Five Charged with Defrauding Hedge Fund Investors

South Florida Business Journal, February 21, 2008.

Five people linked to the now-defunct Lancer Group have been charged with defrauding hedge fund investors of more than $200 million.

Hedge fund manager Michael Lauer was indicted on charges of conspiracy and wire fraud, as were Martin Garvey and Eric Hauser, co-owners of management companies that directed the hedge funds, and Laurence Isaacson and Milton Barbarosh, who had financial interests in Boca Raton -based “shell” companies in which the hedge funds invested, the U.S. Department of Justice said.

According to the indictment, from October 1999 to July 2003, Lauer and his co-defendants manipulated the closing market price of thinly traded shell company securities to falsely inflate the value of the Lancer Group hedge funds. Lauer, Isaacson and Barbarosh identified “shell” companies — including ones owned by Barbarosh — in which the Lancer Group would buy large quantities of restricted stock at pennies a share in private transactions. Lauer, Garvey and Hauser then directed brokers to buy a small amount of the same securities for the Lancer Group at a much higher open market price and to make additional small purchases to drive up the price to a closing target price.

Lauer is accused of then falsely valuing all of the securities held by the Lancer Group, including those restricted shares obtained for pennies a share, at the much higher closing price, which falsely boosted the 20 percent performance fees paid to the management companies; induced new investors to buy into the funds; and kept existing investors in the funds.

Lauer is also accused of creating fake portfolios of the securities supposedly held by the Lancer Group and obtaining falsely inflated appraisals of the shell companies through Isaacson and Barbarosh in order to perpetuate and cover up the scheme.

If convicted, all five men could face a maximum sentence of 20 years for wire fraud, five years for conspiracy and up to $500,000 in fines.

Lancer is also tied up in an ongoing civil suit filed by the Securities and Exchange Commission. The SEC shut down Lancer in 2003.

Attorney Jon Sale, who represents Barbarosh, says it is notable that his client — who is accused of fraudulently valuing the companies — was not included in the SEC suit, and that he maintains his innocence and will vigorously defend himself.

“He is not party to any fraud,” Sale said. “He had a limited role. He did these reports based on hypotheticals, and they were not intended to be used to justify the stock values.”

Attorney Dennis Kainen, who represents Isaacson, said his client is innocent. He added that the SEC investigation is no longer active with regard to Issacson, and that he was exonerated of similar accusations in that matter.

Attorney Carl Schoeppl, who is representing Hauser, said his client intends to defend himself vigorously. The other defendants and their attorneys could not be immediately reached for comment.

In June, Barbarosh, his company Stenton Leigh Group and Lauer were named in a suit brought by the receiver for Lancer Management Group, which is seeking more than $1 billion in damages. The suit maintains Lancer provided investors with inflated reports of the net asset values of its hedge funds, which were managed in New York and the British Virgin Islands. It alleges that Lancer, in some instances using services of Boca Raton-based Stenton Leigh Group, provided investors with inflated valuations of business operations of several companies whose stock Lancer purchased.