State sues broker over Va. hedge fund

By Jeffrey Krasner, Globe Staff, 9/23/2003

Secretary of State William F. Galvin yesterday filed a lawsuit against a Hingham broker who allegedly steered clients into an unregistered hedge fund that lost $350,000, or 85 percent of their investments. The administrative complaint seeks to strip the broker, Gerald F. Stonehouse, of his license and impose a fine.

According to the complaint, Stonehouse was a senior vice president at the Norwell office of Wachovia Securities with 30 years' experience in the investment industry. Stonehouse allegedly set up a side business in which his Wachovia clients could invest in a Virginia hedge fund called Futronix Futures fund.

The fund wasn't approved by Wachovia and wasn't registered for sale in Massachusetts, the complaint alleges. In addition, the hedge fund was an inappropriate investment vehicle for Stonehouse's clients, according to the complaint.

Hedge funds have come under fire in recent weeks for allegedly using improper or illegal trading techniques to profit from short-term stakes in mutual funds, often at the expense of smaller investors. Galvin has opened an investigation into Putnam Investments and Prudential Securities. New York Attorney General Eliot Spitzer recently settled with Canary Capital Partners, a New Jersey hedge fund that was charged with illegal trading. And the Securities and Exchange Commission is probing the Boston office of Prudential Securities.

According to Galvin's complaint, Stonehouse engaged in multiple violations of state and federal securities laws when he steered clients into the Futronix fund in June 2002. The investment did not pan out: The fund first lost thousands in clients' money over what the fund manager described as a "keypunch error," according to the complaint and a letter by Stonehouse filed as a court exhibit. Later, Stonehouse wrote, a brokerage firm improperly executed trades for Futronix, "needlessly causing huge losses."

Wachovia fired Stonehouse in June after it received a complaint about the hedge fund investments, Galvin said. The investment company referred the matter to Galvin. Neither Stonehouse nor his attorney could be reached to comment.

In an interview with state investigators cited in the complaint, Stonehouse explained how he came to put clients into an investment that wasn't approved by his employer. "I knew it was against Wachovia's policy and I know this sounds totally absurd, but I didn't know I was breaking the law by doing it," he said.

Jeffrey Krasner can be reached at krasner@globe.com.