sections 206(4) and 204 of the Advisers Act [15 U.S.C. §§ 80b-6 (4) and 80b-4] and Rules 206(4)-1(a)(5), 204-2(a)(5), 204-2(a)(6), 204-2(a)(7), 204-2(a)(9) and 204-2(a)(10), thereunder [17 C.F.R. §§ 275.206(4)-1(a)(5), 275.204-2(a)(5), 275.204-2(a)(6), 275.204-2(a)(7), 275.204-2(a)(9) and 275.204-2(a)(10)]. Finally, Defendants Hoover and HCM violated Section 207 of the Advisers Act [15 U.S.C. § 80b-7].

9. Defendants Hoover, HCM and Chestnut Management, unless restrained and enjoined, will continue to engage in acts, practices and courses of business as set forth in this Second Amended Complaint or in acts, practices and courses of business of similar object and purpose.

JURISDICTION

10. This Court has jurisdiction over this action pursuant to Sections 20 and 22 of the Securities Act [15 U.S.C. §§ 77t and 77v], Sections 21 and 27 of the Exchange Act [15 U.S.C.§§ 78u and 78aa], and Section 209 of the Advisers Act [15 U.S.C. § 80b-9]. Specifically, the acts and transactions constituting violations occurred primarily within the District of Massachusetts. Hoover, HCM and Chestnut Management were based in Massachusetts at all times until September 2000. While in Massachusetts, Hoover founded the Fund and Chestnut Management and solicited and obtained investments in the Fund. Additionally, many of the victims of Hoover's fraud are located in Massachusetts.

11. The Commission brings this action pursuant to the enforcement authority conferred upon it by Section 20 of the Securities Act [15 U.S.C. § 77t], Section 21 of the Exchange Act [15 U.S.C. § 78u], and Section 209 of the Advisers Act [15 U.S.C. § 80b-9] to permanently enjoin Defendants Hoover, HCM and Chestnut Management and to obtain disgorgement, prejudgement interest, and other equitable relief.

DEFENDANTS

12. Defendant Hoover currently resides at 6000 Windsor Drive, Fairway, Kansas. He is the sole shareholder, chief executive officer, and portfolio manager of Defendants HCM and Chestnut Management. Defendant Hoover lived and worked as a money manager in Boston, Massachusetts until on or about September 2000, when he relocated to the Kansas City, Missouri metropolitan area. Defendant Hoover was featured in 1998, 1999 and 2000 articles in Worth magazine describing selected money managers' stock picks.

13. Defendant HCM has been registered with the Commission as an investment adviser since 1989. At all relevant times, Defendant HCM was a Massachusetts corporation with its principal place of business in Boston, Massachusetts. On October 13, 2000, Defendant HCM filed an amended Form ADV indicating that its address changed to Kansas City, Missouri.

14. Defendant Chestnut Management is a Delaware limited liability company located at The Tower Building, 116 West 47^th Street, Suite 205, Kansas City, Missouri. Hoover founded Chestnut Management in April 2000 and is the 100% owner and manager of Chestnut Management. Chestnut Management is the investment adviser of two hedge funds, Chestnut Fund LP, a domestic hedge fund, and Chestnut Fund Ltd, an off-shore hedge fund organized under the laws of the British Virgin Islands.

MISAPPROPRIATION OF CLIENT FUNDS

15. Between 1995 and 1999, defendant HCM's clients' accounts were held in custody at Charles Schwab & Co., Inc. ("Schwab"). Schwab accounts held equity securities, and any available cash in the accounts was automatically invested in a money market fund. Defendants Hoover and HCM had discretionary authority to conduct certain transactions in client accounts on the client's behalf. Schwab effected transactions in client accounts based upon Defendants Hoover and HCM's instructions.

16. In the following instances, Defendants Hoover and HCM misappropriated client funds by selling shares from each client's money market account to effect the unauthorized transfer of funds and/or withdrawals from client accounts.

Hoover Misappropriated Assets from his Clients' Accounts

17. Between June 1997 and March 1998, Defendants Hoover and HCM misappropriated approximately $404,000 from at least five clients by making unauthorized transfers from their accounts.

Alexander S. Coke

18. At all relevant times, Alexander S. Coke ("Coke") lived in Amsterdam, Netherlands. By January 1997, Coke and his immediate family comprised one of Defendant HCM's largest non-institutional accounts, with approximately $4 million under management. Defendants Hoover and HCM, without Coke's knowledge or consent, withdrew a total of approximately $231,000 from Coke's account, as set forth in paragraphs 19-21 below.

19. On October 16, 1997, Defendants Hoover and HCM, or an employee acting at their direction, faxed Schwab instructions to issue a $100,000 check from Coke's account, payable to Coke. Schwab mailed the check to Defendant HCM's offices where Defendant Hoover forged Coke's endorsement on the check. On October 27, 1997, Defendant Hoover deposited, or caused to be deposited, the funds into Defendant HCM's operating account and used the funds for general expenses.

20. On January 26, 1998, Defendants Hoover and HCM, or an employee acting at their direction, faxed Schwab instructions to issue a $90,000 check from Coke's account, payable to Coke. Schwab mailed the check to Defendant HCM's offices where Defendant Hoover forged Coke's endorsement on the check. On January 27, 1998, Defendant Hoover deposited, or caused to be deposited, the funds into Defendant HCM's operating account and used the funds for general expenses.

21. On March 10, 1998, Defendants Hoover and HCM, or an employee acting at their direction, faxed Schwab instructions to issue a $40,171 check from Coke's account, payable to Coke. On March 11, 1998, Schwab mailed the check to Defendant HCM's offices. Soon thereafter, Defendant Hoover forged Coke's signature and endorsed the check over to "ForeignMotors West" to buy his wife a sports utility vehicle.

22. By August 1999, upon Coke's insistence, Defendant Hoover repaid Coke the misappropriated funds.

Christian P. Hinneberg

23. Christian P. Hinneberg ("Hinneberg") lives in Hamburg, Germany. By January 1997, Hinneberg's account with Defendants Hoover and HCM had approximately $ 1 million under management. Initially, Hinneberg received monthly Schwab account statements at his home address in Hamburg, Germany. On January 27, 1997, a fax was sent to Schwab instructing that the address on Hinneberg's account be changed to a post office box in Boston, Massachusetts. Beginning in June 1997, Defendants Hoover and HCM, without Hinneberg's knowledge or consent, withdrew a total of approximately $108,000 from Hinneberg's account, as set forth in paragraphs 24-26 below.

