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Investment Adviser CIO Charged with Running Ponzi-Like Scheme

David Hu could face up to 45 years in prison for allegedly selling $60 million in fake loans.
By Michael Katz


The co-founder and CIO of an investment adviser firm is facing the possibility of up to 45 years in prison after being charged by the US Securities and Exchange Commission (SEC) and the US Justice Department for running a $60 million Ponzi-like scheme.

The financial regulator alleges that International Investment Group (IIG) CIO David Hu, 62, grossly overvalued the assets in the firm’s flagship hedge fund, which led to the fund paying inflated fees to IIG. Hu also 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.

“As alleged, Hu’s deception caused substantial losses to a retail mutual fund, and other funds IIG advised,” Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office, said in a statement. “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.”

IIG specialized in advising clients with respect to investments in emerging market economies from its inception in 1994 until its registration as an investment adviser was revoked by the SEC in November due to fraud.

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According to the SEC’s complaint, the company launched three private funds beginning in 1998 that had the stated strategy of investing in trade finance loans. Trade finance loans are loans made to small- to medium-sized businesses, usually commodities exporters located in emerging markets. The loans are typically risky investments because the borrower’s ability to repay could be impacted by less stable regulatory and economic conditions in the borrower’s home country.

All three of the private funds were marketed to pension funds, insurers, and hedge funds as a way to diversify their portfolios with exposure to trade finance loans in Latin America. IIG touted its risk control strategies, which included portfolio concentration limits at the borrower, country, and commodity level, and boasted about its robust credit review process for borrowers.

Hu prepared valuations of the private funds on a regular basis, including through a determination of the funds’ net asset values (NAV), and IIG received compensation based on the NAV and performance calculations.  

The SEC said that beginning in 2007, Hu and others “engaged in various deceptive acts to misrepresent the performance of and conceal losses,” including overvaluing portfolio assets and replacing non-performing assets with fictitious loans that were reported as legitimate performing assets.

IIG had learned that a South American coffee producer had defaulted on a $30 million loan by one of its funds, but Hu allegedly decided to conceal the loss and knowingly valued the loan incorrectly. The overvaluation of the coffee loan materially inflated the NAV reported to investors, according to the SEC.

The SEC also accuses Hu and others at IIG of hiding losses 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 allegedly cause IIG to sell the overvalued and/or fictitious loans to new investors, according to the SEC’s complaint, and “use the proceeds to generate the necessary liquidity required to pay off earlier investors.”

IIG also advised an open-end mutual fund marketed to retail investors and selected trade finance loans for the retail fund’s portfolio. The SEC said that in March 2017, the borrower of one of the loans IIG had recommended had defaulted on a $6 million payment. Worried that the default would lead the retail fund to end the advisory relationship, Hu allegedly directed others at IIG to use funds from an account under its control to make the defaulted payment, giving the appearance that the borrower was creditworthy and current in its payments.

To fill the $6 million hole it had created in the other account, the SEC said Hu had IIG sell the retail fund a new fake $6 million loan and used those funds to reimburse the account it had used to make the earlier payment to the retail fund.

The complaint charges Hu with violating the antifraud provisions of the federal securities laws and seeks permanent injunctive relief, disgorgement, and civil penalties. In a parallel action, the US Attorney’s Office for the Southern District of New York (SDNY) also announced criminal charges against Hu.

The SDNY charged Hu with one count of securities fraud, which carries a maximum sentence of 20 years in prison; one count of wire fraud, which carries a maximum sentence of 20 years in prison, and one count of conspiracy to commit investment adviser fraud, securities fraud, and wire fraud, which carries a maximum sentence of five years in prison.

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Home > News > Market Moves > How GDP and Stocks Do When Dems and GOP Control the Presidency and Congress
Market Moves

How GDP and Stocks Do When Dems and GOP Control the Presidency and Congress

If the White House and Congress are blue, the economy does best, LPL says. But a Democratic president and a Republican Congress do best for the S&P 500.
By Larry Light

What will happen to the economy and the stock market if the Democrats make a clean sweep in November’s election, taking over the White House and both houses of Congress?

