Illinois Investment Advisory Firm Heavily Sanctioned for Defrauding Its Private Hedge Fund Clients

The SEC announced that Directors Financial Group ("DFG") and its owner, Sharon E. Vaughn, have agreed to pay a $200,000 civil penalty in addition to paying disgorgement and prejudgment interest of nearly $809,000. In addition, an Illinois federal court has directed that DFG's hedge fund, known as Directors Performance Fund (the "Fund"), distribute all of its assets, totaling $22.5 million, to the fund's investors.

That sum represents the investors' return of principal and profit before DFG "defrauded their private hedge fund clients", according to an SEC press release. According to the SEC's federal court complaint, DFG, among other things: 1) invested the Fund's assets in a fraudulent Prime Bank trading scheme (the "Trading Program"); 2) failed to investigate the Trading Program or its promoters; 3) entered into an undisclosed profit sharing agreement that ceded 25% of the Fund's purported profits to one of the Trading Program's promoters; 4) gave control of the Fund's assets to the Trading Program's promoters in violation of the terms of the Fund's prospectus; and 5) tried to cover up their fraud by withholding documents from - and providing fake documents to - SEC staff.

Source: SEC Press Release, January 31, 2007