Aletheia and Chief Executive Peter J. Eichler Jr. "had an obligation… (Katie Falkenberg, For The…)
Federal regulators accused a Santa Monica hedge fund manager of defrauding investors by saddling them with losing securities trades while claiming winners for himself.
The Securities and Exchange Commission alleged that Peter J. Eichler Jr., chief executive of Aletheia Research and Management Inc., made about $2 million by allocating a disproportionately large share of money-making trades to his personal brokerage accounts. He steered another $2 million in improper profits to favored employees and clients, the SEC alleged.
Clients in two Aletheia-run hedge funds, meanwhile, suffered $4.4 million in losses, according to the civil complaint filed Friday.
"Aletheia and Eichler had an obligation to treat all clients with equal fairness, but instead they cherry-picked winners and losers," Michele Wein Layne, director of the SEC's Los Angeles office, said in a statement.
Eichler also failed to warn clients about mounting financial problems at Aletheia until two days before the firm filed for Chapter 11 bankruptcy protection last month, the SEC said.
"Aletheia did not intentionally or otherwise harm any of its investment products or its clients," Eichler, 55, said in a statement.
"Mr. Eichler and Aletheia were both investors in this product," the statement said. "Mr. Eichler made additional personal investments in this fund during the time in question. Aletheia and Mr. Eichler look forward to cooperating with the SEC to resolve any remaining issues."
The allegedly improper trading occurred in options contracts, which give investors the right to buy or sell shares of a stock at a set price. Rather than specifying accounts at the time orders were placed, Eichler often waited more than an hour after making the transactions to designate which account they would go into, the SEC said. By then, the trades already were profitable or not.
In completed trades with a clear profit or loss, 98.3% of the transactions that Eichler assigned to his personal accounts were profitable, yielding a cumulative 19.1% investment return, according to the SEC.
Only 31.7% of trades allocated to the hedge funds turned a profit, resulting in a 1.7% cumulative loss.
The SEC complaint is the latest in a series of woes for the once-successful investment firm.
Aletheia, Eichler and another top executive agreed to pay $400,000 in penalties last year to resolve previous SEC accusations that the firm failed to provide hedge fund investors with quarterly account statements and timely audit reports. The agency also alleged that Aletheia didn't inform potential clients about the results of prior SEC examinations.
Aletheia's co-founder and former chief financial officer, Roger Peikin, sued the company in 2010. He alleges that Eichler wrongfully fired him after Peikin objected to Eichler's management style and handling of the prior SEC inquiry.
Peikin's suit also accuses Eichler of using company assets as "his personal piggy bank" and of paying himself "millions in compensation." Eichler used Aletheia corporate funds for lavish family vacations, including private jet travel and "hotel suites ranging from $10,000 to $18,000 per night," according to the suit.
"Expensive European trips are disguised as business travel when, in fact, the cost of travel far exceeds the revenue by any client Eichler is purporting to visit," Peikin said in the suit.
Eichler has denied those allegations. The lawsuit is pending.
Three investors have filed complaints against Eichler with the Financial Industry Regulatory Authority, an industry oversight organization. The complaints accused Aletheia and Eichler of making "unsuitable" investments and failing to disclose the risks of certain investments, causing cumulative losses exceeding $2.8 million.
Eichler has denied the allegations.
Aletheia filed for bankruptcy Nov. 11, listing liabilities of between $10 million and $50 million.
The assets Aletheia manages have tumbled from a peak of more than $10 billion to perhaps as little as $250 million, according to a recent filing by a trustee in the bankruptcy case.
Also, California revoked Aletheia's corporate status this year because the company owes the state more than $2 million in unpaid taxes.