On August 31, 2011, the SEC announced it froze the assets of a Chicago-based money manager and his hedge fund advisory firm for lying to prospective investors in their startup hedge fund.
The SEC claims that Belal K. Faruki and his firm, Neural Markets LLC, solicited highly sophisticated individuals to invest in the “Evolution Quantitative 1X Fund,” a hedge fund they managed that allegedly employed a proprietary algorithm to conduct an arbitrage strategy involving trading in liquid exchange-traded funds (ETFs). Faruki and Neural Markets misrepresented the amount of investor capital and that trading was creating returns when, in reality, it incurred losses. They defrauded at least one investor out of $1 million before admitting the losses, and were still seeking other wealthy investors prior to the SEC obtaining a court order to stop the scheme.
According to Bruce Karpati, the Co-Chief of the SEC’s Asset Management Unit, “Faruki and Neural Markets lied throughout this elaborate scheme in order to attract capital from sophisticated investors. Even sophisticated institutional investors should be wary of unscrupulous hedge fund managers who cloak their misrepresentations in lofty pitches about a complex investment strategy.”
The SEC’s complaint filed in federal court in Chicago alleges that Faruki and Neural Markets informed investors that the hedge fund started trading in 2009. From January 2010 until approximately October 2010, Faruki and Neural Markets misrepresented the hedge fund’s performance results, falsely claimed that wealthy investors invested $5 million into the fund, and misstated that it employed a top-notch auditor to help prepare the fund’s financial statements. Faruki also misrepresented to investors that he invested his own funds into the hedge fund so that his own interests were the same as other investors.