SEC Files Lawsuit Against Hedge Fund for Misrepresenting CMO Holdings

The Securities and Exchange Commission has filed a civil against in the United States District Court, Northern District of Florida against Don Warner Reinhard, general partner of hedge fund Magnolia Capital Advisors, for allegedly issuing false and misleading statements to investors as to the actual risk of his collateralized mortgage obligation (CMO) holdings.

The SEC said he engaged in the fraud between January 2002 and August 2003, which cost his investors more than $6 million, and that, in addition, Reinhard failed to disclose to his clients and to the SEC via filings that he had been sued by the Florida Department of Insurance over his CMO holdings. The SEC said Reinhard furnished his clients with artificially inflated account statements between December 2002 and June 2003.

Furthermore, in July and August of 2003, he hid CMO losses in a number of his brokerage accounts from his broker/dealer and clearing firm, in order to avoid margin calls, by temporarily parking the CMOs in a third-party’s brokerage accounts.