The SEC also alleges that RD Legal and founder Roni Dersovitz repeatedly misled investors about how much they had bet on the outcome of a judgment against Iran for sponsoring a terrorist attack that killed Americans.
An attorney for Dersovitz said the SEC’s action was misguided. “We have always been completely transparent with our investors,” he said.
The SEC action caps a turbulent few years for RD Legal. The fund spent years buying up victim claims tied to a $ 1.8 billion court judgment against Iran for the 1983 bombing of a Marine barracks in Beirut.
In 2015, The Wall Street Journal reported that RD Legal used an accounting strategy allowing it to reap millions from the bet, even before it was clear that the judgment would be paid and investors could profit, according to documents and people familiar with the matter.
At the time, a spokesman for the firm said the money was used to cover “operating expenses”.
The SEC examined RD Legal’s actions as part of a series of new investigations into how hedge funds value thinly traded holdings.
The SEC alleged that Dersovitz, 56 years old, and the firm artificially boosted the values of their holdings at certain instances, allowing them to collect lucrative fees off fund performance. That came as the firm prevented investors from withdrawing their own reported gains.
“In other words, investors got monthly IOUs based on inflated valuations, while RDLC and Dersovitz pulled cash out of the funds and further out of reach of investors,” the SEC said in its suit.
Dersovitz also made misrepresentations to his investors about the concentration of the Iran bet, the SEC said in its order initiating the case before its in-house court. At one point, he said the firm’s maximum exposure to the case was $ 12.5 million; in actuality, it had more than $ 100 million tied to the litigation, the complaint alleged.
The majority of SEC enforcement actions are settled as they are filed. The RD Legal case, however, was filed as one expected to go to trial before an in-house SEC judge. The hedge fund has 20 days to respond to the allegations.
The Supreme Court in April cleared the way for victims of the Beirut attack to collect their judgment against Iran. It wasn’t clear if RD Legal had profited from the bet.
Write to Rob Copeland at firstname.lastname@example.org and Aruna Viswanatha at Aruna.Viswanatha@wsj.com
This story was first published by The Wall Street Journal
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