In terms of economic growth, Democratic ownership of the presidency and both congressional houses led to the highest average gross domestic product (GDP) increase, an average of 4.0% per year, according to tabulation by LPL Financial, going back to 1950.

Think of the booming 1960s economy in the Johnson years.

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The second best, at 3.6%, was when a Democrat occupied the Oval Office and the GOP had both sides of Capitol Hill (much of the Clinton era, for instance, in the high-growth 1990s). 

How the stock market did is a little different. With a Democratic president and Republican majorities in both houses (Clinton and the second Obama term), the S&P 500 returned the best, 18.3%. Second best was a Republican as president and a split Congress, at 17.9% for stocks. The Reagan tenure exemplifies that.

How the Economy and Stocks Perform under GOP and Dem Control

President Congress Average GDP Average S&P 500 Return Years
Dem Dem 4 13.2 18
Dem Rep 3.6 18.3 8
Dem Split 2 15.9 4
Rep Rep 2.5 9.4 10
Rep Dem 2.8 8.7 22
Rep Split 3.2 17.9 7

Source: LPL Financial


A blue sweep in 2020 might not be as bad for stocks as some investors fear. UBS and JPMorgan think that might even be good for the market.

Right now, Joseph Biden, the presumptive Democratic nominee, holds an 11-point poll lead over President Donald Trump. “President Trump’s popularity and poll numbers have been dropping sharply in recent months,” pointed out Bob Doll, Nuveen’s chief equity strategist, in a research note last week. “And the possibilities of a Democratic sweep of the White House and Congress are growing.”

Party control of the White House since 1950 has shown vastly more recessions for the Republicans (10 versus one). Yet when you throw in the split government factor, things get more complicated. Perhaps what party runs Congress helps, or hinders, a sitting president’s impact, via policies he is able to enact, on economic growth and the stock market performance that parallels it.

In the post-World War II world, the Democrats’ New Deal dominance of both ends of Pennsylvania Avenue became more sporadic. From 1950 through the 1970s, Democrats ruled both chambers on Capitol Hill except for Republican Dwight Eisenhower’s first two years, when the GOP briefly captured majorities in the House and Senate. A bipartisan comity prevailed in those days, and Ike easily won approvals for his agenda, such as building the interstate highway system.

Divided government and increasingly nasty partisanship became more common since the 1980s. In his eight years as president, Ronald Reagan (he took office in 1981) had six years with fellow Republicans controlling the Senate, and the Democrats reigning in the House throughout. Those six years of split government were his most productive. He passed a large tax cut and an overhaul of the tax code, plus he launched a military buildup.

Republicans reclaimed control of the House and Senate in the 1990s during the last six of Democrat Bill Clinton’s eight-year presidency, which featured the defeat of his health-care initiative and his impeachment. Two-term Republican George W. Bush had a split Congress for his first two years, then his party took charge of both houses, up until his last two. He delivered a tax cut, not to mention boosting anti-terror security and starting a war in Iraq.

Barack Obama, a Democrat, also had just two years of his party’s commanding the House and Senate, which he used to enact his government-backed health plan and a crackdown on Wall Street. Republicans took the House in 2010 and the Senate in 2014, pretty much ending Obama’s agenda.

Republican Trump’s first two years allowed him the luxury of majorities in both houses, and he enacted a big tax cut, named two justices to the Supreme Court, and pared many Obama-era regulations. In his last two years, though, the Democrats won back the House, which voted for his impeachment (he was acquitted in the Senate, like Clinton, although Clinton prevailed in a Republican upper chamber).

The political landscape of 2020 is so discombobulated, with a pandemic and a recession under way, that past norms may prove to be meaningless.

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