The Securities and Exchange Commission has filed a civil action alleging ThinkStrategy Capital Management and its sole managing director overstated the returns of its hedge funds and withheld fund profits from investors.

The company and the managing director, Chetan Kapur have consented to an agreement-without admitting to nor denying the charges-that forbids them from being involved in the securities industry and requires them to pay unspecified penalties with interest, according to the SEC.       

Filed in U.S. District Court for the Southern District of New York last week, the SEC complaint charges New York-based ThinkStrategy and Kapur, 36, with several securities violations. The SEC asks that Kapur ans his firm be permanently banned from the securities industry, for the court to impose unspecified civil monetary penalties, for them to surrender the profits and proceeds they obtained and for them to pay prejudgment interest.

Kapur's two hedge funds were ThinkStrategy Capital Fund and TS Multi-Strategy Fund. The Capital Fund traded primarily equities, while the larger Multi-Strategy Fund held investments in other hedge funds. At its peak in 2008, ThinkStrategy managed approximately $520 million in assets.

The SEC alleges that ThinkStrategy and Kapur, between 2004 and November 2010, engaged in a pattern of deceptive conduct designed to bolster their track record, size, and credentials. Specifically, ThinkStrategy and Kapur materially overstated the performance of the Capital Fund, giving investors the false impression that the fund's returns were consistently positive and minimally volatile, according to the SEC.

The SEC also alleges that ThinkStrategy and Kapur repeatedly inflated the firm's assets, exaggerated the firm's longevity and performance history, and misrepresented the size and credentials of ThinkStrategy's management team.

With respect to the Multi-Strategy Fund, a fund of hedge funds, the complaint alleges that ThinkStrategy and Kapur misstated the scope and quality of due diligence checks on certain managers and funds selected for inclusion in the portfolio.

The SEC's complaint also alleges that ThinkStrategy and Kapur told investors that all funds in the portfolio would be selected using a rigorous due diligence process, including having reputable service providers, but instead selected several funds that failed to meet this standard. As a result, the Multi-Strategy Fund made investments in certain hedge funds that were later revealed to be Ponzi schemes or other serious frauds, including Bayou Superfund, Valhalla/Victory Funds and Finvest Primer Fund, according to the SEC.

The SEC also alleges that had ThinkStrategy adhered to its stated due diligence standards, and required audited financial statements certified by bona fide accounting firms, the Multi-Strategy Fund may not have invested detrimentally in those funds.

-Jim McConville