John M Fife is a "LENDER OF LAST RESORT" according to my research...ADMD is out of cash and has NO prospect of any FINANCING because it squandered all the shares in the EXPANDED AUTHORIZED SHARE COUNT....this is actual COURT DOC from the FIFE CASE in which he settled for about a half million dollars ... UNITED STATES DISTRICT COURT
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) SECURITIESAND EXCHANGE COMMISSION, ) 1 Plaintiff, ) ) v. ) Civil Action No. 1 JOHN M. FIFE and ) ';IUDBEKENNELLY CLARION MANAGEMENT, LLC,
Defendants.
Plaintiff, the United States Securities and Exchange Commission ("SEC"), alleges the
following:
NATURE OF THE ACTION
1. In 2002 and 2003, defendants John M. Fife ("Fife") and Clarion Management,
LLC ("Clarion Management") (collectively, "Defendants") engaged in a fraudulent scheme to , purchase variable annuity contracts issued by the Lincoln National Life Insurance Company
("Lincoln") in order to engage in "market timing" in mutual funds for the benefit of Clarion
Capital, LP ("Clarion Capital"). Clarion Capital was a Chicago-based hedge fund formed by
Fife for the express purpose of engaging in market timing through the purchase of variable
annuity contracts. Fife controlled Clarion Capital and carried out the scheme through Clarion
Management, the hedge fund's general partner and unregistered investment adviser.
2. Knowing that Lincoln's variable annuity contracts were not intended for
professional market timers and that Lincoln monitored activity in these contracts to restrict
excessive trading and took steps to prevent professional market timers fiom obtaining contracts,
Defendants engaged in a deceptive scheme using nominee trusts and other deceptive tactics to
purchase dozens of contracts and engage in hundreds of market timing trades for the benefit of
Clarion Capital.
3. To accomplish their scheme, Defendants first created dozens of phony family
trusts that were in fact wholly owned by and for the benefit of Clarion Capital and controlled by
Clarion Capital through its adviser, Clarion Management. Defendants then purchased the
variable annuity contracts, which were both funded by and for the benefit of Clarion Capital, in
the names of these nominee trusts to hide Clarion Capital's financial interest in all of the
contracts.
4. After obtaining each contract, Defendants engaged in market timing activity in the
mutual funds offered through the variable annuity contracts until they exceeded the level of
transfer activity permitted by Lincoln for individual contracts, at which time Lincoln restricted
Defendants fiom further market timing activity in each such contract by requiring them to submit
hture transfer requests in such contract by U.S. Mail. Lincoln's general practice was to restrict
contracts that exceeded 24 transfers (12 round-tips) per year.
5. By August 2002, when Lincoln began restricting some of these contracts due to
excessive transfer activity, Defendants had invested more than $10 million of Clarion Capital's
hnds for market timing activity at Lincoln through 17 separate contracts held in the name of
different family trusts.
6. When Lincoln restricted a particular contract purchased by Defendant for Clarion
Capital though a nominee trust, Defendants engaged in fiu-ther deceptive conduct to put Clarion
Capital's money back to work, circumventing Lincoln's efforts to restrict market timing by
withdrawing most or all of the funds in such contract, and then using different nominee trusts to
purchase more contracts and engage in more market timing, again using Clarion Capital funds
and again for the benefit of Clarion Capital.
7. On or around November 25,2002, after Lincoln detected some common patterns
in Defendants' market timing scheme, including the fact that all of the trusts through which
Defendants were purchasing the contracts designated Clarion Management as their trustee,
Lincoln informed Defendants that it would block the purchase of any new contracts where,
among other things, Clarion Management was the trustee.
8. Rather than ceasing their market timing activities, Defendants applied additional
layers of deception to evade Lincoln's restrictions. After receiving the November 25 letter,
Defendants again purchased a dozen additional contracts for the benefit of Clarion Capital in the
name of new nominee trusts owned and controlled by Clarion Capital. In addition, in order to
circumvent Lincoln's additional restriction concerning Clarion Management, Defendants created
and used new nominee trustees, wholly owned and controlled by Clarion Management, in
connection with the purchase of additional contracts, in order to conceal Clarion Management's
control over the new trusts and continuing role in the scheme.
