The Securities and Exchange Commission claims the manager misled investors about the success of Paramount Partners.
More than 50 Minnesotans may be out nearly $16 million that they invested with a onetime Wayzata-based hedge fund, according to a lawsuit filed Wednesday by the Securities and Exchange Commission (SEC) in federal court in Minneapolis. The government is attempting to shut the fund down before any money that's left disappears.
The SEC alleges that former Minneapolis resident John Lawton misled investors about the successes of the fund, Paramount Partners, and overstated its balance sheet to hide some losses.
U.S. District Judge Ann Montgomery declined the government's emergency request for a temporary restraining order on Lawton and his business but gave the fund manager, who operates in San Francisco, until this afternoon to appear before her. Lawton, 34, participated in a hearing Wednesday via speakerphone and without legal representation. Montgomery suggested that he bring a lawyer with him today.
Lawton denied the government's allegations in an interview and said he was in the process of returning funds to his limited-partner investors when the government stepped in.
"We've had successful years. Last fall was really good," Lawton said.
The SEC told a different story in its court pleadings. Of the 54 investors who invested with Lawton and Paramount between 2001 and 2008, nearly all were Minnesotans.
The SEC said they invested about $10.8 million on the Lawton's assertion that the fund was earning returns of 19 percent to 65 percent -- "with only one losing year, 2004, in which Paramount supposedly lost approximately 5 percent."
As of Dec. 31, the SEC said, Paramount and Lawton's investment advisory firm, Crossroad Capital Management, gave investors financial statements that listed assets totaling $17 million. But those funds actually totaled just $5.3 million, the government said, and they continued to dwindle in January and February and now are $1.3 million.
Crossroad is Paramount's general partner, the SEC said. Lawton owns at least half of Crossroad and manages Paramount's investments. The SEC said Lawton and Crossroad receive an annual management fee equal to 1 percent of Paramount's net asset value and an annual performance fee equal to 25 percent of any positive returns.
The SEC said that earlier this month, Lawton provided it with brokerage statements that showed the missing $12 million in a brokerage account. But the agency learned from the brokerage that the account actually had been closed in June 2008. The government also said that $900,000 was withdrawn last month from Paramount accounts under Lawton's control.
"This is an individual who already has lied to us. We see that as an egregious situation," SEC attorney James Davidson told Montgomery when arguing for an immediate restraining order. "There may be assets that we don't know about that need to be frozen."
Lawton told Montgomery that he is not a flight risk and that his accounts already are effectively frozen by the mere presence of an SEC inquiry. When Lawton told Montgomery he was flying to Chicago today to meet with the SEC, she told him to change his flight plans and travel to Minneapolis for an afternoon hearing on the government's motion to shut him down.
According to the lawsuit, Lawton and Paramount moved from Wayzata to San Francisco about a year ago.
The suit cited three investments -- $950,000, $600,000 and $450,000 -- made by three unidentified Minnesotans since September 2006. Two of the investors were friends of one of Lawton's unnamed Minnesota sales agents, and in the third case, the sales agent was a friend of the family of the investor. All began expressing concerns about the nature of their investments last fall as hedge funds were in the news as alleged vehicles for fraud schemes.
It is unclear what brought Paramount and Lawton to the SEC's attention.
On the Internet, Paramount describes itself as "a boutique for wealthy investors" with a "market timing" strategy of taking long and short stock positions on larger U.S. stock exchange companies.
Lawton was sued by an investor in 2007 for an alleged failure to provide "proper" accounting to Paramount's limited partners, including annual financial statements and quarterly account statements. The suit eventually was settled. The plaintiffs declined to comment.
But Lawton said, "They were paid."
David Phelps • 612-673-7269