Two Former Hedge Fund Managers Get 3 Years for Fraud

Two former hedge fund managers, who padded their resumes and doctored their company's marketing material to defraud investors out of more than $1 million, were each sentenced to three years in prison Wednesday.

Michael Katz and Christopher Fardella of KMFG International, LLC both pleaded guilty in October 2011 to one count of securities fraud, mail fraud and conspiracy before U.S. District Judge Laura Swain in Manhattan.

The men, along with two other co-defendants, were partners at the Florida hedge fund. From April 2005 through November 2006, they made “cold calls” that netted $1.03 million from investors across the country. During these calls, investors were lied to about the firm’s financial performance and sent materials that claimed the hedge fund was operated by a team of successful traders, hedge fund managers and executives from oil and gas companies with a track record of producing profits.

Instead, what investors got was a group of people who had no experience running a hedge fund and who were never top-level executives in the oil or gas industry.

KMFG’s misleading marketing materials described its trading strategy as focused on “stocks that are overbought or oversold” and said its strategy made the company “relatively insensitive to world events and overall market events.” They claimed their winning strategy had been developed by a current “managing member of KMFG International on a separate equities fund” which had generated  “cumulative returns for 30 months of over 165%.” According to prosecutors, the company never made a profit for any of its investors.

Instead, Katz, 33, and Fardella, 34, used the money they bilked to treat themselves to expensive meals and trips to Las Vegas. According to court documents, the men and their co-conspirators either lost or spent $981,000 out of the $1.03 million they collected from investors.

“Their sentences demonstrate to those who may consider similar schemes that smoke and mirrors will not fool law enforcement, and you will be held accountable for such fraudulent activity,” said U.S. Attorney Preet Bharara.

In addition to their prison sentences, the men were also ordered to pay $981,000.

A third KMFG employee, Kristian Murphy-Fuhse, has been charged for his role in the fraud. He pleaded guilty in January and is awaiting sentencing.

Calls to Katz and Fardella’s attorneys were not immediately returned.