9. During the scheme, Defendants engaged in numerous additional deceptive
practices in connection with the purchase of variable annuity contracts from Lincoln in order to
conceal Clarion Capital's common ownership of and interest in the annuity contracts and its
professional market timing activities through these contracts. These additional deceptive
practices included, among other things: (a) obtaining and providing to Lincoln separate tax
identification numbers for each trust to suggest, falsely, that the annuity contracts really were for
the benefit of separate, unrelated family trusts; (b) using seven different brokers through whom
Defendants purchased the contracts in order to diffuse attention; (c) falsely representing to at
least one broker that the family trusts were owned by wealthy families; (d) designating different
contact addresses on some of the later contracts to make the contracts appear unrelated to Clarion
Management; (e) providing Lincoln, for some applications, with selective, incomplete and
misleading portions of trust documents falsely suggesting that the trusts were for the sole benefit
of natural persons; and (f) in some cases, purchasing contracts with a relatively modest initial
investment amounts (under $50,000) to avoid any increased scrutiny that might arise from larger
contracts, and then after the contracts were approved, investing hundreds of thousands of dollars
more of Clarion Capital funds into the contracts to be used for market timing.
10. Defendants' deceptive conduct throughout the scheme was intended to and had
the effect of frustrating Lincoln's efforts to police against market timing, circumventing the
specific restrictions that Lincoln specifically imposed in connection with the contracts that
Defendants caused to be purchased for Clarion Capital's benefit, and concealing Clarion
Capital's identity and professional market timing activity.
11. Ultimately, Lincoln was able to detect and block Defendants from obtaining new
contracts, but not before Defendants had purchased 39 variable annuity contracts from Lincoln,
through which Defendants applied millions of dollars of Clarion Capital's funds for market
timing activity. During the period of the scheme, Defendants were able to engage in more than
,900 market timing transfers (450 "round-trips") for the benefit of Clarion Capital, through their
use of nominee trusts, trustees, and various other deceptive means.
12. During the period of the scheme, Defendants made hundreds of thousands of
dollars in profits for Clarion Capital and themselves from engaging in market timing in the
mutual hdso ffered through Lincoln's variable annuity products. These profits came at the
expense of other mutual fund shareholders, the mutual funds and Lincoln, which was forced to
expend resources to detect and put a stop to Defendants' market timing scheme.
13. Through the activities alleged in this Complaint, Fife and Clarion Management
violated Section lo@) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule lob-5
thereunder. As relief, the SEC seeks: (a) a finding that Fife and Clarion Management violated
Section 10(b) of the Exchange Act and Rule lob-5 thereunder; (b) a finding that Fife was a
control person of Clarion Management for the purposes of Section 20(a) of the Exchange Act;
(c) the entry of orders of permanent injunction against Fife and Clarion Management prohibiting
them fiom engaging in future violations of Section lo@) of the Exchange Act and Rule lob-5
thereunder; (d) ancillary relief in the form of disgorgement of ill-gotten gains against Fife and
Clarion Management, with prejudgment interest; and (e) the imposition of a civil monetary
penalty against Fife.
JURISDICTION AND VENUE
14. This Court has jurisdiction over this action pursuant to Sections 21 and 27 of the
Exchange Act [15 U.S.C. @78u and 78aaI.
15. Venue is proper in this district because many of the acts and transactions alleged
in this Complaint occurred in this district, and also because Defendant Fife resides in the district
and Defendant Clarion Management's principal place of business is located in this district.
16. The Commission seeks a permanent injunction, disgorgement of ill-gotten gains
and the imposition of a civil penalty pursuant to Section 21(d) of the Exchange Act. [15 U.S.C.
§78u(d)i.
17. Defendants, directly or indirectly, made use of the mails and means of
instrumentalities of interstate commerce in connection with the transactions, acts, practices, and
courses of business alleged herein.
DEFENDANTS
18. John M. Fife, age 46, is a resident of Chicago, Illinois. At all relevant times, Fife
controlled Clarion Capital through its general partner and unregistered investment adviser,
Clarion Management.
19. Clarion Management, LLC is an Illinois limited liability company organized in
January 2001. At all relevant times, Clarion Management acted as the general partner and
unregistered investment adviser to Clarion Capital. At all relevant times, Clarion Management
was wholly owned by Clarion, hc., which was wholly owned by Fife.
