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SEC Charges Georgia Based Fund Investment Adviser With Front-Running and Other Fraud

Last month the Securities and Exchange Commission (“SEC”) commenced an administrative proceeding against an Augusta Georgia investment adviser to a hedge fund called Geier International Strategies Fund, LLC (“GISF”).  According to the SEC’s Order Instituting Administrative Proceedings, Christopher M. Gibson, the fund’s adviser, caused the fund to invest the  majority of the fund’s assets in a single security, then personally profited and helped both his friends and a preferred investor in the fund to personally profit at the expense of the fund and its other members by engaging in frontrunning and other fraudulent conduct.

More specifically the Order alleges that in 2011 GISF had 21 investors and a total asset value of approximately $60 million. In early, Gibson, who had previously advised the fund through a Georgia registered investment adviser called Geier Group, LLC, caused the fund to purchase large quantities of Tanzanian Royalty Exploration Corporation (“TRX”), and Alberta, Canada based gold mining resource company that has never been profitable. The fund held 10.3% of all of TRX’s outstanding common stock by April 29, 2011, a holding that was valued at over $70 million at the time.  However, as TRX’s value plunged from late April to late September, the fund’s value also declined precipitously.

Allegedly after having a conversation with an investor (“Investor A”), Gibson decided to sell the fund’s stake in TRX in late September.  However, before selling the fund’s shares, Gibson sold all of the TRX shares held in his personal account and two other accounts he controlled.  By trading prior to the time he knew he was going to sell the firm’s 3.7 million shares, Gibson was able to obtain an average of $4.04 per share for his personal TRX shares, according to the allegations. The fund’s average price received per share was only $3.50 per share.  Thus Gibson engaged in illegal front running that benefitted him and the other accounts he controlled over the fund’s investors.

Gibson then allegedly engaged in transactions that preferred Investor A, his girlfriend, and a family member.  Specifically, according to the allegations Gibson caused the fund to purchase over 680,000 additional TRX shares in October 2011 directly from Investor A’s personal account.  Even though he had previously determined the fund should divest its TRX holding, this contrary transaction was also improper because Gibson caused the fund to pay a premium for Investor A’s shares.  When Gibson later liquidated GISF’s remaining TRX holdings, the fund suffered further losses since the proceeds were less than the fund had paid Investor A for the shares.

Finally, Gibson is alleged to have favored his girlfriend, his father and himself be recommending, prior to the liquidation of the fund’s TRX shares that they purchase of put contracts with a strike price of $4 and an expiration date in November.  Because Gibson knew that TRX’s price would decline upon the liquidation of fund shares, Gibson acted in violation of his fiduciary duty by using that information to benefit himself and others outside the fund, and engaged in fraudulent conduct in violation of his fiduciary responsibilities.

The SEC charged Gibson with violating Section 10(b) of the Securities Exchange Act and Rules 10b-5(a) and (c), Sections 206(1) and 206(2) of the Investment Advisers Act, and Section 206(4) of the Investment Advisers Act and Rule 206(4)-8 under that Act.

Parker MacIntyre provides legal and compliance services to investment advisers, broker dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our website for more information.

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