Massachusetts slams barn door, watches horse run down the lane to New York

Hedge Fund Regulation 22 May 2008

Stories of regulatory infractions are usually a great antidote for insomnia.  But this one’s a hum-dinger.

The Secretary of State for Massachusetts William Galvin issued a cease and desist order to a fund manager earlier this week after a 2 week investigation that turned up a panoply of alleged regulatory breeches dating back over the past decade.

The tale would end there if it weren’t for the fact that any story including the words “Galvin” and “hedge fund” is sure to generate a lot of interest.  As you may recall, this was the same William Galvin who mixed it up with hedge fund manager Phil Goldstein recently over his unsecure website (see related posting).

So it would appear that this just might be another attempt to draw (not entirely unwarranted) attention to potential pitfalls of not requiring all investment managers, including hedge funds to register with authorities.  But while it appears as though the manager in this case may have indeed been in breach of securities regulations, we have trouble believing for a minute that this case was randomly targeted by the state.

In addition to allegedly selling units of his fund to investors that did not meet minimum wealth levels, the complaint suggests that the manager, Michael Regan, may have also lost all investors’ money.   The question remains, however, was any loss a result of a lack of some kind of oversight?

None of this really matters to the public, however, if the story becomes one about a greedy hedge fund manager who lost millions of hard-working people’s money.  To make the PR even worse for the manager, he picked a Boston law firm that, according to its website, specializes in “Drug Trafficking, Money Laundering, Weapons, Tax Crime, Fraud, Import, Export, Civil Right, Organized Crime, Racketeering, Computer, Immigration, Corporate, Crimes, Obstruction, Corruption, Conspiracy, Extradition.”

Reuters ran a good overview on Monday, but to get a real sense of what went down, we recommend you check out the complaint itself.  Even better, check out the exhibits (the fund’s sales pitch, monthly commentaries, letters from the fund’s lawyers to investors etc.).

As the Boston Herald reports today, the lawyer, Raymond Mansolillo, says his client was the one who actually brought the situation to the attention of authorities:

“Mansolillo insisted Regan was the one who approached law-enforcement officials about activities at Regan’s Natick-based River Stream Fund and insisted on notifying his clients about problems with their funds.

“Galvin’s office, which earlier this week filed a complaint against Regan for not being licensed in Massachusetts, ‘rushed’ to file a civil charge only after federal authorities were approached by Regan, Mansolillo said.

“‘It was completely unprofessional,’ said Mansolillo of Galvin’s actions, which he described as ‘premature’ and intended to ‘ignite the emotions of investors’ who may have lost money.”

When Mansolillo refers to “igniting the emotions of investors”, he might have been talking about the following rather colorful language in the complaint:

“Investors nationwide in the fund had been calling the division describing long term relationships with Regan and the representations he had made…”

“Several investors did not understand the nature of their investments.  But because of the bonds of friendship, trusted Regan with their money…”

“Investors in River Stream ranged from working individuals starting a nest egg for retirement, trustees of pension and profit sharing plans [ed: what the…(!?)] young adults relying on Regan to manage their scholarship money and funds saved for college tuition by students and parents to retirees and widows…”

“…several investors may be forced to sell their homes…”

“Any individual who came across the discarded documents could have used the passwords, social security numbers, tax identification forms and other personal information found into the trash (sic) to access various clients’ personal brokerage or personal bank accounts…”

Obviously, we have no idea what is up with this fund and we don’t care to speculate. (According to the fund’s counsel, the matter is currently in the hands of “Federal Law Enforcement Authorities in New York”).  But before we conclude that the money is all gone, we note that the complaint only quotes an investor who concluded that “the entire fund may be in jeopardy” after he spoke with Regan’s counsel.

According to the complaint, Regan told investors that the fund had $15 million bucks in it on April 15, 2008.  The very next line reads,

“According to a brokerage account statement for River Stream obtained by the division, the ending balance of one account as of April 30, 2008 was $1625.54.”

The balance in “one account”?  What does this mean?  It appears to mean that one investor had that much in their account, right?  Obviously, when you make it look like that was the balance in the entire fund, the media is going to report it that way.  For example, the Boston Globe reported on Monday:

“A civil complaint filed today says Regan last month claimed to have $15 million in his River Stream Fund, but an April 30 financial statement listed just $1,625.”

You’d think that if the complaint was alleging the money was actually gone, that it would include said “brokerage account statement” in the extensive list of exhibits on its website.

There is obviously a lot more to come on this story.  But for now, one thing seems abundantly clear: Massachusetts is trying to make its point about registration by finding the baddest looking apple in the bushel – who may or may not have lost any money, but who looks pretty rotten anyway – and hoping that the public backlash against him can propel a loosely-related agenda.

In other words, if there was anything untoward about this fund, it’s entirely possible that it would not have been avoided through appropriate registration.

To borrow another farming analogy, perhaps Massachusetts feels that if they throw enough mud against a barn door, some of it is bound to stick.

(John Grisham, if you are reading this, please email us at  We’ve got an idea for you.)

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