24. On June 28, 1997, Defendant Hoover faxed Schwab instructions to issue a $28,000 check from Hinneberg's account, payable to Hinneberg. On June 30, 1997, Schwab mailed the check to the post office box address. Defendant Hoover forged Hinneberg's endorsement and, on July 3, 1997, deposited, or caused to be deposited, the funds into his personal account at Schwab.

25. Similarly, on September 19, 1997, Defendants Hoover and HCM, or an employee acting at their direction, faxed Schwab instructions to issue a $20,000 check from Hinneberg's account, payable to Hinneberg. On September 19, 1997, Schwab mailed the check to the post office box address. Defendant Hoover forged Hinneberg's endorsement and, on September 25, 1997, deposited, or caused to be deposited, the funds into Defendant HCM's operating account atSchwab.

26. Finally, on June 16, 1998, Defendants Hoover and HCM, or an employee acting at their direction, faxed Schwab instructions to issue a $60,000 check from Hinneberg's account, payable to Hinneberg. On June 17, 1998, Schwab mailed the check to the post office box address. On or about June 23, 1998, Defendant Hoover forged Hinneberg's signature, and endorsed the check over to American Express as payment on Defendant Hoover's personal credit card.

27. After Defendant Hoover was contacted by the Commission's enforcement staff, Defendant Hoover returned funds that he had misappropriated from Hinneberg's account. Specifically, on September 1, 1998, Defendant Hoover wrote three checks totaling approximately $128,000 to Hinneberg from Defendant Hoover's personal checking account. Without Hinneberg's knowledge or consent, Defendant Hoover forged Hinneberg's signature as an endorsement on those checks, and deposited, or caused the deposit of, the funds, into Hinneberg's account.

Matilda Cuneo

28. Mathilda Cuneo ("Cuneo") was an elderly widow who resided in Bedford, Massachusetts. By June 1997, Cuneo's account with Defendants Hoover and HCM had approximately $1.2 million under management. In June 1997, Cuneo was in the hospital and non compos mentis. On June 5, 1997, Defendants Hoover and HCM, or an employee acting at their direction, faxed Schwab a forged letter of authority that instructed Schwab to transfer $50,000 from Cuneo's account to Defendant HCM's operating account. On June 27, 1997, Cuneo died. On April 15, 1998, the executor of Cuneo's estate demanded that Defendant Hoover repay theestate the amount of the unauthorized transfer. By September 1, 1998, Defendant Hoover had repaid Cuneo's estate in full.

Susan Bacon

29. In 1994, Defendant Hoover encouraged Susan Bacon ("Bacon"), with whom he had a personal relationship, to set up an account at Defendant HCM to manage funds that she had inherited from her mother. On April 21, 1995, after the relationship ended, Defendant Hoover transferred Bacon's initial investment into two custodial accounts for her children, Anthony and Isabel Bacon.

30. The two custodial accounts were established pursuant to the Uniform Gifts to Minors Act with Bacon as the custodian and Defendant Hoover as the investment adviser. Until March 24, 1997, Bacon received statements for the children's accounts. On March 24, 1997, Defendant Hoover sent Schwab a forged letter of authority which instructed Schwab to change the address of record, from Bacon's home address to Defendant Hoover's home address. Defendant Hoover caused the address change without Bacon's knowledge or consent.

31. On or about May 30, 1997, Defendant Hoover requested that Schwab issue a $9,076.66 check from Isabel Bacon's account and a $7,204.86 check from Anthony Bacon's account, payable to Susan Bacon. On May 30, 1997, Schwab mailed the two checks to Defendant Hoover's home address. Defendant Hoover forged Bacon's signature on both checks. On June 4, 1997, Defendant Hoover caused the funds to be deposited into Defendant HCM's operating account. Defendant Hoover caused the withdrawal from the Bacon custodial accounts on or about May 30, 1997, without Bacon's knowledge or consent.

32. On April 9, 1998, Schwab deducted $16,281.53 from Defendant HCM's operatingaccount and returned the funds to the respective Bacon custodial accounts.

33. During Commission investigative testimony, Defendant Hoover was questioned regarding the unauthorized transfers set forth in paragraphs 17-31 above. Defendant Hoover provided limited testimony regarding the Coke transactions in paragraphs 18-22 above and asserted his Fifth Amendment privilege against self-incrimination in response to all questions regarding the conduct alleged in paragraphs 23-31.

Hoover Overbilled Investment Advisory Fees

34. For the years 1995, 1996 and 1997, Defendant HCM's Form ADV stated that Defendant HCM clients were charged advisory fees on a quarterly basis equal to 1% annually of the fair market value of the clients' securities under management. Beginning with the Form ADV filed in January 1998, Defendant HCM disclosed that clients living in the United States would be charged advisory fees of 1% of assets under management annually and foreign-based clients would be charged 1.5% of assets under management annually. None of the Forms ADV indicated that any client could be charged more than the fees set forth in the ADV. The standard client agreement was consistent with the disclosures in the Form ADV.

35. Defendants Hoover and HCM billed clients for management fees by faxing Schwab a list of client account numbers and amounts to be deducted. Following Defendant Hoover's instructions, Schwab deducted the amount from the client account and transferred the funds to Defendant HCM's management fee disbursement or operating account.

36. Between March 24, 1995 and March 31, 1998, Defendants HCM and Hoover misappropriated client funds by overbilling clients at least $75,166 in advisory fees. Defendants HCM and Hoover overcharged clients in two ways: by charging advisory fees at a higherpercentage rate than agreed and/or by charging the account more than once a quarter.

Alexander S. Coke

37. From March 1995 through December 1996, without Coke's knowledge or consent, Defendants Hoover and HCM, or an employee acting at their direction, caused excessive withdrawals totaling approximately $25,000 from Coke's accounts.

