The former managing partner and chief investment officer of a New York-based investment advisory firm has been sentenced to 12 years in prison for his role in defrauding clients and investors in a more than $120 million Ponzi scheme, according to the U.S. Attorney for the Southern District of New York.
David Hu, 64, of West Orange, N.J., who in January 2021 pleaded guilty to investment adviser fraud, securities fraud, and wire fraud offenses, was sentenced on Monday by U.S. District Judge Alvin K. Hellerstein.
In addition to the prison sentence, Hu was ordered to serve three years of supervised release. The court also announced that it would impose restitution to victims and forfeiture of the proceeds of the offenses, with the amounts to be determined at a later date, the release noted.
Hu co-founded the Manhattan-based International Investment Group (IIG) in 1994. The SEC-registered investment adviser provided investment management and advisory services, including for three private funds that it operated: the IIG Trade Opportunities Fund N.V., the IIG Global Trade Finance Fund, Ltd., and the IIG Structured Trade Finance Fund, Ltd. The firm also advised the Venezuela Recovery Fund, a fund that managed the remaining assets of a failed Venezuelan bank.
The U.S. Attorney said from about 2007 to 2019, Hu and co-conspirator Martin Silver, also a co-founder of IIG, engaged in the scheme that defrauded investors in IIG-managed funds by among other things, “overvaluing distressed loans held by the IIG Funds; falsifying paperwork to create a series of fake loans that were classified, fraudulently, as positively performing loans, and to otherwise hide losses; selling overvalued and fake loans to a collateralized loan obligation trust and new private funds established and advised by IIG; and using the proceeds from those fraudulent sales to generate liquidity required to pay off earlier investors in a Ponzi-like manner.”
Silver pleaded guilty to investment adviser fraud, securities fraud, and wire fraud offenses in April 2021 and is awaiting sentencing.
Authorities said IIG advertised itself as specializing in global trade financing, particularly in providing trade finance loans to small and medium-sized businesses. Its “purported expertise was in trade finance loans to borrowers located in Central or South America, and in a variety of industries, with a stated focus on ‘soft commodities,’ such as coffee, agriculture, fishing.” It also claimed that its finance loans were “secured by collateral, such as the underlying traded goods, assets held by the borrowers, or expected payments by third parties.”
According to authorities, all three funds were marketed to institutional investors, including pension funds, hedge funds and insurers. IIG, it said, touted its risk control strategies and its robust credit review process for borrower. IIG purported to value the trade finance loans in its funds on a regular basis. “IIG and, in turn, Hu, received a performance fee with respect to the IIG Funds, as well as a management fee, which was calculated as a percentage of the assets under management held in the Funds,” the court said.
The court said beginning in 2007, Hu and others engaged in various deceptive acts to cover up losses in its Trade Opportunities Fund (TOF). They overvalued portfolio assets and replaced non-performing assets with fictitious loans that were reported as if they were legitimate performing assets, among other deceptions.
In one instance, when IIG learned that a South American coffee producer had defaulted on a $30 million loan by TOF, Hu and Silver, fearing if it was disclosed that existing investors would flee the fund and that ongoing fundraising efforts would suffer, knowingly incorrectly valued the loan at par plus accrued interest on the TOF’s books. The overvaluation of the loan materially inflated the net asset value reported to TOF investors.