Federal regulators have filed suit alleging the owners of a now-defunct Santa Rosa investment firm invested retirement money in a risky hedge fund and were given undisclosed financial incentives in return.
The U.S. Department of Labor civil suit is the first regulatory action taken against the founders of Zenith Capital in connection with the collapse of Global Money Management, a San Diego hedge fund that failed in 2004.
Zenith put $39 million into the hedge fund for more than 100 Bay Area investors, including 13 retirement plans.
The lawsuit will attempt to force Zenith's owners to repay all losses to the retirement plans, plus interest. It did not specify the amount of the financial losses. The suit also seeks to permanently ban the three owners from providing any investment advice to retirement plans.
Named in the suit are Rick Tasker, now with Epoch Consulting in Santa Rosa, and Jed Cooper and Gregory Smith, both now with the Annadel Group of Santa Rosa and San Rafael.
"We've done nothing wrong," Tasker said Friday, declining further comment. Neither Cooper nor Smith returned phone calls.
The suit, filed Thursday in U.S. District Court in San Francisco, follows a two-year investigation by the Labor Department's Employee Benefits Security Administration. The agency regulates pension plans sponsored by corporations and labor unions.
"We will vigorously pursue investment advisers who try to line their own pockets by illegally steering pension investments. Fiduciaries must invest solely in the interests of the workers to whom these funds ultimately belong," said Bradford Campbell, assistant secretary for the employee benefits agency.
Zenith steered millions of dollars into Global Money Management before its collapse. More than half of the hedge fund's 194 accounts were held by Zenith clients, including 60 from Sonoma County.
The suit makes two claims: That Zenith's owners violated their fiduciary duties to the retirement plans; and that they engaged in prohibited transactions by collecting undisclosed fees.
In November 1998, Global Money Management's general partner, LF Global Investments, agreed to pay the defendants half of all incentive fees it received from investments made by Zenith clients.
Zenith's owners invested funds from 13 retirement plans in Global Money Management between April 1999 and September 2003, according to the suit.
But the defendants allegedly did not inform the retirement plans about the incentive fee agreement. Those fees accounted for 22 to 38 percent of Zenith's annual revenues from 2000 to 2003, according to the suit.
In June 2000, LF Global took a 10 percent ownership interest in Zenith. That stake was reduced to 6.7 percent in January 2002 following a merger with Wealth Management Consultants, according to the suit.
Zenith invested retirement plan funds in Global Money Management even though it did not fit the plans' stated investment goals. While Global documents warned investors that the hedge fund was highly risky, Zenith's owners told clients Global was a safe and conservative investment, according to the suit.
Zenith's owners did not inspect Global's books, verify earnings statements, or conduct background checks on Global's principal officials, according to the suit.
Global was the only hedge fund the defendants recommended to their clients, according to the suit.
Zenith's ties to Global came to light in March 2004 when federal regulators seized the hedge fund after investors complained they could not get their money out. The Securities and Exchange Commission filed a civil complaint in U.S. District Court in San Diego accusing fund manager Marvin Friedman of securities fraud and put the fund in a receivership.
The next day, the receiver filed bankruptcy on behalf of the fund. Global had told investors it had more than $100 million in its accounts, but the receiver found only $8,524 in cash and $3 million in stock.
Claims in the bankruptcy total $70 million. As of June, the receiver has approved $30 million in payments. The receiver projects up to $1.5 million more in payments before the receivership is closed out.
Friedman was sentenced to six years in federal prison after pleading guilty to one count of money laundering and one count of filing a false tax return.
Global's other principal official, Paul Levy, was sentenced to five years in federal prison after pleading guilty to one count of conspiracy to commit wire fraud and mail fraud and filing false tax returns.
You can reach Staff Writer Michael Coit at 521-5470 or mike.coit@pressdemocrat.com.
UPDATED: Please read and follow our commenting policy: