The allegations read: The securities and exchange commission ("commission") alleges in its complaint that third friday management, llc ("third friday") and its sole managing member and majority owner, michael e. Lewitt ("lewitt") (collectively, "defendants"), engaged in fraudulent conduct and gross breaches of fiduciary duties to their fund client, the third friday total return fund, l.p. (the "fund"), and the fund's investors.
since at least 2012, the fund was marketed to investors as "investing exclusively in s&p 500 index options which have full liquidity." the fund's ppm further elaborated the fund's "strategy of selling straddles on the s&p 500 index over a portfolio of income generating securities." however, beginning in or around january 2018 through march 2020 (the "relevant period"), third friday and lewitt suddenly changed course without disclosing the new investment strategy to fund investors, many of whom are senior citizens. In direct contravention of the fund's prohibition against illiquid investments, defendants made 45 separate loan advances totaling more than $19 million to a distressed company that acquired and operated struggling rural hospitals and filed for chapter 11 bankruptcy in december 2019 (the "bankrupt entity"). These investments totaled nearly two-thirds of the fund's assets.
in addition, lewitt failed to disclose to the fund's investors that he had a financial interest and partnership with a group of private affiliated companies that invested in distressed health care companies which had committed to investing $30 million to the bankrupt entity, and that he used fund assets to make bridge loans to the bankrupt entity and other healthcare companies. He further failed to disclose that the bankrupt entity paid his affiliated group of companies 3% "broker fees" in connection with the undisclosed bridge loans the fund made to the bankrupt entity, totaling over $450,000. Lewitt, with sole authority of the fund, also misappropriated at least $4.7 million of investor funds for his personal use, including over $900,000 to pay a personal irs tax lien.
by engaging in this conduct, defendants violated section 17(a) of the securities act of 1933 ("securities act"), section 10(b) of the securities exchange act of 1934 ("exchange act") and rule 10b-5 thereunder and sections 206(1) and 206(2) of the investment advisers act of 1940 ("advisers act"); third friday violated section 206(4) of the advisers act and rules 206(4)-2 and 206(4)-8 thereunder, and lewitt aided and abetted third friday's violations of section 206(4) of the advisers act and rules 206(4)-2 and 206(4)-8 thereunder.
