SEC Halts Petters Ponzi Scheme Fund Diversion

Nick Parmee 29 March 2011

SEC Halts Petters Ponzi Scheme Fund Diversion

The Securities and Exchange Commission has obtained an emergency court order to halt an attempt by a Connecticut-based fund manager to divert to himself and others settlement funds intended for US victims of a Ponzi scheme operated by Minnesota businessman Thomas Petters.

The SEC has charged Marlon Quan with facilitating the Petters' fraud and funneling several hundred million dollars of investors' money into the scheme. It alleges that Quan and his firms (Stewardship Investment Advisors and Acorn Capital Group) invested hedge fund assets with Petters while pocketing more than $90 million in fees.

They falsely assured investors that their money would be safeguarded by “lock box accounts” to protect them against defaults. When Petters was unable to make payments on investments held by the funds that Quan managed, Quan and his firms concealed Petters’s defaults from investors by concocting sham round trip transactions with Petters.

In its emergency court action, the SEC alleges that Quan, despite a glaring conflict of interest, more recently negotiated an agreement to divert a settlement payment of approximately $14 million relating to a receivership and a bankruptcy of Petters’s entities.

“Quan falsely assured his fund investors about safeguards that did not exist and made up phony transactions to hide Petters’s defaults, all while he pocketed millions of dollars in fees,” said Robert Khuzami, director of the SEC’s division of enforcement.

The SEC further alleges that Quan falsely assured existing and new investors that the Quan Hedge Funds were doing well when in reality Petters began defaulting on the investments they held. Instead of disclosing these defaults to his fund’s investors, Quan embarked on a series of convoluted transactions in which he exchanged $187 million with Petters Co in “round trips” that created the false appearance that Petters was making his payments.

Petters has already been jailed for 50 years for his fraudulent activities.

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