David Hu, the co-founder and chief investment officer of a New York RIA firm, was arrested Friday. He stands accused of involvement in a “string of frauds” aimed “to cover up tens of millions of dollars in losses on bad bets in order to keep his investment advisory business, the International Investment Group LLC (“IIG”), afloat,” according to the Securities and Exchange Commission.
According to the lawsuit, “Beginning in or about 2007, Hu and others at IIG engaged in a practice of hiding losses in the TOF portfolio by overvaluing troubled loans and replacing defaulted loans with fake “performing” loan assets. When it was necessary to create liquidity, including to meet redemption requests, Hu would cause IIG to sell the overvalued and/or fictitious loans to new investors… and use the proceeds to generate the necessary liquidity required to pay off earlier investors.
The U.S. Attorney's Office for the Southern District of New York charged Hu with investment adviser fraud, securities fraud and wire fraud and the SEC filed a civil action on Friday.
According to the SEC, the former CIO committed fraud that was described by the SEC as a “Ponzi-like scheme. ”
According to a press release from the agency, The SEC filed its complaint at the federal district court in Manhattan, and alleges that, “from October 2013, Hu orchestrated multiple frauds on IIG's investment advisory clients.” The complaint states that “Hu grossly overvalued the assets in IIG's flagship hedge fund, resulting in the fund paying inflated fees to IIG. In addition, through IIG, Hu allegedly sold at least $60 million in fake trade finance loans to other investors and used the proceeds to pay the redemption requests of earlier investors and other liabilities.”
The former CIO is accused of going as even deceiving “IIG clients into purchasing these loans by directing others at IIG to create and provide to the clients fake loan documentation to substantiate the non-existent loans, including fake promissory notes and a forged credit agreement.”
Sanjay Wadhwa, Senior Associate Director of the SEC's New York Regional Office, said, "As alleged, Hu's deception caused substantial losses to a retail mutual fund, and other funds IIG advised. The SEC remains committed to holding accountable individual wrongdoers who seek to take advantage of investors for personal gain, including when they employ elaborate means to cover up their fraud."
In November of last year, the SEC charged IIG with fraud, and revoked its registration as an investment adviser. On March 30, 2020, the SEC obtained a final judgment on consent that enjoins IIG from violating the antifraud provisions of the federal securities laws and requires IIG to pay more than $35 million in disgorgement and prejudgment interest.