The head of a former registered investment advisor pleaded guilty for his role in a variety of schemes that defrauded investors out of more than $100 million, according to the U.S. Justice Department.
Several days after David Hu, a managing partner and the chief investment officer for the New York-based International Investment Group (IIG), pleaded to the DOJ charges on Jan. 28, a federal judge affirmed the SEC’s request for an injunction against Hu, enjoining him from violating antifraud provisions of federal securities laws. Last July, the SEC and DOJ charged Hu for his role in the schemes.
According to Manhattan U.S. Attorney Audrey Strauss, Hu did not meet his fiduciary responsibilities while defrauding investors out of millions over the course of more than a decade.
“Hu mismarked millions of dollars of loan assets, falsified paperwork to create fake loans, sold overvalued and fake loans and used the proceeds from those sales to pay off earlier investors, and falsified paperwork to deceive auditors and avoid scrutiny,” she said. “He now faces a serious term of imprisonment.”
According to the SEC, Hu “grossly overvalued” assets that included his firm’s main hedge fund, which left the fund paying higher fees back to the firm. Additionally, the SEC argued that Hu sold at least $60 million of falsified trade finance loans, using the earnings to pay back earlier investors. (Trade finance loans are risky loans for small or mid-sized companies in emerging markets, according to the Commission’s July complaint against Hu.) To hide losses, Hu would overvalue loans and replace defaulted ones, and would even create fictitious loans to borrowers, often in foreign countries, according to the Justice Department. In order to pass the scrutiny of auditors, the DOJ asserted that Hu sometimes directed entities controlled by IIG’s business associates to confirm the existence of these loans to auditors.
An attorney representing Hu did not return a request for comment as of press time.
In December 2012, the firm became an advisor to a mutual fund marketed for retail investors, and began making investment recommendations, including that the fund should invest in IIG’s trade finance loans, according to the DOJ. In one instance, IIG recommended that the fund invest in loans to an unnamed borrower from Argentina, the Justice Department stated. But by early 2017, that borrower did not pay the principal on the fund’s $6 million loan. To ensure the fund would continue to invest in IIG loans, Hu made an attempt to conceal the borrower’s default, according to the DOJ.
“For example, in or about March 2017, (Hu) caused approximately $6 million to be transferred into an account associated with the Argentine Borrower from the account of a different borrower (“Borrower-1”), and further directed the funds from Borrower-1’s account to pay off the debt owed by the Argentine Borrower to the Retail Fund,” the charges against Hu read.
To replace the funds from the other borrower’s account, Hu reportedly convinced the fund for retail investors to invest in a new (and fictitious) $6 million loan to the buyer from Argentina, and then had that money transferred into the other borrower’s account, “effectively reimbursing” that borrower for the $6 million it paid to close the default of the original loan, according to the DOJ. Apparently, Hu also forged documents legitimizing this new loan, the charges stated. But according to the Justice Department, in 2017 the retail funds’ representatives raised concerns about the loans; Hu failed to disclose that the last loan had been fraudulent, and the fund eventually lost its entire $6 million investment.
Hu pleaded guilty to investment advisor fraud, securities fraud, and wire fraud offenses, which carry potential sentences ranging from five to 20 years in prison; the sentencing is scheduled for June 17. Hu agreed to forfeit $129 million “representing proceeds traceable to the commission of the offenses,” according to the DOJ, but in March 2020 the SEC also required IIG to pay more than $35 million in disgorgement and prejudgment interest. The SEC revoked IIG’s registration in November 2019.
