SFC freezes fund manager's assets

Charles Schmitt & Associates is suspected of defrauding clients of its fund of hedge funds.

Hong Kong's Securities and Futures Commission has frozen the assets of locally based Charles Schmitt & Associates, an investment advisor and fund manager. The SFC suspects the firm of misappropriating client assets invested in a fund on which the firm's managing director, Charles Schmitt, advised - namely a fund of hedge funds called the CSA Absolute Return Fund, also managed by Schmitt.

CSA manages $200 million. Founded in Hong Kong in 1992, it claims a track record of providing clients with an annual return of 18% net of fees. The CSA Absolute Return Fund, which is not authorized by the SFC, invests in 10 market-neutral sub-fund strategies.

Schmitt is a fixture of the Asian hedge fund scene and a regular speaker at the Terrapinn series of hedge fund conferences held throughout the region. Before moving to Hong Kong he was a senior business manager at the New York Stock Exchange and for a while managed the NYSE's pension fund.

The SFC met with Schmitt yesterday (Tuesday), "during which he was not able to provide satisfactory answers regarding transfers of client monies into bank accounts with which he is connected," says the SFC. "There is suspicion that client assets might have been misappropriated from... the CSA Absolute Return Fund. The SFC therefore believes that clients' property has been dealt with in a manner prejudicial to the interests of the clients... The SFC will continue to look into the case to determine what further regulatory actions may be necessary. The SFC understands that the Commercial Crime Bureau of the Police is also investigating the matter."

The SFC says the case appears to be an isolated case of deliberate fraud, and says fund managers must appoint an independent trustee or custodian to ensure investor protection. As its announcement came after closing hours, FinanceAsia was unable to learn more details about this case, or obtain a response from CSA.

The restriction notice on CSA's assets was issued yesterday pursuant to sections 204 and 205 of the Securities and Futures Ordinance to prohibit CSA from carrying on any of its activities for which it is regulated, and disposing of or dealing with any assets held or controlled by it.