20. At all relevant times, Fife controlled Clarion Management. At all relevant times,
Fife had the authority to exercise control and did exercise control over Clarion Management in
all aspects of Clarion Management's activities, including: (a) the purchase and surrender of
variable annuity contracts; (b) all investment strategy and transfer activity in the variable annuity
contracts purchased for the benefit of Clarion Capital; (c) all market timing activity; (d) the
creation of trusts, limited liability companies and trustees associated with Clarion Management
or Clarion Capital; (e) the creation and implementation of Clarion Capital's investment strategy;
(f) the actions of all persons employed by Wacker Services Corporation, an affiliated entity, who
performed services for Clarion Management; and (g) the designations of contract owners,
annuitants, beneficiaries and trustees in applications submitted in connection with the purchase
of variable annuity contracts fiom Lincoln for the benefit of Clarion Capital.
THE FRAUDULENT SCHEME
Backwound
Market Timing
21. Market timing refers to the practice of short-term buying and selling of shares of
the same mutual fund in order to exploit inefficiencies in mutual fund pricing.
22. In this case, Defendants sought to engage in market timing in mutual funds
comprised of equity securities traded on overseas exchanges in Europe and Asia.
23. Market timing in such international mutual funds seeks to exploit the fact that the
prices set by such funds for overseas equity securities in their portfolios reflects the closing
prices on the foreign exchange where the foreign securities are listed. These foreign exchanges
close hours before the U.S. national exchanges and securities markets ("U.S. markets").
Consequently, the prices used for valuing the foreign securities in international mutual funds
may not reflect changes in the global markets that occurred after the close of the foreign
exchange but before the close of the U.S. markets. Market timing seeks to take advantage of this
stale pricing of foreign securities in the portfolios of international mutual funds.
24. Most market timing purchases are followed by redemptions the next business day
or shortly thereafter, in order to lock in the gain from the pricing inefficiencies. Each market
timing purchase followed closely thereafter by a redemption is commonly referred to in the
securities industry as a "round-trip."
25. Market timing, while not illegal per se, can adversely affect mutual fund
shareholders because profits that a market timer takes can dilute the value of the shares held by
long-term shareholders. In addition, the frequent in-and-out trading necessary for market timing
activity disrupts portfolio management, increases trading costs (which all shareholders bear), and
may cause the mutual fund to realize capital gains at inopportune times.
26. As a consequence, many mutual funds are averse to market timing and typically
prohibit market timing altogether or impose limitations on the frequency of trades in order to
limit market timing.
Clarion Capital, LP
27. In January 2001, Fife formed Clarion Capital as an Illinois limited partnership for
the express purpose of engaging in market timing in international mutual funds.
28. Clarion Capital operated as a hedge fund, raising money from multiple wealthy
investors through a private placement offering.
29. In the private placement memorandum provided to its investors, Clarion Capital
identified Clarion Management as its general partner, and disclosed that Clarion Management
was responsible for devising and implementing Clarion Capital's market timing strategy. The
private placement memorandum also disclosed that Fife was a principal of Clarion, Inc. and that
Clarion, Inc. was the manager and sole owner of Clarion Management.
30. In its private placement memorandum, Clarion Capital acknowledged that most
international mutual funds did not permit market timing by ordinary investors. Clarion Capital
informed investors that, because of this, it would be engaging in market timing in international
mutual funds indirectly, through variable annuity products offered by insurance companies.
Clarion Capital explained that the reason for this was that most international mutual funds
permitted ongoing sales and redemptions of international mutual funds by insurance companies,
as opposed to ordinary investors, due to the insurance companies' need to continually purchase
and redeem their shares in these international mutual funds to accommodate the investment
decisions of the thousands of individual investors who have invested their funds in the insurance
companies' financial products.
3 1. Clarion Capital acknowledged in its private placement memorandum that some of
the insurance companies that sell variable annuity contracts might impose their own restrictions
on trading in the event that Clarion Capital was deemed to be engaged in excessive trading
through the variable annuities.
32. Consequently, and as stated in the private placement memorandum, it was also
Clarion Capital's express intention not to acquire these variable annuity contracts directly, but
instead to acquire them through wholly-owned limited liability companies.
33. The private placement memorandum warned investors that the opportunity to
engage in market timing in variable annuity contracts might be limited by future regulatory
action because market timing "can be seen as effectively diluting the interests" of other
shareholders.
34. Lincoln was one of the insurance companies through whom Defendants pursued
their market timing strategy on behalf of Clarion Capital.
35. As the general partner for Clarion Capital, Clarion Management operated all
aspects of the partnership, including carrying out the market timing investment strategy. For
these services, Clarion Management charged Clarion Capital an annual management fee of 2% of
assets
