SEC Closes Fountainhead Asset Management

Between November 2001 and the present, Fountainhead Asset Management raised about $5 million from 18 private investors. In Wall Street terms, the fund based in Wayne, Pennsylvania, is very small potatoes. However, now that its investor assets are only $1.7 million, one of two things must be true. Either the guys running it did a bad job, or they were crooked. The Security and Exchange Commission has decided the latter is the case, and the agency claims that the partners "sent false quarterly statements and newsletters to investors, consistently overstating the fund's value and performance." It appears the SEC is underlining the need for registration of hedge fund managers here.

Before addressing the political agenda of the SEC, it should be noted that the investment climate from November 2001 to the present could well be the most difficult in post-war history. Anthony Postiglione and William Lennon, the partners who run Fountainhead, could well have made bad choices in a difficult climate and dropped the value of the assets by 60% or so quite honestly.

That said, the SEC is pretty sure it has caught a couple of fraudsters. Amy Greer, who is trial counsel in the SEC's Philadelphia office, remarked to Reuters, "it appears to be a very egregious and blatant fraud." Clearly, she is not one to pull her punches. Her office also charges that Messrs. Postiglione and Lennon churned the accounts, or more precisely, traded excessively ""for the sole purpose of generating soft dollar credits, which they then withdrew as cash and used for, among other things, their own personal living expenses."

The receiver has been called in, and the assets of the investors will be distributed as best as possible. However, the damage has been done. And even if subsequent legal action provides them some redress because the courts decide it was fraud and not bad luck, that compensation is years away. The investors may never get every penny back.

And it is with this sort of case that the SEC will prove the need for oversight of the hedge fund world. Financiers hate regulation, but they hate fraud even more. When bank robber Willie Sutton was asked why he robbed banks, he said, "because that's where the money is." When fraudsters operate in hedge funds, rather than mutual funds or other regulated markets, there is a reason. That's where the opportunity lies. SEC regulation will make it more cumbersome to operate a hedge fund, but it will make outright fraud much harder.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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