Canadian hedge fund trader fined $299 million for swindling investors

August 19, 2008 - (Tip Report) Philadelphia - A US Federal Court has fined a Canadian hedge fund trader $279 million for swindling investors alongside an additional $20 million in civil monetary damages.

The Commodity Futures Trading Commission (CFTC) revealed earlier this week that Paul Eustace of Oakville Ontario, Canada was ordered to pay more than $279 million in restitution and a $12 million civil penalty for defrauding commodity pool participants in four pools that he managed.

The commodity pool operator that Eustace controlled, the Philadelphia Alternative Asset Management Co. (PAAM), was also ordered by the Court to pay an $8.8 million civil monetary penalty and also permanently barred Eustace's company from registration and trading.

The Court order was handed down by Judge Michael M. Baylson of the U.S. District Court for the Eastern District of Pennsylvania on August 13, 2008. The Order followed a July 13, 2007 consent order of permanent injunction against Eustace that enjoins Eustace from further violations, and imposes permanent trading and registration bans.

Eustace is also awaiting trial on two criminal counts of fraud levied against the hedge fund operator in November.

CFTC Acting Chairman Walter Lukken was quoted in an August 19th release as saying, "This concludes a successful effort by our Division of Enforcement to stop fraud in its tracks, return as much money as possible to defrauded investors, and to bring wrongdoers to justice."

The Commodity Futures Trading Commission launched its investigation into Eustace's dealings in June, 2005 based on complaints filed with the CFTC alleging fraud on the part of the Canadian hedge fund operator and PAAM.

In the original complaint, the CFTC charged that Eustace sent out false account statements to customers of his four hedge funds to hide more than $200 million in losses he or his funds incurred.

Eustace concealed those losses by issuing or causing to be issued, false account statements reflecting highly and consistently profitable trading results. Eustace also misappropriated assets of the Option Capital and LP Funds and received incentive and management fees through his fraudulent operation of the pools. Eustace was also charged with fraudulent solicitation and registration violations.

In completing its investigation into the dealings of the Ontario resident, the CFTC credited the Ontario Securities Commission (OTC) for its cooperation into the investigation of Eustace and his four hedge funds. The OTC has not commented on the US Court's findings.

The CFTC was able to freeze $70 million of PAAM funds at the time charges were levied against Eustace and his four hedge funds, and a receiver for one of the funds later recovered $96 million more.

Bermuda-based MF Global Ltd., which served as PAAM's broker, agreed in December to pay $77 million to settle related claims brought by the CFTC and the receiver. The company inadequately supervised an account used to hide losses, the CFTC said at the time.

Eustace remains in custody. Unable to afford a lawyer after all of Eustace's funds were frozen, the court appointed an attorney to represent him. So much for the system, eh? Court appointed attorneys are an expense to the Court. At the time of Eustace's arrest he was employed at a $20 per hour job.

Eustace had defended himself in the civil case, but a criminal attorney was appointed to represent him in Court when later charged.