38. Specifically, on or about March 24, 1995, May 30, 1996 and December 13, 1996, without Coke's knowledge or consent, Defendants Hoover and HCM, or an employee acting at their direction, instructed Schwab to deduct $5,000, $10,000 and $10,000, respectively, from Coke's accounts for purported advisory fees. At the end of those quarters, Defendants Hoover and HCM again instructed Schwab to deduct additional advisory fees from Coke's accounts.

Christian P. Hinneberg

39. Defendants Hoover and HCM, or an employee acting at their direction, sent Hinneberg a Statement of Management Fees dated January 8, 1997, which reflected an advisory fee of $2,752.84 for the quarter ended December 31, 1996. Without Hinneberg's knowledge or consent, however, Defendants Hoover and HCM, or an employee acting at their direction, caused the withdrawal of more than $5000 from Hinneberg's account for that quarter.

Jurgen Koob

40. From March 1996 through January 1997, without Koob's knowledge or consent, Defendants Hoover and HCM, or an employee acting at their direction, caused excessive withdrawals totaling approximately $36,900 from Koob's account.

41. Specifically, on or about May 30, 1996, Defendants Hoover and HCM, or an employee acting at their direction, instructed Schwab to deduct $10,000 from Koob's account forpurported advisory fees. Defendants Hoover and HCM, or an employee acting at their direction, instructed Schwab to deduct these purported advisory fees in addition to appropriate advisory fees which had already been charged for the quarter.

42. Specifically, on or about July 10, 1996 and September 23, 1996, Defendants Hoover and HCM, or an employee acting at their direction, instructed Schwab to deduct $22,390 and $2,529, respectively, from Koob's accounts for purported advisory fees. Defendants Hoover and HCM, or an employee acting at their direction, instructed Schwab to deduct these purported advisory fees in addition to appropriate advisory fees which had already been charged for each quarter.

43. Defendants Hoover and HCM sent Koob a Statement of Management Fees dated January 9, 1997, which reflected an advisory fee of $1,141.72 for the quarter ended December 31, 1996. Without Koob's knowledge or consent, however, Defendants Hoover and HCM caused an additional withdrawal of $1,000 from Koob's account for that quarter.

44. Koob subsequently questioned Hoover about the additional charge and Defendant Hoover credited Koob's account for the excessive $1,000 withdrawal.

Benjamin I. Brown

45. From January through April 1997, without Benjamin Brown's ("Brown") knowledge or consent, Defendants Hoover and HCM caused excessive withdrawals totaling approximately $6,900 from Brown's brokerage trust account and individual retirement account.

46. Defendants Hoover and HCM sent Brown a Statement of Management Fees dated January 22, 1997 for Brown's brokerage trust and individual retirement accounts, which reflected advisory fees for both accounts of approximately $4,269 for the fourth quarter of 1996. OnJanuary 10, 1997, Defendants Hoover and HCM caused the withdrawal of more than $9,500 from those accounts for the purported payment of advisory fees.

47. Defendants Hoover and HCM sent Brown a Statement of Management Fees dated April 7, 1997 for Brown's brokerage trust account, which reflected advisory fees of $1,335 for the first quarter of 1997. On April 10, 1997, Defendants Hoover and HCM caused the withdrawal of $1,335 from Brown's brokerage trust account. On April 18, 1997, Defendants Hoover and HCM caused an additional withdrawal of $1675 from Brown's brokerage trust account for purported advisory fees.

Matilda Cuneo

48. Defendants Hoover and HCM sent Cuneo a Statement of Management Fees dated July 14,1996, which reflected an advisory fee of $3,926 for the quarter ended June 30, 1996. Without Cuneo's knowledge or consent, however, Defendants Hoover and HCM caused an additional withdrawal on July 18, 1996 of $3,926 from Cuneo's account for that quarter.

49. During Commission investigative testimony, Defendant Hoover was questioned about the excessive withdrawals from client accounts for purported fees as set forth in paragraphs 37-40 and 41-48 above. Although Hoover provided limited testimony about HCM's billing procedures and the Coke transactions set forth in paragraphs 37-38 above, Hoover asserted his Fifth Amendment privilege against self-incrimination in response to all questions about the conduct alleged in paragraphs 39-40 and 41-48.

Hoover Fraudulently Solicited and Obtained Personal Loans From Clients

50. Between August 1998 and August 1999, Defendant Hoover borrowed almost $1 million from clients. In each instance, Defendant Hoover misrepresented the purpose of the loanto the client. As an investment adviser, Defendant Hoover owed his clients a fiduciary duty to accurately disclose his financial condition.

Alexander S. Coke

51. In August 1998, Defendant Hoover asked Coke for a $400,000 loan. At that time, Defendant Hoover told Coke that he needed the $400,000 as part of a payment to his ex-wife to buy out her interest in Defendant HCM. Additionally, at Coke's request, Defendant Hoover provided Coke with financial statements. The financial statements Defendant Hoover provided to Coke were false and fraudulent because Defendant Hoover misrepresented that his personal assets included $700,000 in cash and $900,000 of real estate in a neighborhood of Franklin, Pennsylvania called "Hoover Hill." In fact, Defendant Hoover did not own any real estate in 1998.

52. On August 31,1998, Coke wrote Defendant Hoover a check from his SchwabOne account for $400,000. On September 2, 1998, Defendant Hoover deposited Coke's check in his personal bank account at Boston Private Bank & Trust Company.

Joanne Morris Camer

53. In late June 1999, Defendant Hoover asked client Joanne Morris Camer ("Camer") for a $405,000 loan. Defendant Hoover told Camer that he needed the money to pay a bill and for a divorce settlement payment to his ex-wife.

54. In June 1999, Camer wrote Defendant Hoover a check from her SchwabOne account for $405,000. On June 30, 1999, Defendant Hoover deposited Camer's check in his personal bank account at Boston Private Bank & Trust. In investigative testimony, Hoover admitted that he used the funds that Camer had loaned him to repay Coke.

Heilwig and Jim Nille

55. In August 1999, Defendant Hoover asked clients Heilwig and Jim Nille ("Nille") for a $150,000 loan. Defendant Hoover told the Nilles that he needed the money to make a payment to his ex-wife.

