The Securities and Exchange Commission has shut down a former Marine’s investment operation, alleging he defrauded active-duty members, veterans and others, spending their money on, among other things, rent for a $10,000-a-month Hollywood mansion, a luxury sports car and tabs at high-end nightclubs.
Clayton A. Cohn, 26, of Winnetka, Ill., and his hedge fund management firm Marketaction Advisors, LLC, are accused of raising $1.78 million from at least 24 investors, according to the SEC’s complaint filed in federal court in Chicago.
Cohn’s lawyer, Howard Rosenburg, denies that Cohn targeted troops and said it is “mind boggling” that the SEC would “attack” Cohn, who suffers from a traumatic brain injury received in Iraq.
The complaint says the former Marine targeted “mostly unsophisticated investors” and solicited friends, family members and fellow veterans to invest. To cover up his fraud, the SEC alleges he created false performance reports for investors that showed the fund was steadily growing and that it had an annual return of nearly 200 percent in 2012.
Cohn has been selling these securities since at least September 2011, the SEC contends.
“Cohn lured fellow military and other investors into his hedge fund by portraying himself as a successful trader who generated massive returns for his investors,” said Timothy L. Warren, acting director of the Chicago Regional Office of the SEC, in a statement announcing the complaint. “But Cohn’s hedge fund investors didn’t have a chance to make a profit since he never invested most of their money and promptly lost the portion he did invest.”
Cohn also controls a charity — the Veteran’s Financial Education Network — that describes itself as “dedicated to the financial education of our veterans.” The SEC complaint says the website, since taken down, tells veterans if they’re “looking to find the best money manager that is suitable for you, [VFEN] will help guide you in the right direction” and describes Cohn as a money manager who “manages millions of dollars.” The charity’s Facebook page still exists, but the website and phone number no longer operate.
Rosenburg said in an email that he and Cohn are “surprised and dismayed” that the SEC filed the action.
“Among the sensational allegations, the claim that Clayton targeted U.S. Marines is particularly false,” Rosenburg said.
The SEC left out some facts, Rosenburg contends. “Clayton made legitimate investments with his investors’ funds. Unfortunately, some of those investments were unsuccessful.”
Cohn was wounded in Iraq when his Humvee hit a roadside bomb, Rosenburg said. “He has endured years of therapy and treatment for the traumatic brain injury he sustained while fighting for this country. Clayton sacrificed his own wellbeing for the American government and its citizens. After all Clayton has given to this country, it is mind boggling that the SEC would attack Clayton in such a headline-grabbing manner.”
Cohn’s LinkedIn profile states he left the Marine Corps as a sergeant in 2009 after four years, that he served as an infantry machine gunner and served two tours in Iraq, and that he received a Purple Heart for injuries in in a battle during his first tour.
Marine Corps Manpower and Reserve Affairs spokeswoman Yvonne Carlock said records show Cohn did serve in the Marine Corps from July 2005 to July 2009 but that he left as a corporal. He was later promoted to sergeant in the Individual Ready Reserve. She confirmed Cohn’s Purple Heart and two deployments to Iraq.
Cohn had been cooperating with the SEC investigation, Rosenburg said, but “the SEC listed a set of demands and gave an ultimatum that he either agree to all demands or they would file a case. The SEC refused to provide Clayton sufficient time to understand, digest and evaluate their demands.”
The SEC complaint charges Cohn and Marketaction Advisors with violating anti-fraud provisions of federal securities laws. The court agreed to the SEC’s request for a temporary restraining order to stop operations, and a freeze of assets. They seek to recover the money, and request financial penalties.
The Marketaction Advisors website is no longer active, and the company’s phone number has been disconnected. In an Aug. 8 post on his Facebook page, Cohn wrote that he can’t comment on the SEC matter.
“This is a very trying time for me and my family,” he wrote. “The complaint makes many incredible allegations. With my attorneys I had been cooperating with the SEC prior to the filing of the complaint to try to find a reasonable resolution to this difficult situation. I still hope to find a reasonable resolution.”
Rosenburg said Cohn was shutting down the fund’s operations before the SEC sought a restraining order. “He notified investors that the fund was not taking new money, was not making new investments and was in the process of winding down,” he said.
“We have been befuddled as to why the SEC needed to run to court to shut down a fund that already was shut down.”
The SEC alleges that Cohn invested less than half of the $1.78 million that he raised, “and he has lost what money he has invested.” He also used some of the money to invest in some small companies, including a T-shirt design company, a small hair extension sales company and a 3-D adult film production company, the complaint alleges, adding that “these investments are virtually worthless.”
He allegedly spent at least $400,000 of investors’ money on personal expenses such as rent on a $10,000-per-month mansion in Los Angeles, payments on a luxury sports car, gambling, extravagant tabs at high-end nightclubs and luxurious personal items, according to the complaint.
A publicly available Tumblr blog and linked Instagram account, both tied to Cohn’s Facebook profile, includes several photos posted over the last year that appear to have been taken at nightclubs, including one of someone smoking a cigar tagged “#decadence.”
Another photo from 2012 shows a sign listing a number of luxury brands, such as Burberry, Gucci and Louis Vuitton. Cohn’s comment reads, “Apparently my life isn’t complete because I own an item from every name on this list except Fendi... sigh :\. #onepercentproblems”.
“The jig is just about up,” stated the SEC complaint. “Several investors have requested redemptions simultaneously. Cohn has refused to honor their requests, claiming that unspecified liquidity problems have temporarily delayed such redemptions.
“In fact, Cohn and the Fund are broke. But that sad reality has not diminished his thirst for new victims, which he has continued to lure since losing the bulk of investors’ proceeds.”
According to the SEC’s website, hedge funds pool investors’ money like mutual funds do, but typically have more investment strategies. Many hedge funds try to make profits in all types of markets by borrowing, short-selling and other speculative practices not often used by mutual funds. Hedge funds are not subject to some of the regulations that are designed to protect investors, but they are subject to the same prohibitions against fraud.
According to the SEC complaint, Cohn attended DePaul University in Chicago for one semester before dropping out, and worked as a broker trainee for a brokerage firm in Chicago for three weeks before quitting to start his own financial services firm. After that unsuccessful attempt, he decided to start his own hedge fund.
Staff writers Dan Lamothe and Cathy Walser contributed to this report.