Hedge fund faces criminal charges

Beacon Rock Capital L.L.C. was charged with defrauding mutual funds of $2.4 million, the first hedge fund in U.S. history to be accused criminally with deceptive market timing, Philadelphia's U.S. attorney said yesterday.

Thomas Gerbasio, 36, the former vice president of mutual funds at Fiserv Securities Inc., of Philadelphia, was also charged in the case, Philadelphia U.S. Attorney Pat Meehan said in a statement. Market timing involves short-term trading that tries to take advantage of perceived inaccuracies in mutual fund share prices, Meehan said.

Gerbasio and Portland, Ore.-based Beacon Rock executed trades using that strategy after mutual funds they used had said it was potentially harmful to fund investors, Meehan said. Beacon Rock made more than 26,000 market-timing trades, and Gerbasio earned about $215,000, Meehan said.

"Gerbasio and Beacon Rock were aware of and received numerous potential warnings from mutual fund companies that market timing was unwanted and potentially harmful to their shareholders," Meehan said. "The defendants simply found a way around the obstacles by cheating."

Beacon Rock deceived the mutual funds, none of which were named by Meehan, by using multiple account numbers, trading in amounts less than thresholds that triggered fund surveillance, and misrepresenting its trading strategy when questioned by the funds, Meehan said.

If convicted, Beacon Rock faces a maximum fine of $25 million. Gerbasio faces up to 20 years in jail plus a three-year period of supervised release and a $5 million fine.

Gerbasio settled a civil suit over market timing for hedge fund customers with the U.S. Securities and Exchange Commission in April 2006 for an undisclosed amount.

"Beacon Rock is cooperating with law enforcement authorities in the investigation," said the hedge fund's attorney, Scott Resnik of New York's Katten Muchin Rosemman. "No individuals at the company have been charged with criminal wrongdoing. The company is taking full responsibility."

Calls to Joseph Grimes, an attorney for Gerbasio, were not immediately returned.