SEC says UK hedge fund defrauded U.S. mutual funds

By Martha Graybow

NEW YORK (Reuters) - U.S. securities regulators filed a civil lawsuit against Headstart Advisers Ltd on Thursday, contending the British-based hedge fund defrauded U.S. mutual funds through improper trading several years ago.

The case is the second in a week brought against a UK hedge fund over allegations of late trading and deceptive market timing, practices that shook the U.S. mutual fund industry in 2003. Numerous enforcement actions were subsequently brought against U.S. fund firms and brokers.

The new lawsuit by the U.S. Securities and Exchange Commission was filed against Headstart and its investment adviser, Najy Nasser, a 39-year-old resident of Monaco and graduate of the London School of Economics.

The SEC, in a complaint filed in U.S. District Court in Manhattan, said Headstart actively traded U.S. mutual funds from about September 1998 to September 2003, and routinely engaged in late trading of U.S. mutual funds and deceptive techniques to market time the funds.

Headstart earned illicit profits of about $198 million (100 million pounds) through the activity, according to the SEC. The fund had assets under management of at least $500 million at one point, the SEC said.

Headstart and Nasser "employed a number of deceptive tactics, including utilizing multiple accounts ... to help conceal Headstart Fund's identity and thereby trick the U.S. mutual funds into accepting Headstart Fund's trades," the complaint said.

Headstart tried to elude detection by setting up trading subsidiaries with unrelated names, the SEC said.

A company document cited in the complaint gave employees instructions in naming new accounts or trading subsidiaries, telling them that "Shakespeare, TV shows or comics are an untapped pool of names, the Classics have been done to death," according to the SEC.