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Hedge fund manager James Shepherd pleads guilty to commodity pool fraud

Tuesday, June 18, 2013
From Precy Dumlao, Opalesque Asia – North Carolina hedge fund manager James Alexander Shepherd pleaded guilty to defrauding investors of at least $6m after admitting to using a personal post office box and bogus bank statements to hide his criminal activities for nearly seven years, prosecutors said in a statement.

Anne M Tompkins, United States Attorney for the Western District of North Carolina said that the 58-year-old Shepherd admitted to one count of securities fraud. Court documents showed that from 2006 through 2013, Shepherd defrauded over 100 investors in Union County and elsewhere of approximately $6m.

Shepherd was charged with promising his victims returns on their investments in funds Shepherd owned and controlled, including The Shepherd Major Play Option Fund, LP and the Shepherd’s Model Hedge Fund. In addition, Shepherd had some individual investors that invested their money independently of any particular investment vehicle. Court records showed that in about 2006, Shepherd began misappropriating investor money from the Major Play Fund.

Shepherd used the funds to pay investors of his hedge fund, to trade in his personal accounts, and to fund the operations of Shepherd’s newsletter, which offered investment news and advice to thousands of subscribers. Shepherd also used the money to fund his personal lifestyle. Documents indicated that Shepherd built a $2m residence in Vass, North Carolina, and used investor money to make mortgage payments on the residence.

To conceal his fraudulent conduct, Shepherd sent to investors certified financial statements for the Major Play fund, accompanied by an Independent Auditor’s Report that assured the investors that an independent audit on the fund had been conducted in compliance with the rules of the United States Commodities Futures Trading Commission. The false financial statements also misrepresented to investor victims the financial condition of the fund.

In one instance, in December 31, 2012, Shepherd represented in a fraudulent statement that the fund had a $6,041,850 cash balance, when in reality the fund had less than $100,000 at the time. Shepherd was able to obtain the Independent Auditor’s Report each year by tricking the accountant who provided it.

According to common practice at the time, the accountant would send a letter of inquiry to the bank the fund held its account, requesting the fund’s cash balance. On each occasion, the accountant sent the inquiry letter to the bank’s post office box address provided by Shepherd and to the attention of “Charles Fisher,” who was purportedly working at the bank. But records showed that the accountant would then receive a letter or fax confirmation from Charles Fisher verifying the Major Play Fund’s bank balance, as well as a copy of the bank statement confirming the cash balance of the fund.

It was learned that Charles Fisher was a fictitious bank employee. Shepherd would forge the name Fisher on a fake bank letter and send forged bank statements with fake balances. Shepherd generated the fraudulent bank statements using a version of Adobe Acrobat that enabled him to type false numbers over true bank statements. Shepherd also controlled the PO box.

“For seven years, Shepherd used his investment fund as his personal piggy bank and repeatedly lied to his investors who trusted him with their savings. This is not the case of a single bad investment. Shepherd used his investors’ money to fund his failing investment funds and his personal lifestyle and prolonged the fraudulent scheme through trickery and lies. Prosecuting investment schemes is a priority for this office, and we will continue to go after those who make false promises and steal people’s hard-earned money,” said Tompkins.

“James Shepherd went to great lengths to conceal his criminal scheme, even creating phantom bank employees in order to fool the auditors tracking his accounts. The FBI and our law enforcement partners will keep exposing those responsible for these crimes as long as innocent people are cheated out of their hard earned money,” said John A Strong, Special Agent in Charge of the Charlotte Division of the FBI. The bill of information filed against Shepherd includes a notice of forfeiture, which gives notice that the defendant must forfeit to the United States of the property involved in the offenses charged in the information and all property that is proceeds of such offenses. Shepherd’s initial appearance and plea hearing have not been set yet by the court.

Shepherd faces a maximum of 20 years in prison and a $5m fine. As part of his plea agreement, Shepherd has agreed to pay full restitution to his victims, the amount of which will be determined by the court at sentencing. In a related action, the CFTC also filed a civil enforcement action against Shepherd. The case was investigated by the FBI.

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