Banking

N.Y. indictment has ties to ex-Charlotte hedge fund manager

Stephen Maiden, a former Charlotte hedge fund manager, is serving seven years in federal prison for securities fraud.
Stephen Maiden, a former Charlotte hedge fund manager, is serving seven years in federal prison for securities fraud. LinkedIn photo

Two former technology company executives were arrested last week on market manipulation and accounting fraud charges that appear connected to a former Charlotte hedge fund manager already serving time in federal prison.

The indictment unsealed in Manhattan outlines the role of an unnamed, unindicted hedge fund manager in North Carolina that fits the description of Stephen Maiden, who was sentenced in February to seven years in prison for an investment scheme that cost investors at least $8.9 million.

The indictment could bolster a civil suit that more than two dozen individuals, mostly in the Carolinas, filed in 2014 against Maiden and his former hedge fund administrator, SS&C Technologies. That case is currently moving forward in N.C. Business Court.

In last week’s indictment in New York, a federal grand jury charged Kaleil Isaza Tuzman, the former chairman and CEO of KIT Digital, with market manipulation and accounting fraud. The company’s former chief financial officer, Robin Smyth, was charged with accounting fraud.

KIT Digital, a once publicly traded online video technology company, filed for chapter 11 bankruptcy in 2013 after acknowledging accounting errors and irregularities. The company, based in New York, has since emerged from bankruptcy under the name Piksel.

Tuzman and Smith no longer work for the company. Tuzman gained attention in 2001 when the former Goldman Sachs banker was featured in a documentary called “Startup.com” about his company govWorks, which became a casualty of the dot-com bubble.

Tuzman was arrested in Colombia and Smith in Australia, the U.S. Attorney’s office in Manhattan said. The U.S. Securities and Exchange Commission also filed civil charges last week against the pair.

N.C. Business Court suit

The 2014 suit filed by investors against Maiden and SS&C Technologies previously alleged that Maiden had ties to Tuzman, saying they started doing business together in 2008. That suit says Maiden’s involvement with Tuzman and two other individuals led to the demise of his fund.

Maiden, Tuzman and the others “came together for the purpose of using their web of companies to engage in self-dealing for their personal benefit,” the suit alleges.

Gary Mauney, the Charlotte attorney representing the investors in the civil suit, said the context in the indictment indicates Maiden is the hedge fund manager listed as “co-conspirator #1.”

“The allegations of the complaint and the allegations in the indictment more or less read the same way in terms of some of the underlying transactions going on at the hedge fund,” Mauney said. “Certainly the matters that are laid out in the indictment will be part of the discovery in our case, which is ongoing.”

The U.S. Attorney’s Office, the SEC and Maiden’s attorney, Rick Glaser, declined to comment.

The indictment alleges that between December 2008 and September 2011, Tuzman and the hedge fund manager engaged in a scheme to artificially inflate the share price and trading volume for KIT Digital’s stock.

The hedge fund manager, at Tuzman’s behest, purchased and sold shares of KIT Digital to create the “illusion” of greater trading volume, the indictment alleges. Tuzman invested in the hedge fund and directed KIT Digital to invest in the fund without disclosing this to the public, according to court documents.

The civil suit in N.C. Business Court also describes an arrangement in which Maiden agreed to invest in KIT Digital shares “to artificially increase the volume of trading” and to “increase the value of” KIT Digital shares. Maiden, in return, received a “secret payment” for making the investments that he did not disclose to investors, the suit says.

Friend, classmates lost money

Maiden, now 42, launched the Maiden Capital Opportunity Fund in 2006 with investments from individuals in Charlotte and elsewhere, according to federal court documents. Hedge funds are loosely regulated investments for the wealthy.

By February 2009, Maiden had lost a substantial amount of investor funds in a series of failed investments, including in an unnamed “illiquid microcap company,” according to court documents. But to keep investors from pulling their money, he began sending out false statements showing that the fund was doing well and making money, court documents allege. By July 2012, Maiden Capital was insolvent.

Maiden’s scheme lost money for friends, former business school classmates, neighbors and even groomsmen from his wedding, according to the civil complaint in N.C. Business Court.

When Maiden was sentenced in February, U.S. District Judge Robert Conrad and prosecutors acknowledged Maiden had cooperated with an ongoing investigation, including meeting with authorities in New York. Maiden is serving his prison time at a medium-security federal facility in Cumberland, Md.

The investor suit seeks compensatory and punitive damages from Maiden and SS&C Technologies. The suit alleges SS&C papered over “accounting infirmities” at the fund and made a choice to stop “documenting and verifying” the fund’s assets.

Lawyers representing SS&C did not immediately respond to a request for comment.

Rick Rothacker: 704-358-5170, @rickrothacker

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