56. On August 9, 1999, Jim Nille wrote Defendant Hoover a check from the Nille's personal checking account. On or about August 9, 1999, Defendant Hoover gave the Nille check to his second wife, K. Mechelle Hoover, who deposited the funds into her bank account at Boston Private Bank & Trust Company. On August 10, 1999, K. Mechelle Hoover transferred $100,000 to Defendant Hoover's personal bank account at Boston Private Bank & Trust and used $50,000 to pay general living expenses.

57. During Commission investigative testimony, Defendant Hoover was questioned about the personal loans from clients set forth in paragraphs 51-56 above. Although Defendant Hoover provided limited testimony regarding the allegations in paragraphs 51-54 above, he asserted his Fifth Amendment privilege against self-incrimination in response to all questions about the conduct alleged in paragraphs 55-56.

HOOVER DEFRAUDED INVESTORS IN THE CHESTNUT FUND

58. In April 2000, Hoover established the Chestnut Fund, a hedge fund organized as a Delaware limited partnership, and began selling limited partnership interests in the Fund to investors. At all relevant times, Chestnut Management was the general partner of the Fund. Initially, HCM served as the Fund's investment manager. By June 2001, however, Chestnut Management had begun serving as the Fund's investment manager. As sole owner and operator of both HCM and Chestnut Management, Hoover has made all of the investment decisions forthe Fund since its inception.

Hoover Created and Distributed Fraudulent Offering Documents

59. The Fund is governed primarily by two documents: a Limited Partnership Agreement ("LPA") and a Confidential Private Placement Memorandum ("PPM") (collectively "Offering Documents"). The Offering Documents, initially drafted in or about April 2000, set forth the terms and conditions of the Fund, including, among other things, the types of investments the Fund will make and the compensation for the Fund's investment adviser and general partner.

60. Hoover distributed the Offering Documents to prospective investors in the Fund. The PPM was modified several times and different versions were distributed to investors. Each copy of the PPM that was given to a prospective investor was individually numbered.

61. The Offering Documents contain several fraudulent misrepresentations, including:

In versions of the PPM given to at least twelve prospective investors, Hoover fraudulently misrepresented that the Fund's investment adviser would receive "merit compensation" for its services consisting of an annual management fee of one percent of each limited partner's capital account balance and 20% of net profits in excess of 5%. In fact, Hoover took more than $625,000 out of the Fund even though the Fund was not profitable.
In versions of the PPM given to at least ten prospective investors, Hoover fraudulently misrepresented that an individual named Murray Stahl, the editor of an investment research report, was a Co-Manager and Member of Chestnut Management. In fact, Murray Stahl was not a Co-Manager or Member of Chestnut Management and was never affiliated with Chestnut Management or the Chestnut Fund.
In three different versions of the PPM given to different prospective investors, Hoover variously fraudulently misrepresented that Deloitte & Touche LLP, Ernst & Young LLP and Rothstein Kass and Company LLC served as auditors to the Fund. In fact, none of the three firms was ever retained to perform, or performed, an audit of the Fund.
In versions of the LPA given to at least eight prospective investors, Hoover fraudulently misrepresented that the Fund's financial statements were audited each year by independent auditors and that the financial statements and auditor's report were distributed to investors. In fact, the Fund's financial statements were never audited by an independent auditor and financial statements were never distributed to investors.
In versions of the LPA given to at least ten prospective investors, Hoover fraudulently misrepresented that Chestnut Management, as General Partner, maintained an investment in the Fund of the lesser of 1% of Fund assets or $250,000. In fact, Chestnut Management never invested in the Fund.

62. Hoover repeated some of these fraudulent misrepresentations to prospective investors in other documents, including:

In two different one page information sheets distributed to at least six prospective investors, Hoover fraudulently misrepresented that Murray Stahl was a "Portfolio Manager" of the Fund. In fact, Murray Stahl was never a Portfolio Manager of the Fund or affiliated with the Fund.
In an undated one page "Term Sheet" distributed to at least four prospective investors, Hoover fraudulently misrepresented that the firm of Rothstein, Kass and Company, P.C. provided tax and audit services for the Fund. In fact, Rothstein, Kass andCompany, P.C. did not provide tax, audit or any other services for the Fund.

63. Additionally, in an email that Hoover sent to three prospective investors, Hoover fraudulently misrepresented that he was "placing most of my own resources into the Fund." Hoover repeated this misrepresentation in a conversation with one of the prospective investors, fraudulently misrepresented that he was investing his own money, his wife's money and his young child's college savings in the Fund. In fact, Hoover did not invest any of his own money, his wife's money or his young child's money in the Fund.

Hoover Misappropriated Assets from the Fund

64. Over an eighteen month period after establishing the Fund in April 2000, Hoover misappropriated more than $625,000 from the Fund.

65. Between May 31, 2000 through April 30, 2001, Hoover misappropriated at least $464,250.27 from the Fund. On more than one occasion, Hoover characterized these withdrawals as a loan from the Fund. Neither the PPM nor the LPA authorize Hoover to take loans from the Fund nor were these purported loans disclosed to all of the Fund's investors. In many instances, Hoover used funds that he claimed to have borrowed from the Fund to pay for personal expenditures, including:

$30,000 used to pay himself an "officer draw";
$25,000 used to make progress payments on the personal loan Hoover improperly obtained from Joanne Camer, an HCM client, as described in paragraphs 53-54 above. Camer is not an investor in the Chestnut Fund;
$11,500 used to make payments on a personal loan Hoover obtained from Benjamin and Khorshid Brown, HCM clients;
more than $9,500 used to pay back rent charges for office space incurred by Hoover before the Fund was created;
$7,000 used to purchase a cashier's check, payable to Home Rental Services, the Overland Park, Kansas-based rental agent which collected the rent from the landlord from whom Hoover rented his personal residence;
more than $5,000 used to pay for legal fees unrelated to the Fund; and
$600 used to purchase membership in an airline's VIP club for Hoover and his wife.

