SEC Announces Fraud Charges Against Former Portfolio Manager of the Lipper Convertible Hedge Funds

FOR IMMEDIATE RELEASE
2003-143

Washington, D.C., Oct. 29, 2003 — The Securities and Exchange Commission announced fraud charges against Edward J. Strafaci, the former portfolio manager of the Lipper convertible hedge funds, for overstating the value of the funds. Simultaneously, the Office of the United States Attorney for the Southern District of New York announced Strafaci's indictment on criminal charges arising from the same conduct.

The Commission's complaint makes the following allegations. From at least 1998 until January 2002, Strafaci knowingly and recklessly overstated the value of convertible bonds and preferred stock held by the funds, resulting in the dissemination of materially false and misleading fund valuations and performance figures to investors and prospective investors, and the filing of false reports with the Commission.

The hedge funds involved are:

• Lipper Convertibles, L.P., f/k/a Lipco Partners, L.P.;
• Lipper Convertibles Series II, L.P.;
• Lipper Offshore Convertibles, L.P.; and
• Lipper Fixed Income Fund, L.P.

Each of the funds was managed by Lipper & Company, L.P., an investment adviser registered with the Commission, or an affiliate (collectively, the Managing Entities); three of the funds were registered with the Commission as broker-dealers. During the relevant period, Strafaci was the portfolio manager for each of the funds and was an executive vice-president and the Director of Fixed Income Money Management for the Managing Entities. Strafaci resigned these positions in January 2002, and is now the majority shareholder of, and portfolio manager for, a hedge fund holding company.

Stephen M. Cutler, Director of the SEC Division of Enforcement, said "The Commission is fully committed to pursuing federal securities law violations wherever they exist, including at hedge funds. And as this case shows, there is also an increasing likelihood that such violations will be criminally prosecuted."

The Commission's complaint, filed in the United States District Court for the Southern District of New York, alleges that, contrary to representations in the funds' offering materials, Strafaci valued the convertible bonds and convertible preferred stock in which the funds were invested at prices materially higher than market prices or the fair value of such securities. By way of example, the complaint cites analyses indicating that the value of Convertibles - the largest of the funds - was overstated as follows:

According to the complaint, the inflated valuations also resulted in inflated performance figures and in some years converted losses to reported profits.

The complaint further charges that Strafaci priced the Funds' convertible securities without regard to prices obtained in recent sales, frequently disregarded the views of his traders that his valuations - "marks" - were too high, failed to maintain records supporting his valuations, and refused to explain his marks to Lipper management when questions arose after his departure.

"This case illustrates the potential for mischief in hedge fund portfolio valuations," said Wayne M. Carlin, Director of the Commission's Northeast Regional Office. "Where a fund manager fails to adhere to the fund's representations about pricing, and does not value the fund's securities reasonably and in good faith, he or she has committed fraud."

The complaint charges Strafaci with violating or aiding and abetting violations of certain antifraud provisions of the federal securities laws and with aiding and abetting various books-and-records and reporting provisions applicable to registered investment advisers and broker-dealers. The complaint seeks a permanent injunction, disgorgement, and civil money penalties. The litigation is pending.

The Commission's investigation is continuing. The Commission acknowledges the assistance and cooperation of the United States Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation in the investigation of this matter.