“Edward J. Strafaci, a former executive of Lipper Holdings, was indicted yesterday for overstating by millions of dollars the values of two hedge funds he ran. At the same time, the Securities and Exchange Commission brought civil fraud charges against Mr. Strafaci for the same reason,” writes Jonathan Fuerbringer in today’s New York Times.

“The two hedge funds were closed after the overstatement was discovered in early 2002; initially, the company wrote down the value of one of the funds by about 40 percent.”

“The incident also tarnished the reputation of Kenneth Lipper, a former deputy mayor of New York City and a money manager to celebrities before the problems at the funds came to light. Clients of Mr. Lipper’s funds included Michael D. Eisner, the chief executive of Walt Disney; the actress Julia Roberts; and Mortimer B. Zuckerman, the publisher of The Daily News.”

“Mr. Lipper was not indicted yesterday; neither was he charged by the S.E.C. But both the United States attorney and the S.E.C. said that their investigations were continuing. The trustee assigned to liquidate the two hedge funds is also investigating whether there were other culpable parties; his report is due in December.”

“A spokesman for Lipper Holdings said that neither Mr. Lipper nor the firm had any comment, but Mr. Lipper has sent investors a report blaming Mr. Strafaci for the mispricing of the funds.”

“The indictment is another in a series of revelations about the money-management business that shows that there is plenty of opportunity for misconduct, even when executives say they are keeping close tabs. The investigations of fraudulent trading at mutual fund companies is widening. Both mutual funds and hedge funds, which are popular with wealthy investors and subject to only light regulation, could face closer scrutiny from regulators in the future.”

“Mr. Strafaci, 45, who entered a plea of not guilty, was Lipper’s executive vice president and director of fixed-income money management until he resigned abruptly in January 2002. The four-count indictment by James B. Comey, the United States attorney in Manhattan, charged that Mr. Strafaci had been overstating the value of two hedge funds since 1996.”

“According to the indictment, the discrepancies between Lipper’s valuation of the two funds before Mr. Strafaci’s departure in January 2002 and amounts realized when the funds were liquidated in March were even larger than the write-downs in value that Lipper took at the time. The larger of the two funds, Lipper Convertibles, was liquidated for about $365 million, 49.4 percent less than the $722 million shown on the fund’s books when Mr. Strafaci resigned. The smaller Lipper Convertibles Series II was liquidated for $21.1 million; it was valued at $29.5 million when Mr. Strafaci resigned.”

“The S.E.C. leveled the same underlying accusations that the indictment did, but it found misconduct involving four Lipper hedge funds, not two, and starting in 1998, not 1996. Mr. Strafaci has not yet responded to the commission’s accusations, according to the commission.”