The US Securities and Exchange Commission has de-registered International Investment Group, a New York investment advisory firm that it recently charged with securities fraud for hiding losses in a hedge fund and selling at least $60 million in fake loan assets to clients. The regulator has likened the scheme to that of Charles Ponzi (pictured).

IIG is - or rather was - an investment advisor that specialised in trade finance lending, which consists of risky loans to small- and medium-sized companies in emerging markets. IIG used to advise several private investment funds and, in that capacity, selects and manages the Private Funds’ investments, principally in trade finance loans.

The SEC has published a complaint in which it alleges that IIG defrauded its investment advisory clients. It allegedly concealed losses in the portfolio of its 'flagship' hedge fund by overstating the value of certain defaulted trade finance loans and by replacing defaulted loans with fake loans while often selling overvalued and/or fake trade finance loans to investment advisory clients in order to generate liquidity to meet various payment obligations, including redemption requests from earlier investors.

Not a single person has been charged with a felony or misdemeanour. The judgment of 26 November imposes a preliminary asset freeze, but reserves the issue of any monetary relief, including disgorgement, prejudgment interest, and civil penalties, for further determination by the court at the behest of the SEC.

The details of the SEC's allegations are to be found in its civil complaint, distributed to the public in the same month. In it, it denounces IIG for "a string of frauds...to cover up tens of millions of dollars in losses on bad bets and keep its investment advisory business afloat." It says that IG is liable for breaking ss206(1) and 206(2) Investment Advisors Act 1940; s10(b) Securities Exchange Act 1934 and Rule 10b-5 thereunder; and s17(a) Securities Act 1933.

Beginning in or about 2007, according to the SEC, IIG engaged in various deceptive acts to misrepresent the performance of and conceal losses in its Trade Opportunities Fund, overvaluing portfolio assets and replacing non-performing assets with fictitious loans that were reported as if they were legitimate performing assets. The fund’s gross asset value was approximately $300 million but IIG had learnt that a $30 million loan by the fund to a South American coffee producer had ended in default.

The SEC goes on: "When it became untenable to continue to carry the Coffee Loan on the fund’s books as a performing asset due to auditor scrutiny, Executive-1 and Executive-2 removed [it] and replaced it with fake loans to different borrowers. The purported borrowers were foreign companies operating in other industries that were controlled by a business associate of IIG. Accordingly, the purported borrowers never received anything of value from the fund and there was no expectation they ever would make any payments to the fund.

"Executive-1 and Executive-2 directed that documentation be created to evidence each substitute loan for audit purposes. In addition, starting in about 2010, Executive-1 and Executive-2 arranged for the purported borrowers to provide confirmations of the fake debts to auditors. In one case, Executive-2 arranged for TOF to pay a monthly fee to a purported borrower in exchange for receiving such false confirmations. Over time, as new losses arose or as the fictitious loans matured, IIG would remove them from the Trade Opportunities Fund portfolio and replace them with additional substitute loans."

In or about November 2013, the Trade Opportunities Fund continued to have liquidity problems because or investor redemption requests and repayment obligations on loans that the fund had taken from international development banks. To continue to conceal the fund’s losses, the SEC says that Executive-2 spearheaded an effort to securitise the TOF loan portfolio. IIG obtained bank financing of approximately $220 million to capitalise a collateralised loan obligation trust.

In addition to the private funds, IIG also advised an open-end mutual fund marketed to retail investors and selected trade finance loans for the Retail Fund’s portfolio. In or about March 2017, the SEC alleges, one of the loans that IIG had recommended had defaulted on a $6 million payment. Worried about its advisory relationship with the retail fund, IIG allegedly used funds from an account under its control to make the defaulted payment, making it appear that the borrower was creditworthy and current in its payments. To plug the $6 million hole it had created in the other account, the SEC avers that IIG sold the retail fund a new fake $6 million loan and used those funds to reimburse the account that it had raided to make the earlier payment to the retail fund.

IIG's assets are now frozen, pending further judicial action.