Philadelphia Hedge-Fund Firm Has Its Assets Frozen by CFTC By GREGORY ZUCKERMAN Staff Reporter of THE WALL STREET JOURNAL July 6, 2005; Page C3 A hedge-fund and commodity-trading firm that reported stellar returns has had its remaining $75 million in assets frozen by the Commodity Futures Trading Commission after being accused of misleading investors about its trading results and its strategy. The firm, Philadelphia Alternative Asset Management Co., had been operating for about a year, and once managed at least $230 million. It was run by Paul Eustace, a former senior executive at Trout Trading Management Co., a well-known hedge fund that now is called Tewksbury Capital Management. The CFTC obtained a restraining order against the Philadelphia-based company, known as PAAM, and Mr. Eustace, on June 21 in a federal court in Pennsylvania. "Irrespective of his fraud, Mr. Eustace was employing a very aggressive trading strategy involving options. The strategy was similar to attempting to hit the trifecta at the race track," says Gregory Mocek, director of enforcement at the CFTC. "Mr. Eustace intends to vigorously defend these allegations," said his attorney, Jeremy Frey, of Pepper Hamilton LLP, in Philadelphia. Mr. Eustace wasn't available for comment. In a complaint, the CFTC alleges that the firm, a registered commodity-pool operator, and Mr. Eustace fraudulently solicited prospective investors while issuing false statements to at least one investor about the profitability of an investment pool it was running to trade commodity futures and options, among other things. The CFTC contends that PAAM told an investor that the investor's account had increased to more than $1 million when in fact the pool never traded futures or options. The firm also allegedly solicited another prospective investor "by showing purportedly profitable trading results for the pool" that were false because the pool never traded futures and options and because Mr. Eustace "later claimed that they were based on hypothetical trading only," according to the CFTC. The federal court froze the assets of PAAM and those of Mr. Eustace, "preventing the destruction or alteration of their books and business records, and appointing a receiver to take control of the defendants' assets," according to the CFTC. PAAM reported to its investors that one of its funds had scored gains of about 6% through April of this year, despite the difficult time many hedge funds are having, according to materials provided by an investor. The firm is one of many started by former executives of large hedge funds who have branched out on their own amid a surge of interest in hedge funds and commodity-trading pools. But as of May of this year, the CFTC alleges that "the only known commodity-futures and options-trading accounts showed that the accounts had sustained more than a 50% loss in the remaining value of the pool that month." One of the firm's investment pools lost $85 million in May of this year alone, according to someone close to the situation. http://online.wsj.com/article/0,,SB112060625873777909,00.html?mod=home_whats_news_us