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Lancer Management Group - Penny stocks (fraudulent)

2003-07

Count of distinct funds: 1
Capital base: $1 billion
Loss: ?

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stories: sec.gov

This narrative contributed by Ann Logue.

Michael Lauer has the honor of being one of the first hedge-fund fraudsters caught by the SEC. Sure, other funds had blown up over the years, but because of investment problems rather than gross misrepresentation, and most of the early frauds were perpetrated by amateurs. Lauer, by contrast, was an established investment manager who attracted about $1 billion in capital from wealthy individuals and large institutions. Lauer invested the fund's money in penny stocks, which are relatively easy to manipulate. Unfortunately, the manipulation didn't go in the fund's favor.

Lauer took advantage of the thin market for these stocks to claim higher values for them than was reasonable, and both Lancer's auditor and bank went along with it. That allowed the fund to report great gains to customers rather than the losses that were occurring when a more reasonable market valuation was used. When the SEC opened its investigation, investors ran for the gates, which forced the fund to sell its illiquid penny stocks at penny prices. Lauer thus blamed the losses on the SEC, but the commission was not persuaded. Instead, it shut down the fund and held Lauer in contempt of court.

The SEC's discussion of the case is here.

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Important: This fund is on our list of hedge funds that have "imploded" (see also ailing lenders). However, please note that "imploded" is a somewhat subjective. The "imploded" list contains hedge funds (or other unregulated and autonomous speculative investment funds) which have gone through some sort of permanent adverse change. This is a somewhat subjective call, and does not necessarily mean total shutdown or bankruptcy. It can also mean steep and rapid mark-downs in net asset value; or abnormal "bail-out" by corporate parents or peers in order to avoid write-downs and provide liquidity. The funds are of any type and sector.