The Securities and Exchange Commission has declared charges against a Houston, TX-based fund manager and his firm for defrauding investors in two hedge funds.
George Jarkesy worked with Thomas Belesis, a chief executive at a brokerage who also is charged in the case, to launch two funds in 2007 and 2009, the SEC says. The John Thomas Bridge and Opportunity Fund LP I, and John Thomas Bridge and Opportunity Fund LP II together raised $30 million from investors.
An investigation carried out by the SEC’s division of enforcement outlines that Jarkesy and his firm, John Thomas Capital Management (which has since been renamed as Patriot28), inflated valuations of the funds’ assets, causing the value of investors’ shares to be overstated and his management and incentive fees to be increased.
Meanwhile, Jarkesy led investors to believe that, as fund manager, he was solely responsible for all investment decisions. However, the SEC contends that Belesis “sometimes supplanted” Jarkesy as the decision-maker and directed some investments from the hedge funds into a company in which his firm was heavily invested.
“Belesis also bullied Jarkesy into showering excessive fees on John Thomas Financial even in instances where the firm had done virtually nothing to earn them,” the authority added.
According to the SEC’s order instituting administrative proceedings against Jarkesy, Belesis and their firms, Jarkesy used fund assets to hire multiple stock promoters in 2010 and 2011 to create an “artificial and unsustainable spike in the price of two microcap stocks in which the funds were heavily invested.”
As a result, the funds recorded temporary gains in the value of the microcap stocks, which the SEC said Jarkesy used to mask the write-down of other more illiquid holdings of the funds.
The administrative proceedings will determine what, if any, remedial action is appropriate in the public interest against Jarkesy, John Thomas Capital Management, Belesis, and John Thomas Financial, including disgorgement and financial penalties, the SEC said.