66. In addition to Hoover's misappropriation of $464,250.27 from the Fund through purported loans, Hoover misappropriated an additional amount of approximately $161,700 from the Fund, including:

On or about April 17, 2000, Hoover misappropriated $50,000 from the Fund. On or about that date, investors James and Heilwig Nille authorized Hoover to withdraw $150,000 from their account at Schwab for investment in the Fund. On or about April 17 and 18, 2000, Hoover caused $150,000 to be withdrawn from the Nille's Schwab account. However, only $100,000 was invested in the Fund. On or about May 31, 2000, Hoover sent a letter to the Nilles falsely stating that they had invested $150,000 in the Fund. On or about February 15, 2001, Hoover provided the Nilles with a "Statement of Partner's Capital," again falsely stating that the Nilles invested $150,000 in the Fund.
On or about July 20, 2000, Hoover misappropriated $10,000 from the Fund. Hoover used these assets to make a charitable donation to the Catholic Schools Foundation, Inc. This donation was made to satisfy a pledge that Hoover personally had made. The Fund was not authorized to make charitable donations.
On or about December 11, 2000, Hoover misappropriated $12,665 from the Fund. Hoover characterized this withdrawal as for "expenses." However, within one weekof making this transfer, Hoover used the money to pay (i) $3,000 to his wife, K. Mechelle Hoover, for "consulting;" (ii) $5,460 to Washington Management Co. for back rent; and (iii) $1,000 to himself.
In or about April 2001, Hoover misappropriated $8,999.34 from the Fund. At that time, investor Lowell Stanley requested that Hoover transfer all of his money then under Hoover's management to the Fund. On or about April 13, 2001, Hoover informed Banc of America that $172,999.34 would be received by the Fund's Contribution Account. Hoover instructed Banc of America to place $164,000 in the Fund and to transfer the remaining balance of $8,999.34 to Chestnut Management's account at UMB Bank.
In September 2001, Hoover misappropriated $30,000 from the Fund. On or about September 17, 2001 and September 18, 2001, Hoover transferred $30,000 from the Fund, through several accounts he controls, to make a payment for one year's rent on his personal residence in Kansas. One week prior to making this transfer, Hoover attempted to have an employee effect the transfer by fraudulently stating that the money would be spent on a charitable donation. When the employee refused, Hoover stated that he would take care of the transfer himself. The employee resigned on that date because he was suspicious of the transaction.
On or about October 29, 2001, Hoover misappropriated $50,000 from the Fund. Hoover instructed Banc of America to transfer that amount from the Fund to Chestnut Management's account at UMB Bank. Hoover then used the money to make an additional $50,000 progress payment on the personal loan Hoover improperly obtained from Joanne Camer, an HCM client, as described in paragraphs 53-54 above.

Hoover Misrepresented the Fund's Performance to Investors

67. To hide his misappropriations of Fund assets, Hoover made false statements to investors in the Fund concerning the Fund's performance, including:

On or about December 29, 2000, in an email sent to one investor, Hoover fraudulently misrepresented that "the Chestnut Fund is going great guns, up about 18% since April." In fact, the Fund lost money over that period.
On or about February 15, 2001, in an account statement given to two investors, Hoover fraudulently misrepresented that the value of their investment in the Fund had grown from $150,000.00 to $155,663.40 (net of expenses) from April 18, 2000 through December 31, 2000, reflecting cumulative performance of 3.78% over that period. In fact, only $100,000 of the investors' money was placed in the Fund as described in paragraph 66 above, and moreover, the Fund lost money over that period. Furthermore, although Hoover disclosed that he had withdrawn a small amount of money from the Fund purportedly to pay for Fund expenses, Hoover fraudulently failed to disclose that he had withdrawn $434,534.61 from the Fund during that period.
On or about February 15, 2001, in an account statement given to one investor, Hoover fraudulently misrepresented that the value of her investment in the Fund had grown from $275,700.00 to $283,545.30 (net of expenses) from May 10, 2000 through December 31, 2000, reflecting cumulative performance of 0.84% over that period. In fact, the Fund lost money over that period. Furthermore, although Hoover disclosed that he had withdrawn a small amount of money from the Fund purportedly to pay for Fund expenses, Hoover fraudulently failed to disclose that he had withdrawn $434,534.61 from the Fund duringthat period.
On or about February 15, 2001, in a letter sent to investors in the Fund, Hoover fraudulently misrepresented that the performance of the Fund (net of expenses) during the second, third and fourth quarters of 2000 as "-0.97%," "+1.79%," and "+08.94," respectively. In fact, the Fund lost money in each of those periods, and for the second quarter of 2000, the Fund's actual loss far exceeded the 0.97% loss that Hoover represented.
In an undated account statement sent to one investor, Hoover fraudulently misrepresented that the value of his investment in the Fund had grown from $100,000.00 to $109,535,20 (net of expenses) from April 18, 2000 through December 31, 2000. In fact, the Fund lost money over that period. Furthermore, although Hoover disclosed that he had withdrawn a small amount of money from the Fund purportedly to pay for Fund expenses, Hoover fraudulently failed to disclose that he had withdrawn $253,774.66 from the Fund since the investor's first investment during that period.
On or about February 12, 2001, in an account statement given to one investor, Hoover fraudulently misrepresented that the value of her investment in the Fund had grown from $100,000.00 to $109,370.66 (net of expenses) from September 1, 2000 through December 31, 2000, reflecting cumulative performance of 9.37% over that period. In fact, the Fund lost money over that period. Furthermore, although Hoover disclosed that he had withdrawn a small amount of money from the Fund purportedly to pay for Fund expenses, Hoover fraudulently failed to disclose that he had withdrawn $253,774.66 from the Fund during that period.
In an undated account statement sent to one investor, Hoover fraudulentlymisrepresented that the value of his investment in the Fund had grown from $300,000.00 to $328,605.60 (net of expenses) from September 1, 2000 through December 31, 2000, reflecting cumulative performance of 9.45% over that period. In fact, the Fund lost money over that period. Furthermore, although Hoover disclosed that he had withdrawn a small amount of money from the Fund purportedly to pay for Fund expenses, Hoover fraudulently failed to disclose that he had withdrawn $47,155.34 from the Fund since the investor's first investment during that period.
In a letter sent to investors in the Fund bearing the date July 25, 2001, Hoover fraudulently misrepresented that the performance of the Fund (net of expenses) from inception through June 30, 2001 was "-0.07%." Hoover also sent a nearly identical letter bearing the same date to other investors in the Fund, in which he fraudulently misrepresented that the performance of the Fund (net of expenses) during the same period was "+5.63%." In fact, the Fund had lost money during that period far in excess of the 0.07% loss that Hoover disclosed to at least some investors.
In an undated account statement sent to one investor, Hoover fraudulently misrepresented that the value of his investment in the Fund had grown from $750,961.00 to $755,843.85 (net of expenses) from January 1, 2001 through June 30, 2001. In fact, the Fund lost money over that period. Furthermore, although Hoover disclosed that he had withdrawn a small amount of money from the Fund purportedly to pay for Fund expenses, Hoover fraudulently failed to disclose that he had withdrawn $7,513.74 from the Fund since the investor's first investment during that period.
In undated account statements sent to at least three investors for the period January 1, 2001, through June 30, 2001, although Hoover disclosed that he had withdrawn asmall amount of money from the Fund purportedly to pay for Fund expenses, Hoover fraudulently failed to disclose that he had withdrawn $328,986.23 from the Fund during that period.
In an undated account statement sent to one investor for the period November 1, 2000 through August 20, 2001, although Hoover disclosed that he had withdrawn a small amount of money from the Fund purportedly to pay for Fund expenses, Hoover fraudulently failed to disclose that he had withdrawn $384,517.52 from the Fund since the investor's first investment during that period.

