As previously reported in the Hedge Fund Law Report, on March 24, 2011, the SEC brought a civil enforcement action against Marlon Quan, and the firms he managed, Acorn Capital Group, LLC (ACORN) and Stewardship Investment Advisors, LLC (SIA), in the U.S. District Court for the District of Minnesota. The SEC accused Quan of using his hedge funds to facilitate a Ponzi scheme orchestrated by Thomas J. Petters by funneling hundreds of millions of dollars of investor money to Petters, while falsely assuring investors of actions taken to protect their investments. See “SEC’s Hedge Fund Focus to Include Review of Funds That Outperform the Market
,” Hedge Fund Law Report, Vol. 4, No. 14 (Apr. 29, 2011). The SEC filed the action on that date in order to stop the imminent distribution of approximately $14 million in settlement funds – obtained from the Petters’ bankruptcy and receivership estates – to certain of Quan’s offshore hedge funds, and to prevent Quan from allegedly dispersing more assets to individuals associated with him. The SEC did so, it said, to protect the interests of investors in Quan’s onshore hedge funds. Thus, the SEC also named as “relief defendants” (defined as persons or entities who received ill-gotten funds or assets as a result of the illegal acts of the defendants) the company that held the settlement funds on behalf of Quan’s associated entities, Asset Based Resource Group (ABRG), and Florene Quan, Quan’s wife who allegedly received certain properties from Quan for nominal value. See, by way of background, “Connecticut District Court Dismisses Complaint Against Hedge Fund Manager and Investment Adviser for Lack of Venue
,” Hedge Fund Law Report, Vol. 2, No. 20 (May 20, 2009). After filing the complaint, the SEC immediately filed a motion to obtain an order freezing the assets of all named defendants, appointing a receiver over certain of Quan’s onshore entities and ABRG, and enjoining Quan, Acorn and SIA from further violations of securities laws. A Bermuda court-appointed liquidator, who took over Quan’s offshore hedge funds, successfully moved to intervene for the limited purpose of being heard regarding the disbursement of settlement proceeds and to object to the appointment of a receiver over ABRG. We detail the background of the action and the Court’s legal analysis. For more on receivers in the hedge fund context, see “Seventh Circuit Approves Federal Receiver’s Hedge Fund Liquidation Plan Subordinating Priority Rights of Redeeming Investors; Agrees That Equity Mandates That All Investors, Redeeming and Not, Be Treated Equally Where Fund Lacks Sufficient Assets to Make Them Whole
,” Hedge Fund Law Report, Vol. 3, No. 50 (Dec. 29, 2010).