Former Hedge Fund Manager Recently Arrested in Italy After Being on Run for Five Years Named in Grand Jury Indictment That Alleges Market Manipulation Scam That Caused $200 Million in Losses
|U.S. Attorney’s Office March 20, 2013|
LOS ANGELES—A German national who managed a series of hedge funds based in the Cayman Islands has been indicted on federal fraud charges alleging that he oversaw a stock manipulation scheme designed to “pump up” the reported returns of his hedge funds, while self-dealing for his own benefit to the detriment of the funds, in a fraud that caused investors to loss approximately $200 million.
Florian Wilhelm Jürgen Homm, 53, was named in a 10-count indictment that was returned late Tuesday afternoon by a federal grand jury in Los Angeles.
The indictment specifically charges Homm with one count of conspiracy to commit securities fraud, eight counts of securities fraud, and one count of wire fraud. The indictment also contains a forfeiture allegation that would cause Homm, if he is convicted of any of the 10 counts in the indictment, to forfeit to the United States “any and all property, real and personal, which constitutes or is derived from proceeds traceable to” any crime to which he is found guilty.
Homm is currently in custody in Italy after being arrested on March 8 at the Uffizi Gallery in Florence. Homm was arrested pursuant to the United States’ request for his provisional arrest pending extradition, based on a criminal complaint relating to the alleged fraud that had been filed by federal prosecutors in Los Angeles. The indictment filed yesterday in Los Angeles replaces the criminal complaint as the charging document.
Homm was the founder and chief investment officer of Absolute Capital Management Holdings Limited, a Cayman Islands-based investment advisor that managed eight hedge funds from 2004 until September 2007. As part of the alleged scheme, Homm bragged to investors that Absolute Capital was named overall winner for 2006 of the European Hedge Fund Group, by the publication Hedge Fund Review.
Court documents filed in United States District Court in Los Angeles—specifically, the indictment and the affidavit in support of the criminal complaint—allege that Homm directed the hedge funds to buy billions of shares of thinly traded, United States-based “penny stocks.” Homm caused most of the purchases of penny stocks to be made through Hunter World Markets Inc., a broker-dealer in Los Angeles that Homm co-owned. Homm, who at the time of the alleged scheme resided in Palma de Majorca, Spain, also allegedly obtained shares of the penny stock companies through various businesses he controlled.
After the hedge funds invested hundreds of millions of dollars in the illiquid penny stocks, Homm’s co-conspirators used a secret instant messaging system to avoid the scrutiny of regulators and caused the hedge funds to trade the stocks among themselves in “cross-trades” made through the Los Angeles-based broker dealer. The cross-trades served to increase the trading prices of the previously illiquid stocks and, in turn, to boost the net asset values and apparent performance of the hedge funds, in a practice called “portfolio pumping.” This apparent performance improvement at the hedge funds generated additional fees for Homm and Absolute Capital. It also boosted Absolute Capital’s stock price on the London Stock Exchange, Alternative Investment Market, from which Homm profited by selling shares. As part of the stock manipulation scheme, Homm and others also allegedly sold their own shares of the penny stocks to the hedge funds managed by Homm.
The indictment alleges that Homm and several co-conspirators who have not been indicted at this time “fraudulently manipulated these stocks to inflate and/or artificially prop up their prices to exaggerate the purported profitability of the hedge funds holding them.
“This enabled the co-conspirators to sell their own shares of the penny stocks at the inflated prices to the hedge funds. The stock price inflation also served to fraudulently overstate the performance of the hedge funds which, in turn, generated substantial performance fees and other compensation for defendant Homm and his co-conspirators,” according to the indictment.
Folllowing allegations made by a “whistleblower” in 2006, Homm dumped tens of millions of dollars worth of his own shares in Absolute Capital and resigned from the firm in the middle of the night on September 18, 2007. The scheme allegedly netted Homm and his co-schemers more than $53 million via trades made through Hunter World Markets alone.
An indictment contains allegations that a defendant has committed a crime. Every defendant is presumed innocent until and unless proven guilty in court.
Each charge of conspiracy to commit securities fraud and securities fraud carry a statutory maximum penalty of 25 years in federal prison. The wire fraud count carries a maximum penalty of 20 years in prison.
The case against Homm is the product of an ongoing investigation by the Federal Bureau of Investigation. Agents in the FBI’s Los Angeles Field Office worked with the FBI’s Legal Attaché Office in Rome and its sub-office in Milan, where agents worked collaboratively with Italian authorities, to secure the apprehension of Homm. The U.S. Department of Justice Attaché in Rome provided substantial assistance.
The Securities and Exchange Commission provided assistance to the FBI’s investigation.
Two years ago, the United States Securities and Exchange Commission filed a civil lawsuit in Los Angeles federal court against Homm and four other defendants, alleging a microcap stock manipulation scheme as part of “portfolio pumping” plot to increase the value of Absolute Capital (see: http://www.sec.gov/litigation/litreleases/2011/lr21865.htm).
Homm recently published a book that was translated into English under the title Rogue Financier: The Adventures of an Estranged Capitalist.