Hoover Negotiated an Investment of Fund Assets for his Own Personal Gain

68. In or about late 2000, Hoover entered into discussions with representatives of Three Dog Bakery, Inc. ("Three Dog Bakery"), a privately held company based in Kansas City, Missouri, concerning a possible investment by the Fund in the company.

69. On or about January 31, 2001, the chief financial officer ("CFO") of Three Dog Bakery, sent an email to Hoover stating that the company was "strongly in need of an investment sooner rather than later," and proposed to Hoover a total investment of $1 million in the form of convertible debentures bearing a 10% interest rate.

70. On or about February 1, 2001, Hoover sent an email to Three Dog Bakery's CFO containing a counteroffer. In that email Hoover claimed he was setting forth a "memo of understanding with respect to the terms of my investment in Three Dog Bakery." Hoover stated that he would accept a 9.5% interest rate on the convertible debentures, but insisted on, among other things, a "finder's fee" of 4% of his clients' total investment and 1,000 shares of common stock, both to be paid to a custodial account for his daughter. Hoover claimed, "my wife insistson this."

71. On or about February 3, 2001, Three Dog Bakery's CFO sent an email to Hoover agreeing to 9.5% interest rate on the convertible debentures and the "finder's fee" proposed by Hoover. The CFO also proposed that the total investment be no less than $1 million and no more than $3 million.

72. On or about February 7, 2001, Hoover sent an email to Three Dog Bakery's CFO. In the email Hoover requested that Three Dog Bakery (i) pay an "Origination Fee" of 7% (instead of 4%) of his clients' total investment to his daughter's account, (ii) provide Chestnut Management with options to purchase up to 3,000 shares of common stock at $1.00 per share, and (iii) make a charitable donation to an entity Hoover claimed was "run by my friend." Hoover further stated that "in return for the above revised terms, we are willing to lower the interest rate to 9% from 9.5% and defer any cash payment on the interest for the first two years rather than just the first year."

73. On or about February 15, 2001, Hoover, acting on behalf of the Fund, entered into a Subscription Agreement and Convertible Debenture with Three Dog Bakery pursuant to which the Fund agreed to purchase up to $3,000,000 of 9% Convertible Debentures of Three Dog Bakery. The terms proposed by Hoover in his February 7, 2001 email were memorialized in the final, executed Subscription Agreement and Convertible Debenture.

Hoover Misappropriated Assets from a Private Charitable Foundation

74. By signing the Subscription Agreement and Convertible Debenture with Three Dog Bakery, Hoover obligated the Fund to purchase no less than $1 million of debentures between February and August 2001. At that time, however, the total available assets of the Fundwere less than $1 million. To satisfy the Fund's obligation to Three Dog Bakery, Hoover used the assets of another client, The Kaplen Foundation ("The Foundation"), a charitable foundation based in northern New Jersey.

75. Since approximately August 1998, Hoover had managed the assets of The Foundation pursuant to the terms of an Investment Management Agreement ("Agreement") entered into between Hoover and The Foundation. The Agreement stated that Hoover was to manage The Foundation's assets in compliance with certain investment objectives set forth in an Investment Policy Statement attached to the Agreement. Among other things, the Investment Policy Statement prohibited Hoover from investing The Foundation's assets in "unregistered securities."

76. Hoover knew that the Three Dog Bakery Convertible Debentures were unregistered securities. In fact, the Convertible Debenture states on the top of its front page, in all caps, that:

NEITHER THIS DEBENTURE NOR THE SHARES OF STOCK TO BE ISSUED UPON CONVERSION OF THIS DEBENTURE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER APPLICABLE STATE SECURITIES LAWS.

77. In three separate transactions in February and March 2001, Hoover caused $700,000.00 to be wired from The Foundation's account at PNC Bank to an account of Three Dog Bakery. Although the wire transfer requests sent to PNC Bank bore a "cc" notation indicating that they were sent to The Foundation, copies of the requests were not sent to The Foundation and The Foundation was not aware of the transfers at the time.

HOOVER MISREPRESENTED ASSETS UNDER MANAGEMENT

78. Defendant Hoover repeatedly overstated the amount of Defendant HCM's assets under management to clients and others. In April 1995, Defendant Hoover met with the trustees of Forest Hills Cemetery to discuss his potential management of its portfolio and provided the trustees with an informational package which falsely stated that Defendant HCM managed $151 million in assets. As of August 1995, however, Defendant HCM's 1995 Form ADV reported only $65.1 million of assets under management.

79. In May 1996, Defendant Hoover provided client Adelphi University with a portfolio review which falsely showed that Defendant HCM managed $205 million in assets. As of February 20, 1996, however, Defendant HCM's 1996 Form ADV reported only $74.3 million of assets under management.

