The SEC has filed a complaint against Russell K. Cannon, a financial advisor from North Salt Lake, Utah, for allegedly inflating the assets of his hedge fund, which allowed him to attract new investors and charge excessive fees.
The complaint also names as defendants RKC Capital Management LLC in Delaware and RKC Capital LLC in Salt Lake City. Cannon, 38, is the founder and sole member of RKC Capital and is controlling member of RKC Capital Management.
The defendants artificially inflated the assets of RKC Matador Fund LLC, a hedge fund formed through the two firms, according to the SEC. Cannon is the controlling member and manager of the hedge fund.
Cannon started the RKC companies after establishing a solo investment advisor practice in 2006. He had been a registered representative for Merrill Lynch and Smith Barney before that. He is charged with engaging in the fraudulent behavior from 2007 to 2011.
Cannon overstated the assets of Matador by inflating the price of the hedge fund's largest holding, Global Pari Mutuel Services, according to the SEC. This was done by marking the close of Global's stock, a manipulative trading practice designed to cause the price of a stock to rise at the close of the market, the SEC said.
Global is a penny stock company traded over the counter by way of the bulletin board and pink sheets, which usually means it is made up of highly speculative securities, according to the SEC.
Cannon and the firms also falsely inflated the fund's assets by instructing Matador's fund administrator to record the price of Matador's holdings in Global above the actual market price for about 15 months, according to the SEC. Cannon also misused RKC's client accounts to enhance Matador's profits, the complaint said.
According to the complaint filed in the U.S. District Court for the District of Utah, the defendants falsely represented to investors that Matador's assets under management and performance returns were greater than they actually were. At one point, Matador's assets were overstated by more than 100% and its performance returns were significantly overstated for several months, the complaint said.
Investors also were given statements that reflected holdings and performance reports that were overstated, according to the SEC.
As an example of the over-pricing, the SEC said that in 2010 Cannon had Matador purchase more than 450,000 shares of Global at an average price of $0.35 per share but instructed that they be valued at $0.88 per share, generating false gains for Matador of more than $235,000.