You may want to read it again:
"Each month, Hope caused the Funds to make certain “Scheme
Trades” that had the purpose and effect of realizing a large gain in the current
month while effectively guaranteeing a large loss would be realized early the
following month. In essence, these trades continuously converted any realized
losses into realized gains in the current month, and losses which would be realized
in subsequent months, except that they would be continually deferred by the
Defendants engaging in additional Scheme Trades. The Defendants did not
simply delay realization of trading losses, however, they also intentionally sized
the Scheme Trades such that the Funds realized a profit every month. Hope
employees maintained a spread sheet that tracked, month to date, the realized
losses of the Funds. As the end of each month approached, Bruton picked the
amount of profit she wished the Funds to show (and de facto, the fees she wished
to generate), and her traders would size the Scheme Trades accordingly."
"The HI Fund had an NAV of approximately $136 million as of
February 29, 2016.
23. As of the same date, the HI Fund had unrealized losses of
approximately $57 million.
24. The HI Fund had unrealized losses at the end of every month for at
least two years, with the amount fluctuating between $3 million and $62
million.
The Fraudulent Trading Scheme
58. In October and December 2014, the Funds experienced significant
trading losses due to volatility in the financial markets.
59. In response to these enormous losses, beginning in November 2014
and continuing almost every month to the present, Defendants entered a series
of trades (“Scheme Trades”) in the accounts of the HI Fund and the HDB Fund
that had the purpose and effect of avoiding realization of the losses.
60. Hope had used similar Scheme Trades in the prior months.
61. Before February 2015, the Defendants used a variety of forms of
Scheme Trades, but they all had the same purpose and effect, i.e., to avoid
having realized losses at any month’s end.
62. In most months after February 2015, the Scheme Trades took the
form of large matching “paired” trades that essentially canceled each other and
cumulatively had little to no prospect of gain or loss, except for transaction
costs.
63. These Scheme Trades, however, effectively “rolled over”
realization of losses to subsequent months, which allowed Defendants to (1)
report a targeted monthly realized gain of approximately 1% in the Funds every
month and (2) receive an incentive fee every month and avoid the high water
mark restriction.
64. Hope employees maintained a spreadsheet that tracked, month to
date, the realized losses of the Funds.
65. As the end of a particular month approached, Bruton would ask
Hope employees for the amount of the Funds’ net realized losses month to date.
66. Bruton would then either enter a Scheme Trade herself or approve
Scheme Trades that the other traders proposed and entered.
67. These Scheme Trades often involved (1) selling call or put options
on futures that would expire at the end of the current month (“first leg option”)
and simultaneously (2) buying call or put options on futures for the same
quantity at the same “strike price” that would expire early the next month
(“second leg option”).
68. These options would typically be deep “in the money,” meaning
they were very likely to be exercised or assigned.
69. The sale of the first leg options would result in significant proceeds
(referred to as “premium”) being paid to the respective Fund, which was
realized as a gain for the current month when the first leg option expired.
70. Bruton picked the size of the first leg option sale so that the
premium collected would be sufficient to offset the losses realized for the
month and enable the fund to report a net realized gain for the current month.
71. The expiration of the first leg options also resulted in the
assignment of futures in the Fund’s account, which would carry a large
“unrealized” loss at the current market price.
72. The expiration of the second leg option, typically at the end of the
first week of the subsequent month, covered this open futures position, but also
required the Fund to realize a large loss (the purchase price of the second leg
option).
73. The net effect of the Scheme Trades was to allow Hope to defer
indefinitely the Funds’ realization of trading losses while consistently reporting a
realized gain in the Funds and collecting an incentive fee.
74. To illustrate with a specific example, the HI Fund began the month
of February 2015 with a net unrealized loss of $44 million. Much of this loss
became realized early in the month.
97. For example, in October of 2014, Hope experienced massive
trading losses as a result of volatility in the market. The HI Fund and the HDB
Fund collectively ended the month with unrealized losses of approximately
$100 million, most of which resulted from the October trading losses.
Nevertheless, Hope reported to investors that the Funds had millions of dollars’
worth of “realized” gains in October and collected incentive fees of more than
$600,000.
F. Hope’s Redemption Practices
105. Hope redeems investors exiting the HI Fund without reducing the
value of their investments by the HI Fund’s large net unrealized losses.
106. Consequently, redeeming investors get a windfall, while the pro
rata share of the unrealized losses to the remaining investors increases.
107. While the Fund states that investors will redeem exclusive of
unrealized losses, the Fund does not inform new investors that the value of their
investments are subject to immediate reduction as a result of their being saddled
with a pro rata share of large unrealized losses.
108. The manner by which the HI Fund pays redemptions (excluding
unrealized losses) creates a risk that, if the unrealized losses continue or there is
a significant exodus, the last investors to redeem will not get any money. That
risk is not expressly disclosed to investors.
You just can't make this shit up.