80. In 1996, Defendant Hoover provided false information to Nelson Publications regarding Defendant HCM's assets under management. Beginning in June 1996, Defendant Hoover sent both clients and prospective clients a reprint of a Nelson Publication's article captioned "World's Best Money Managers 4Q95," which ranked Defendant HCM sixteenth among all US mid-cap value equity managers for the three years ended December 31, 1995. The article reported that Defendant HCM's assets under management as of December 31, 1995, were approximately $135 million. As of August 1995, however, Defendant HCM's 1995 Form ADV reported only $65.1 million of assets under management.

81. In late 1996, Defendant HCM provided client Forest Hills Cemetery documents which falsely reflected assets under management of $214 million as of October 31, 1996. As of February 20, 1996, however, Defendant HCM's 1996 Form ADV reported only $74.3 million ofassets under management.

82. During Commission investigative testimony, Defendant Hoover was questioned regarding the misrepresentation of assets under management set forth in paragraph 80 above, and asserted his Fifth Amendment privilege against self-incrimination in response to those questions.

BOOKS AND RECORDS VIOLATIONS

83. During all relevant times, Defendants Hoover and HCM failed to maintain accurate and complete books and records as is required of a registered investment adviser. Specifically, Defendants Hoover and HCM failed to keep all bills or statements, paid or unpaid, trial balances, financial statements, internal audit working papers relating to the advisory business, and originals of written communications received and copies of all written communications sent by Defendants Hoover and HCM. Correspondence with clients was often missing from both the individual client's files and from Defendants Hoover and HCM's chronological correspondence file.

84. During all relevant times, Defendants Hoover and HCM also failed to maintain powers of attorney and other documents which evidenced the granting of discretionary authority by clients. In addition, Defendants Hoover and HCM failed to maintain written agreements entered into between Defendants Hoover and HCM and the client. Lastly, Defendants Hoover and HCM failed to maintain and preserve the required records in an easily accessible place for a period of not less than five years from the end of the fiscal year during which the last entry was made on such record.

HOOVER FAILED TO DISCLOSE MATERIAL INFORMATION IN FORM ADV

85. Defendants Hoover and HCM had a duty to file accurate and complete FormsADV that were not false or misleading and that did not omit to state material facts required therein. Defendants Hoover and HCM violated this duty because Defendant HCM filed, and Defendant Hoover signed, Forms ADV that failed to reveal that some clients were charged higher fees than those set forth in the Forms ADV.

REMEDIES

86. The violations set forth in this Amended Complaint involve fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement and such violations directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons.

FIRST CLAIM

(Securities Act § 17 (a))

87. The allegations set forth in Paragraphs 1-49 above are hereby realleged and incorporated by reference herein.

88. Between at least January 1996 and October 2001, Defendants Hoover, HCM and Chestnut Management, directly or indirectly, singularly and in concert, knowingly or recklessly, in the offer and sale of securities, used means or instrumentalities of interstate commerce, or of the mails, or a national securities exchange facility: (a) to employ a device, scheme, or artifice to defraud; (b) to make untrue statements of material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (c) to engage in acts, practices or a course of business which operates or would operate as a fraud or deceit purchasers of securities.

89. Defendant Hoover knew, or was reckless in not knowing, that Defendants HCM'sChestnut Management's conduct was improper, and provided knowing and substantial assistance of Defendants HCM's and Chestnut Management's violations.

90. By reason of the foregoing transactions, acts, omissions, practices and course of business, from at least March 1995 through October 2001, Defendants Hoover, HCM and Chestnut Management, knowingly or recklessly, directly or indirectly, violated Section 17(a) of the Securities Act [15 U.S.C. §17q(a)] and Defendant Hoover aided and abetted such violations.

SECOND CLAIM

(Exchange Act § 10(b) and Rule 10b-5)

91. The allegations set forth in Paragraphs 1-49 above are hereby realleged and incorporated by reference herein.

92. Between at least March 1995 and October 2001, Defendants Hoover, HCM and Chestnut Management, directly or indirectly, singularly and in concert, knowingly or recklessly, used means or instrumentalities of interstate commerce, or of the mails, or a national securities exchange facility: (a) to employ a device, scheme, or artifice to defraud; (b) to make untrue statements of material fact, or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) to engage in acts, practices, or a course of business which operates or would operate as a fraud or deceit upon any person in connection with the purchase or sale of securities.

93. Defendant Hoover knew, or was reckless in not knowing, that Defendants HCM's and Chestnut Management's conduct was improper, and provided knowing and substantial assistance of Defendants HCM's and Chestnut Management's violations.

94. By reason of the foregoing transactions, acts, omissions, practices and course ofbusiness, from at least March 1995 through October 2001, Defendants Hoover, HCM and Chestnut Management, knowingly or recklessly, directly or indirectly, violated Section 10(b) of the Exchange Act [15 U.S.C. §78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5] and Defendant Hoover aided and abetted such violation.

THIRD CLAIM

(Advisers Act §§ 206(1), (2))

95. The allegations set forth in Paragraphs 1-77 above are hereby realleged and incorporated by reference herein.

96. Defendant Hoover knew, or was reckless in not knowing, that Defendants HCM's and Chestnut Management's conduct was improper, and provided knowing and substantial assistance of Defendants HCM's and Chestnut Management's violations of the Advisers Act regarding fraud upon investment adviser clients.

97. By reason of the foregoing transactions, Defendants Hoover, HCM and Chestnut Management directly or indirectly, violated Section 206(1) of the Advisers Act [15 U.S.C. § 80b-6(1)], and directly or indirectly, violated Section 206(2) of the Advisers Act [15 U.S.C. § 80b-6(2)], and Defendant Hoover aided and abetted such violations.

FOURTH CLAIM

(Advisers Act § 206(4) and Rule 206(4)-1(a)(5))

98. The allegations set forth in Paragraphs 78-82 above are hereby realleged and incorporated by reference herein.

99. From at least April 1995 through at least 1996, Defendant HCM, directly or indirectly, published, circulated, or distributed advertisements that contained untrue statements ofmaterial fact, or were otherwise false or misleading.

100. Defendant Hoover knew, or was reckless in not knowing, that Defendant HCM's conduct was improper, and provided knowing and substantial assistance of Defendant HCM's violations of the Advisers Act regarding false and misleading advertisements by any investment adviser.

