Massachusetts securities regulators Wednesday sued a local brokerage firm, accusing it of letting two employees sell hedge funds to people who couldn't afford the risky investments that lost them millions of dollars.
Secretary of the Commonwealth William Galvin charged Cantella Securities Inc. with failing to supervise James Pangione and Timothy Rassias when the pair wiped out 90 percent of the hedge funds' capital with bets on technology stocks.
Galvin, already spearheading a probe into illegal mutual fund trading, requested Cantella return $3.5 million to investors who each lost about $100,000 in the loosely regulated funds that are traditionally reserved for the super wealthy.
"Allowing, even encouraging, agents to offer unregistered and high-risk hedge funds to unsophisticated investors will not be tolerated," Galvin said in a statement.
A spokesman at Boston-based Cantella, billing itself on its Web site as Wall Street's best kept secret for letting its representatives "build their franchise the way they want it to be," declined to comment on the suit.
The charges against Cantella come six months after Galvin filed civil complaints against the two brokers for advertising their funds to clients who were not allowed to invest in hedge funds because they are not wealthy enough.
Galvin charged Cantella gave the brokers approval to sell the Hercules Hedgehog Fund and the Agrippa Fund but "never supervised their activities".
Pangione and Rassias ignored last summer's civil complaint and Galvin's spokesman Brian McNiff said the Secretary is now considering turning that case over to Massachusetts Attorney General Tom Reilly, who could bring criminal charges against Pangione and Rassias.
The Cantella spokesman said Pangione and Rassias no longer work for the company. Both lost their licenses to sell securities when they failed to respond to the civil complaint, Galvin's spokesman said.
Neither Pangione nor Rassias could be reached for comment.
Hedge funds typically are aimed at wealthy investors who earn at least $200,000 a year for two years or who can prove a net worth of at least $1 million. In return for being loosely regulated and enjoying freedoms like selling stocks short, hedge funds managers are prohibited from advertising.
Often hedge funds require investors to commit at least $1 million, but recently some have drastically slashed their minimums to attract more clients.
Galvin last summer said his office is policing the $600 billion hedge fund industry very carefully and will act quickly to prevent investor losses.
