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Peter Kuperman invested all of his fund’s assets in a single illiquid penny stock, misleading investors about the fund’s investment strategy and performance.Getty Images/iStockphoto

A Toronto hedge fund manager who invested all of his fund's assets in a single illiquid penny stock has reached a settlement with U.S. securities regulators to reimburse investors for almost $2.9-million (U.S.) in losses.

The U.S. Securities and Exchange Commission said on Thursday it has reached a settlement with Peter Kuperman of Toronto and his New York-based company QED Benchmark Management LLC over allegations they misled investors about a fund's investment strategy and performance.

The SEC said Mr. Kuperman marketed the QED Benchmark LP investment fund based on promises to follow a scientific stock-selection strategy that employed algorithms to focus on 285 different metrics in the areas of momentum, growth, value, risk and estimates. He claimed the fund would use the metrics to pick investments that would likely outperform the market.

QED's offering memorandum and limited partnership agreement stated that no more than 20 per cent of its assets could be invested in any single security and no more than 5 per cent in any illiquid security. However, Mr. Kuperman "deviated from the fund's stated strategy" in almost every respect, the SEC said in an order released on Thursday.

Starting in 2009, the fund began to invest heavily in one stock, earning a loss of 79 per cent in the first quarter alone. At the end of 2009, Mr. Kuperman gave potential investors a report on his results for the year, but excluded "disastrous returns" he had earned in the first quarter and replaced them "with the hypothetical returns that his model purportedly would have achieved if he had applied it correctly and consistently during the quarter," the order said.

In 2010, the SEC said Mr. Kuperman became acquainted with two unidentified Canadians who were active penny-stock promoters, including one who had previously pleaded guilty to securities fraud. In 2011, Mr. Kuperman began investing in a penny stock they were promoting, Emo Capital Corp., which had no assets and was a shell company. The SEC said he did no due diligence on the company before investing.

In return, the stock promoters promised to help Mr. Kuperman find more clients for his fund, the SEC said.

By early 2013, Mr. Kuperman had shifted all of the fund's holdings into Emo common stock and related convertible debentures and continued to mislead investors about the fund's financial state, the SEC said. When some investors inquired about the performance of the fund, Mr. Kuperman said it had an illiquid investment "taking up about 35 per cent of the fund." In reality, the SEC said, the fund had virtually no liquid investments.

Mr. Kuperman ultimately sold the Emo stock "at a steep loss" and used the proceeds to fund partial redemptions for some investors, the SEC said.

In the settlement, Mr. Kuperman has agreed to pay $2.877-million to compensate investors for their losses. He has also agreed to pay a $75,000 penalty and be barred from working in the securities industry.

Andrew Calamari, director of the SEC's New York regional office, said the settlement will help investors get their money back. "Investment advisers must be completely candid when disclosing two key features that investors rely upon when making investment decisions: investment strategy and historical performance," Mr. Calamari said in a statement. "This settlement enables investors in the QED Benchmark LP hedge fund to receive full monetary relief for losses suffered when they were misled on both fronts."

Mr. Kuperman agreed to the settlement without admitting or denying the findings, the SEC said.

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