101. By reason of the foregoing transactions, acts, omissions, practices or courses of business, Defendant HCM violated, and Defendant Hoover aided and abetted Defendant HCM's violations of, Section 206(4) of the Advisers Act [15 U.S.C. § 80b-6(4)] and Rule 206(4)-1(a)(5) thereunder [17 C.F.R. § 275.206(4)-1(a)(5)].

FIFTH CLAIM

(Advisers Act § 204 and Rules 204-2(a)(5), (6), (7), (9) and (10) and 204-2(e)(1))

102. The allegations set forth in Paragraphs 83-84 above are hereby realleged and incorporated by reference herein.

103. Defendants HCM, an investment adviser who made use of the mails and means and instrumentalities of interstate commerce in connection with its business as an investment adviser, failed to make and keep, accurate and current certain books. Defendant HCM also failed to maintain and preserve the required records in an easily accessible place for a period of not less than five years from the end of the fiscal year during which the last entry was made on such record.

104. Defendant Hoover knew, or was reckless in not knowing, that Defendant HCM's conduct was improper and provided knowing and substantial assistance of Defendant HCM's violations of the Advisers Act regarding record keeping requirements.

105. By reason of the foregoing, Defendant HCM violated, and Defendant Hoover aided and abetted Defendant HCM's violation of Section 204 of the Advisers Act [15 U.S.C. § 80b-4] and Rules 204-2(a)(5), (6), (7), (9), and (10) and 204-2(e)(1), thereunder [17 C.F.R. §§ 275.204-2 (a)(5), 275.204-2 (a)(6), 275.204-2 (a)(7), 275.204-2 (a)(9), 275.204-2 (a)(10) and 275.204-2 (e)(1)].

SIXTH CLAIM

(Advisers Act § 207)

106. The allegations set forth in Paragraphs 85 above are hereby realleged and incorporated by reference herein.

107. Between at least 1996 through 1998, Defendants Hoover and HCM willfully made untrue statements of material fact and omitted to state material facts required, in Forms ADV filed with Commission.

108. Defendants Hoover and HCM knew, or were reckless in not knowing, that it violated the Advisers Act by failing to adequately disclose material information in the Forms ADV.

109. By reason of the foregoing, Defendants Hoover and HCM violated Section 207 of the Advisers Act [15 U.S.C. § 80b-7].

PRAYER FOR RELIEF

WHEREFORE, the Commission respectfully requests that this Court:

II.

Issue a Final Judgment of Permanent Injunction permanently restraining and enjoining Defendants Hoover and HCM and their officers, agents, servants, employees, and attorneys, and all persons in active concert or participation, and each of them who receive actual notice of the Final Judgement by personal service or otherwise, from violating Section 10 (b) of the Exchange Act [15 U.S.C. §78j (b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder.

III.

Issue a Final Judgment of Permanent Injunction permanently restraining and enjoining Defendants Hoover, HCM and Chestnut Management and their officers, agents, servants, employees, and attorneys, and all persons in active concert or participation, and each of them who receive actual notice of the Final Judgement by personal service or otherwise, from violating Sections 206(1) and 206(2) of the Advisers Act [15 U.S.C. §§ 80b-6 (1) and 80b-6 (2)].

IV.

Issue a Final Judgment of Permanent Injunction, permanently restraining and enjoining Defendants Hoover and HCM and their officers, agents, servants, employees, and attorneys, and all persons in active concert or participation, and each of them who receive actual notice of the Final Judgement by personal service or otherwise, from violating Section 206(4) of the Advisers Act [15 U.S.C. § 80b-6 (4)] and Rules 206 (4)-1(a)(5) thereunder [17 C.F.R. § 275.206(4)-1(a) (5)].

Issue a Final Judgment of Permanent Injunction permanently restraining and enjoining Defendants Hoover and HCM and their officers, agents, servants, employees, and attorneys, and all persons in active concert or participation, and each of them who receive actual notice of the Final Judgement by personal service or otherwise, from violating Section 204 of the Advisers Act [15 U.S.C. § 80b-4] and Rules 204-2(a)(5), (6), (7), (9), and (10) and 204-2(e)(1), thereunder [17 C.F.R. §§ 275.204-2 (a)(5), 275.204-2 (a)(6), 275.204-2 (a)(7), 275.204-2 (a)(9), 275.204-2 (a)(10) and 275.204-2 (e)(1)].

VI.

VII.

Issue an Order requiring Defendants Hoover, HCM and Chestnut Management to disgorge all ill-gotten gains.

VIII.

Issue an Order requiring Defendants Hoover, HCM and Chestnut Management each to pay a civil penalty in an appropriate amount pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77(t) (d)], Section 21(d) of the Exchange Act [15 U.S.C. § 78u (d)] and Section 209(e) of the Advisers Act [15 U.S.C. § 80b-9 (e)].

IX.

Grant such other relief as this Court deems just and appropriate under the circumstances.

Respectfully submitted,

JUAN MARCEL MARCELINO
District Administrator

By: _____________________________
Kimberly M. Zimmer (BBO # 636185)
Ian D. Roffman (BBO # 637564)

ATTORNEYS FOR PLAINTIFF
SECURITIES AND EXCHANGE COMMISSION
73 Tremont Street, 6^th Floor
Boston, Massachusetts 02108
(617) 424-5900 ext. 203 (Zimmer)

Dated: March 20, 2002

______________________

¹ A hedge fund is a commingled investment pool that generally involves speculative investing, including maintaining both "long" and "short" positions in companies in the same industry in an attempt to offset or "hedge" against potential losses. Hedge funds are organized as private limited partnerships and are available only to sophisticated investors who meet certain requirements under the Investment Company Act of 1940.

² On November 1, 2001, this Court dismissed the Commission's First and Second Claims alleging violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 17(a) of the Securities Act. The dismissal was based on the opinion of the Fourth Circuit in SEC v. Zandford, 238 F.3d 559 (4th Cir. 2001), an appeal of which is currently pending before the U.S. Supreme Court. Therefore, although dismissed, the Commission repleads its First and Second Claims pending the Supreme Court's resolution of that appeal.

http://www.sec.gov/litigation/complaints/complr17487.htm

Modified: 04/24/2002