Lewis Chester, one of the UK's richest hedge fund managers and a donor to the Conservative party leader David Cameron, has promised to fight allegations in the US that he aided and abetted frauds against millions of mutual fund investors.
Pentagon Capital Management, Mr Chester's well-connected hedge fund – whose current and former investors include politicians and tycoons – has put a freeze on client money, telling them it will wind up the business in the coming months rather than see it collapse when the legal action becomes public in the next few days.
The Securities and Exchange Commission, Wall Street's regulator, has told Pentagon it faces civil charges in its multi-year investigation of the "market timing" scandal from the start of this decade. Hedge funds such as Pentagon made huge profits from trading in and out of mutual funds, but the controversial practice triggered an investigation by Eliot Spitzer, then the crusading attorney-general of New York, who said it disadvantaged millions of mutual fund investors.
In a letter sent to Pentagon's 350-plus individual investors, obtained by The Independent, Mr Chester said his lawyers had been informed on Good Friday of the SEC's intention to file charges against a now-defunct Pentagon fund and against Mr Chester .
"Given the negative perception of an SEC complaint against our chief executive, however unfounded... the board decided that this news would inevitably create a high degree of uncertainty, especially among our counterparties and lenders."
An emergency board meeting on Easter Sunday decided to wind down all 17 of Pentagon's funds, which have some $2bn (£1bn) of assets under management. "After more than 20 years of successfully managing money for our investors, this is an extremely sad decision for us," Mr Chester wrote. He went on: "The preservation of our reputation and good name is so important to us that we believe it is essential that we fight this unjust action in court."
The SEC has not yet filed its complaint, and declined to comment last night. The civil charges are understood to be related to its "market timing" investigation of employees at a New York-based broker, Trautman Wasserman, which traded with Pentagon between 1999 and 2003.
Mr Chester jointly owns Pentagon with his father David. The pair have a combined worth of £102m, according to The Sunday Times Rich List. The management team has millions of their own wealth tied up in the Pentagon funds, whose former outside investors have included Lord Levy and Richard Desmond, owner of the Daily Express.Reuse content