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28 Mar 2007

Hedge Fund Faces Fines of up to $25 Million

A hedge fund accused of defrauding mutual funds of $2.4 million in 2003 could face additional fines under a proposed plea agreement filed Tuesday in U.S. District Court in Philadelphia.

The guilty plea would mark the first criminal case in U.S. history against a hedge fund for deceptive market timing. Traders can calculate their purchases to take advantage of the lag in time before the mutual fund is updated. Many mutual funds have established methods to detect market-timing and ban those that engage in the practice.

Among other things, the U.S. attorney's office said that Gerbasio and Beacon Rock set up more than 30 accounts to evade detection. Under the agreement, in which Beacon Rock Capital LLC is to plead guilty to one count of securities fraud, a judge may levy a fine of up to $25 million, although the guidelines for such a violation call for a range of $1.26 million to $2.52 million, said Derek Cohen, an assistant U.S. attorney in Philadelphia.

Beacon Rock Capital also has agreed to forfeit $475,905 as a result of a "market-timing" scheme that netted the hedge fund $2.4 million. The plea agreement is scheduled for a hearing on April 4. In exchange for the company's guilty plea and cooperation, the government is agreeing not to prosecute the two principals, Blake Singer and Bryant Jaksic.

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