David Bryson, 46, and Bart Gutekunst, 63, two former managing partners of Connecticut-based hedge fund New Stream Capital, were sentenced Wednesday to federal prison for their role in a scheme to defraud investors.
Bryson was sentenced to 33 months; Gutekunst was sentenced to 30 months.
“In an effort to protect their own invested money and to collect more than $5.8 million in additional fees, New Stream executives devised and promoted a series of misrepresentations carefully calculated and designed to keep existing-investors in the dark about the true risk of the fund and to deceptively raise millions of dollars in new investments in an effort to keep their fund viable,” said First Assistant U.S. Attorney Michael J. Gustafson.
“A prison term is an appropriate result for such criminal conduct,” he added.
In November 2007, New Stream Capital restructured its funds by launching a new feeder fund in the United States and a series of feeder funds based in the Cayman Islands. At the same time, New Stream announced that its Bermuda fund would be closing and that all foreign investors would have to move their investments into the Cayman funds.
The restructuring eliminated the preferential liquidation rights previously enjoyed by the feeder fund through which the fund’s largest investor, Gottex Fund Management Ltd., had invested. Gottex threatened to pull its $300 million investment in March 2008, the U.S. Securities and Exchange Commission said in its federal complaint.
Faced with the redemption request, Bryson and Gutekunst, along with chief financial officer Richard Pereira, 40, devised a scheme to retain their largest investor by secretly keeping the Bermuda fund open and giving priority to investors in the Bermuda fund.
New Stream failed to inform investors, who had moved funds from Bermuda into the Cayman funds, that the Bermuda fund remained open and that it enjoyed priority over the Cayman funds. In its marketing materials, the hedge fund also omitted the continued existence of the Bermuda fund.
The SEC said disclosure of the fund structure would have made it much more difficult to raise new money through the feeder funds and would have spurred redemptions from existing investors.
“As such, disclosure of the March 2008 changes would have adversely affected the defendants’ own pecuniary interests by, among other things, jeopardizing the increased cash flow from a new, lucrative fee structure that they had implemented in the fall of 2007,” the writ stated.
The three executives pleaded guilty to criminal fraud charges in May 2014. Pereira was due to be sentenced Thursday, May 7.
New Stream, an asset-based lender which at one time had about $750 million assets under management, suffered as the financial crisis worsened and received $545 million in redemption requests in September 2008, causing it to suspend further redemptions. After several unsuccessful restructuring attempts, New Stream filed for Chapter 11 bankruptcy protection in March 2011.
While preferred class investors were expected to recover about half of their investment, investors in the Cayman funds were expected to receive only 5 cents on the dollar, the SEC said.
“The defendants devised a fraudulent scheme to protect the assets of their largest client at the expense of their other investors,” said Cheryl Garcia, special agent in charge of the New York Office of Labor Racketeering and Fraud Investigations for the Office of Inspector General of the U.S. Department of Labor. “One of the investors deceived and victimized by the conspirators was an employer retirement trust covered by the Employee Retirement Income Security Act. Employees participating in the trust lost millions of dollars in retirement savings,” she added.