The U.S. Securities and Exchange Commission (SEC) has fined Montford Associates and its owner, Ernest Montford, for failing to disclose payments it received from an allegedly fraudulent hedge fund.

According to investment news, Montford Associates and Montford were ordered to pay $650,000 in penalties. While the firm is not being accused of participation in Stanley Kowalewski’s alleged multi-million dollar fraud, they are being accused of lying to their investors about compensation it received from SJK Investment Management for recommending it to clients.

“The independence of an investment adviser like Montford Associates is critical to the trust investors place in them,” William Hicks of the SEC’s enforcement division said. “Undisclosed payments from a recommended hedge fund, like the ones at issue here, compromise that independence and would erode the public’s trust if left unchecked.”

According to the SEC’s complaint, “Montford knew that the schools and charitable organizations that were his clients were managed by part-time volunteers who relied on his investment advice and valued stable and consistent investments.” So when Kowalewski left Columbia Partners Investment Management to start SJK, Montford “knew [his] clients would be uncomfortable moving their investments a third time to have Kowalewski manage their money.” But he and his firm pushed them to do so, anyway, the SEC said, and were paid $210,000 for “consulting services” and “marketing and syndication fees.”

For more information from the U.S. Securities and Exchange Commission, visit the SEC website.

An Apple research analyst who refused to cooperate in the US government’s insider-trading probe has been charged with illegally supplying hedge funds with tips as a part of his consulting service.

The charges against John Kinnucan, the analyst, were announced Friday shortly before a former SanDisk Corp executive pleaded guilty to “conspiring to divulge company secrets to an unnamed consultant.” According to an unidentified source, that consultant was Kinnucan.

In a two year span, according to investigators, Kinnucan paid insiders with cash, trips, and additional benefits in exchange for secret information, including iPhone sale trends. Kinnucan then took the information to hedge fund traders in exchange for hundreds of thousands of dollars.

Dan Grossman, an alleged tip receiver, is a former portfolio manager with Carlson Capital. While the hedge fund would not identify Grossman, sources have said he retained a lawyer. Grossman has not been faced with any wrongdoing.

Kinnucan was arrested Thursday. He is charged two counts of securities fraud and two counts of conspiracy. He faces up to 20 years in prison for each count of securities fraud and one conspiracy fraud count. He faces up to five years in prison for the other conspiracy count.

Federal prosecutors believe that Kinnucan shared corporate secrets as part of his counseling arrangement with one Dallas hedge fund and at least one other unidentified hedge funds.

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A British hedge fund firm and its chief executive have been ordered by a federal judge to pay over $75 million after a train on Securities and Exchange Commission (SEC) civil charges. The charges stated that the hedge fund firm participated in abusive mutual fund trading.

According to U.S. District Judge Robert Sweet, the SEC proved that Pentagon Capital Management PLC purposefully violated federal securities law when they engaged in “late trading”. Late trading occurs when a firm makes mutual fund trades after the market has closed, at stale prices.

This case is just one of many in the industry-wide examination of improper trading in mutual fund shares. The SEC case is one of the few that are going to trial. The investigations started in September 2003.

Sweet wrote that, “This scheme was broad ranging over the course of several years and in no sense isolated.”

The judge disallowed the claim by the SEC that Pentagon engaged in fraudulent “market timing” in mutual funds.

Pentagon had been accused of trading improperly from about June 1999 to September 2003. The penalty includes the disgorgement of $38.4 million of improper profits and a $38.4 million fine.

Frank Razzano, a lawyer for Pentagon, said, “We are grateful for Judge Sweet’s finding that no illegal market timing took place. We are disappointed by his late trading conclusion.” Frank also said that he would be appealing.

Market timing is described as rapid trading in violation of funds’ rules, and at the expense of ordinary investors who lack such privileges. Market timing is considered inappropriate.

Late trading is described as the trading of mutual fund shares after 4 p.m. eastern time, when share prices are calculated, but at old prices. Late trading is considered to be illegal.

While in the past Pentagon oversaw more than $2 billion of assets, they are currently winding down their operations.

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The Securities and Exchange Commission (SEC), according to The Wall Street Journal, has their eye out for hedge fund fraud.  The organization is starting this process by looking at firms doing better than expected.

The SEC has created a method of analyzing data that picks out hedge funds with higher than normal numbers, despite the suffering market.  The WSJ also pointed out that the SEC is trying to catch the “next Bernie Madoff” before his or her investors are defrauded out of billions of dollars, as Madoffs investors were in his Ponzi scheme.  The SEC has already begun four civil-fraud lawsuits based on the results of their data collection.

Some suspect the reason behind the SEC crack down are the critiques that the agency has not done more to identify and prosecute financial malpractice at the height of the financial crisis.

The Huffington Post points out a high-profile example of this in the fraud investigator who spent nearly ten years building a case against Madoff’s wealth management firm.  Harry Markopolos told the House Financial Services Committee that the SEC was “financially illiterate” and “captive to the industry it regulates” In 2009.  Another example the SEC is under fire for is its failure to place a check on Lehman Brothers’ heavy over-leveraging and for waiting to investigate Alan Stanford until 8 years after they suspected wrongdoing.

In late 2001, the SEC has had a proactive period.  They have redoubled efforts to stamp out insider trading and sued six former executives of Fannie Mae and Freddie Mac for securities fraud.

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