A former Montgomery County hedge fund has agreed to pay $6.8 million in fines and restitution in a fraud settlement with the U.S. Securities and Exchange Commission.

The SEC said Covenant Partners' two owners, William B. Fretz Jr. and John P. Freeman, raised millions of dollars from 1999 to 2014, mostly from their family and friends.

"Rather than investing the money as promised," the SEC wrote, "they funneled more than $1 million to [a business of theirs that was failing], paid themselves nearly $600,000 in performance fees they had not earned, and used fund assets to repay personal obligations."

Under the settlement, approved Wednesday by a bankruptcy judge in Philadelphia, Fretz and Freeman did not admit guilt but were barred from denying the findings."

Fretz and Freeman were sanctioned but never criminally charged for improperly investing funds for State Sen. Vincent J. Fumo and his charity, Citizens' Alliance.

In April, The Inquirer reported that after Fumo went to jail in 2009, Fretz and Freeman continued the same pattern of mingling personal interests with investors' money.

In 2013, the Financial Industry Regulatory Authority barred Fretz and Freeman from the finance industry.

Covenant filed for bankruptcy in September 2014, around the same time that a fellow Montgomery County investor was engineering a takeover of Covenant's only major asset - nearly eight million shares in a Plymouth Meeting-based online pet-supply retailer, Pet 360, that was about to be bought out by PetSmart for $160 million.

The ownership of those shares is being litigated in bankruptcy court and a separate shareholder-fraud lawsuit in Delaware Chancery Court.

The outcome of those cases is to determine how much of the settlement the SEC will collect. Covenant, Fretz, and Freeman are all liable for $5.83 million in "ill-gotten gains" and interest, and Fretz and Freeman each owe an additional $500,000 in civil penalties.

The SEC said settlement money is to be distributed to investors harmed by Covenant.

Peter Frorer, the investor trying to claim ownership of the Pet360 shares, opposed the SEC settlement, arguing it would dilute the value of his and other creditors' claims against Covenant.

In a written opinion Wednesday, Judge Stephen Raslavich backed the opinion of trustee Gary F. Seitz that if the SEC charges went to trial, it would be "impossible to win," and damages could be as high as $9 million.

In court filings, Frorer alleges that Fretz has more than $5 million in personal holdings that were not disclosed in the bankruptcy. He cites real estate in Poland, office buildings in Montgomery County, vacation homes on the Jersey Shore and in the Poconos, a vineyard in California, and a wine collection worth $100,000.

Seitz, the trustee handling Covenant's case, said he had not seen those assets before Frorer's filing and was investigating whether they could be liquidated, "and other potential lawsuits" against Fretz and Freeman once the issue of the Pet360 shares is settled.

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