Minneapolis hedge fund manager Steven Markusen and partner Jay Cope stand accused of bilking more than $1 million from investors by rigging invoices for false research fees and by manipulating the stock price of one of the fund's largest holdings.
In a lawsuit filed this week in U.S. District Court in Minneapolis, the U.S. Securities and Exchange Commission (SEC) alleged that Markusen, Cope and Markusen's Archer Advisors violated antifraud provisions of federal securities laws and various reporting requirements.
The enforcement body seeks the disgorgement of ill-gotten gains from the defendants and an order enjoining them from future securities laws violations.
Markusen, 60, of Minneapolis, and Cope, 55, of Shorewood, could not be reached for comment.
According to the SEC suit, Markusen and Cope collected phony research expenses and fees from 2008 until 2013, when Wayzata-based Archer Advisors ceased operations.
"Markusen and his firm had an obligation to manage investor money in the hedge funds fairly and honestly. Instead, he and Cope exploited their control of the funds to engage in long-running schemes to misappropriate fund assets and artificially pump up the value of the poorly performing funds," Robert Burson, associate director of the SEC's regional Chicago office, said in a statement.
Markusen and Archer Advisors, which was formed in 2002, ran two hedge funds with more than 60 investors and $36 million under management.
The suit says that Markusen billed the two funds for nearly $500,000 in fake expenses, mostly for purported research. Also under the guise of research, Markusen obtained $100,000 to pay Cope's salary. Another $450,000 came from the funds to cover the expenses of Cope performing duties as outside research consultant, the suit alleged.
"The claim was a fiction," the SEC contends. "In fact, Cope was an Archer insider and officer whose main duties were helping Markusen find new investors and placing trades."
According to the suit, Cope was usually paid in installments of $10,000 a month, of which $1,000 a month would be kicked back to Markusen.
Markusen used the money for personal expenses such as country club dues, a Lexus and tuition for a Connecticut boarding school, the suit alleged.
Markusen and Cope are also accused of excessive day-trading to gin up fee commissions from the brokerages handling the accounts of the two funds. The so-called "soft money" was supposed to pay for third-party investment research.
By placing hundreds of day trades, the two racked up commissions of more than $100,000 in just five months, the suit alleged.
In 2010, the government says, Markusen and Cope began pumping up the value of one of the largest holdings, CyberOptics Corp., a Minneapolis-based company that manufactures an inspection system for circuit board and semiconductor production.
By making last-minute buy orders on the final trading day of the month, Markusen and Cope would artificially inflate the price of the thinly traded stock, according to the suit. The practice is known as "marking the close." Markusen and Cope did it 28 times, the suit alleged.
The funds' portfolios were valued at the end of the month. "A higher [CyberOptics] closing price at the end of the month thus allowed Markusen to both inflate the funds' performance to investors and extract more management fees," the suit said.
By the end of 2012, the value of the hedge funds was less than $10 million "due to both poor performance, which was exacerbated by phony expenses, and investors leaving the funds because of that performance," the suit said.
Archer Advisors closed in October 2013, shortly after Markusen and Pope learned of an SEC investigation, according to the suit.
David Phelps • 612-673-7269