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NFA enforcement action demonstrates tenacity and collaboration
NFA's Business Conduct Committee's Decision last month to permanently bar Integral Investment Management LP, a commodity pool operator Member of NFA, and Conrad P. Seghers, a principal and associated person of Integral Investment, from NFA membership and associate membership marked the culmination of months of investigative work by NFA compliance and legal staff. The case serves as an example of NFA's investigative capabilities and its strong working relationships with other regulators and enforcement agencies.
NFA began investigating Seghers' activities in late 2000, when NFA Compliance staff visited Seghers' Dallas office. As part of its review, NFA looked at Integral Investment's web site, which promoted its hedge funds and claimed that these funds offered investors steady returns of 1.5 percent per month.
"We repeatedly asked Seghers to substantiate this performance claim," says NFA Associate General Counsel Ron Hirst. "Seghers produced a number documents for us, but they failed to support the advertised performance for his hedge funds."
NFA then interviewed customers of Seghers, requested additional books and records, made another visit to Seghers' offices in May 2001, and had numerous phone conversations with Seghers and his lawyer.
"Seghers' responses to our questions became increasingly evasive and confusing," says Hirst. Although Seghers' funds appeared to trade securities, not futures, NFA decided to review the account activity in several trading accounts which Seghers maintained for his funds at a securities broker-dealer.
"We had serious concerns about Seghers' performance claims for his hedge funds," says Hirst. "Even though this was primarily a securities issue, there was enough suspicious activity to warrant our further investigation."
While NFA continued its account activity review, the broker-dealer launched its own independent review of Seghers' accounts. The review revealed large losses in the accounts that were not reflected in Seghers' performance claims.
"When we asked Seghers about the disparity between his performance claims and the activity in the accounts at the broker-dealer, he told us he had his 'own method' of valuing his funds' trades," says Hirst.
In October 2001, NFA presented the SEC with evidence suggesting that Seghers and Integral Investment advertised misleading returns and furnished investors with misleading statements concerning the performance of the funds operated by Seghers and Integral Investment. Approximately one month after NFA referred the Seghers case to the SEC, the Art Institute of Chicago filed suit in Texas charging Seghers and Integral Investment with fraud in connection with a $40 million investment the Art Institute made in Seghers' hedge funds. Mr. Seghers' attorney has since filed a countersuit on behalf of Mr. Seghers.
On February 28, 2002, NFA's Business Conduct Committee issued a Complaint against Integral Investment and Seghers, alleging violations of NFA Compliance rules 2-4, 2-5 and 2-10. Although Integral Investments and Seghers filed an Answer in which they denied the allegations in the Complaint, they simultaneously submitted a Settlement Offer in which they agreed to permanently withdraw from NFA membership.
"This was a very challenging case for NFA," says NFA's Senior Executive Vice-President Dan Roth. "We are proud to have played a key role in this investigation. By collaborating with other regulatory and enforcement agencies, we were able to uncover Mr. Seghers' questionable activity and take the necessary enforcement action."