Yale Alum Charged with Running Hedge Fund Scam While Student

The SEC has settled fraud charges against Omar Zaki, who the regulator accused of running an unregistered investment adviser and a hedge fund while an undergraduate at Yale.

According to the SEC, Zaki misled fund investors about the fund’s assets under management, performance, and management. According to the SEC’s cease-and-desist order, Zaki allegedly formed the investment adviser and the fund in 2016,and raised approximately $1.7 million from 11 investors between January 2017 and February 2018. Zaki is also accused of providing two investors prospectuses that contained false information about trading history, investment returns, and the composition of a fund management team.

The prospectus Zaki prepared falsely claimed the fund had trading history dating back to December 2016, when it did not start trading until June 2017. It also said the fund had returns from its proprietary algorithm trading ranging from 18% to 114% over a 10-year period, even though the algorithm was not available to the fund prior to 2017 and was never deployed. The prospectus also boasted that the fund had returns in its biotech portfolio in excess of 80% from December 2016 through early March 2017, even though it neither maintained a separate biotech portfolio nor conducted any trading at all until June 2017.

Additionally, the order said that Zaki made additional misrepresentations to one of these investors, including giving written presentations that falsely overstated the fund’s assets and repeatedly concealing the true performance of the investor’s investment in the fund.

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The scheme allegedly unraveled when two of the investors in the fund began looking into opening an offshore fund with Zaki, which they intended to offer to their friends and family members. But the investors became suspicious when Zaki refused to allow them to verify the fund’s bank account and brokerage account balances directly with the custodians. Zaki then redeemed the investments made by the two investors after they demanded their money back.

In November 2016, Zaki and fellow Yale student Sami Ahmed established Armitage, LLC, according to Connecticut’s business registry.

“My family members and I were among the investors victimized by Omar Zaki’s fraudulent activities,” Ahmed said in an email to the Yale News, Yale’s student newspaper. “We lost considerable amounts of money from his schemes.”

Zaki agreed to settle the charges against him without admitting or denying the SEC’s allegations.

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Tags: Hedge Fund, Omar Zaki, SEC, Yale

FinHub, the SEC’s strategic hub for innovation and financial technology, has published a framework for analyzing whether a digital asset is offered and sold as an investment contract, and is therefore a security.

The framework is not an overview of the law, but is intended to be an analytical tool to help market participants assess whether the federal securities laws apply to the offer, sale, or resale of a particular digital asset. The framework is also not a rule, regulation, or statement of the SEC, and is not binding. And it does not modify or replace any existing applicable laws, regulations, or rules.

“As financial technologies, methods of capital formation, and market structures continue to evolve, market participants should be aware that they may be conducting activities that fall within our jurisdiction,” the SEC’s Bill Hinman and Valerie Szczepanik said in a release. “Depending on the nature of the digital asset, including what rights it purports to convey and how it is offered and sold, it may fall within the definition of a security under the US federal securities laws.”

For example, market participants may be involved in activities that require registration of transactions, and people or entities involved in those transactions. And even if no registration is required, activities involving digital assets that are securities may still be subject to the SEC’s regulation and oversight, said Hinman and Szczepanik.

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The SEC said the information contained in the framework may apply to entities conducting activities related to digital assets that include: offering, selling, or distributing; marketing or promoting; buying, selling, or trading; facilitating exchanges; holding or storing; and offering financial services such as management or advice.

According to the framework, those considering an initial coin offering need to consider whether the US federal securities laws apply. It says a digital asset should be analyzed to determine whether it has the characteristics of any product that meets the definition of security under the federal securities laws.

The framework also provides guidance for analyzing whether a digital asset has the characteristics of an investment contract. Both the SEC and the federal courts frequently use the “investment contract” analysis to determine whether unique or novel instruments or arrangements, such as digital assets, are securities subject to the federal securities laws. Federal securities laws require all offers and sales of securities, including those involving a digital asset, to either be registered under its provisions or to qualify for an exemption from registration.

“Determining whether a new type of financial instrument, including a digital asset, is a security can require a careful analysis of the nature of the instrument and how it is offered and sold,” said Hinman and Szczepanik. “If after applying the framework, market participants have questions regarding whether a particular digital asset is a security, they are encouraged to reach out to the Staff through FinHub’s webform.”

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Tags: Cryptocurrency, Digtial Asset, Federal Securities, FinHub, SEC