Shut-down brokerage committed fraud: Finra

The Financial Industry Regulatory Authority Inc. says that a brokerage firm that recently shut down committed securities fraud. MICG Investment Management LLC of Newport News, Va., perpetrated a fraud in the management of a proprietary hedge fund, according to the regulator. Finra also filed a complaint against the firm for allegedly misusing investors' funds and causing false account statements to be issued to investors. Facing the same allegations: Jeffrey A. Martinovich, the firm's chief executive and majority owner. At its height, MICG had about 40 independent reps and advisers, sources said. Finra filed the internal administrative proceeding with its office of hearing officers on May 14. Two days earlier, MICG closed its doors when the firm failed to meet its net capital requirement. The hedge fund — MICG Venture Strategies LLC — was organized and managed by MICG and Mr. Martinovich, according to the lawsuit. Finra's complaint also charges that MICG and Mr. Martinovich improperly assigned excessive asset values to two non-public securities owned by the hedge fund, and then used the excessive asset values as the basis for paying unjustified management and incentive performance fees. Mr. Martinovich was also charged with fraudulently inducing an elderly, non-accredited MICG client to invest $75,000 in the hedge fund, According to the Finra complaint, the ginned-up assets included 1.8 million shares of common stock in EVP Solar Inc., a private company. The fund initially valued the stock at about $1.15 per share, but Finra claims that MICG and Mr. Martinovich boosted the value of the shares to $2.13 — six months after purchasing the stock. Mr. Martinovich and MICG received a management fee of $337,000 from the hedge fund. Finra says the other overvalued investment was a stake in a soccer club, Derby County FC, which plays in the second tier of England's professional league. Mr. Martinovich allegedly sent an e-mail to staff members in December 2008 instructing them to change the value of the hedge fund's interest in the shares of the club to $7.6 million. Finra claims MICG had purchased the shares about a year earlier for $5 million. Mr. Martinovich could not be reached to comment. But in a statement in March on his public record with Finra's BrokerCheck system, he said that “MICG vehemently denies all allegations” in Finra's initial investigation.