The CIO of a New York investment advisory firm has pled guilty to defrauding institutional clients in a $100 million Ponzi scheme, according to the U.S. Attorney for the Southern District of New York.
David Hu of West Orange, N.J., the managing partner and CIO of International Investment Group, pled guilty yesterday to securities fraud, investment advisor fraud and wire fraud. The U.S. Attorney said Hu had perpetrated the scheme for more than 10 years. Among other things, said law enforcement, he invented some investments and overvalued others, using money from new clients to pay off those who had invested before.
Hu, 63, agreed to forfeit $129 million as part of his plea agreement, said the U.S. Attorney.
International Investment Group, founded in 1994, is an SEC-registered firm that provided advisory services for three trade finance funds it operated, including the IIG Trade Opportunities Fund N.V., the IIG Global Trade Finance Fund Ltd.; and the IIG Structured Trade Finance Fund Ltd. It also advised other vehicles. The firm said it specialized in global trade finance and offered loans to midsize and small companies—focusing on exporters and importers involved in global trade. Investments in these funds were sold by IIG to pension funds, hedge funds and insurers.
The U.S. Attorney said that from 2007 to 2019, Hu mismarked and overvalued distressed loans in the funds. The scheme also involved “falsifying paperwork to create a series of fake loans that were classified, fraudulently, as positively performing loans, and to otherwise hide losses.” He also sold overvalued and fictitious loans to a collateralized loan obligation trust and new funds established by his firm, the U.S. Attorney said, adding that Hu and his unnamed co-conspirator mismarked both defaulting and distressed loans.
To hide the losses from defaulted loans in the Trade Opportunities Fund from auditors, Hu and the co-conspirator “removed the defaulted loans from the [fund] portfolio, replacing them with tens of millions of dollars in fictitious loans to purported borrowers in foreign countries. … [They] also created or directed the creation of documents to keep in IIG’s files as purported documentation of the fake loans,” according to the U.S. Attorney.
In 2012 Hu’s firm became an investment advisor to an open-ended retail mutual fund, and recommended loans that his firm had originated. When an Argentinian borrower failed to make a principal payment on a $6 million loan, Hu facilitated a transfer of $6 million from another borrower’s account to pay off the loan, then raised another $6 million in a new loan for the Argentinian borrower. Those proceeds were used to pay back the other borrower, authorities said.
In another instance, IIG created collateralized loan obligation trust in 2014, getting $220 million in bank financing, and IIG then served as the trust’s investment advisor. Hu and the co-conspirator, said law enforcers, used the trust to hide the losses of the Trade Opportunities Fund.
Hu pled guilty to one count of conspiracy to commit investment advisor fraud, securities fraud and wire fraud, which carries a maximum sentence of five years in prison. He also pled guilty to one count of securities fraud and one count of wire fraud, both of which carry maximum 20-year prison sentences.