(CN) - Houston hedge fund manager and radio talk show host George Jarkesy's challenge of SEC charges that he fraudulently raised $30 million belongs in a federal appeals court, a federal judge ruled, dismissing the case.
The SEC filed a cease-and-desist order
against George Jarkesy and his company Patriot28 LLC in 2013, accusing him of violating the Securities Exchange Act and other federal laws through his management of two hedge funds.
In addition to running hedge funds, the 39-year-old Jarkesy hosts a nationally syndicated talk radio show and is a political commentator who often appears on Fox News.
The SEC claimed in its enforcement order that Jarkesy ran Houston-based Patriot28 LLC, originally named John Thomas Capital Management, and its two hedge funds in collusion with broker Anastasios "Tommy" Belesis, founder and CEO of John Thomas Financial.
Although their companies shared the "John Thomas" name, they falsely portrayed them as wholly independent, the SEC said.
Jarkesy formed his company in 2007 to manage hedge funds for wealthy investors who accepted the funds' high-risk investment strategy and were financially able to lose their entire investment.
The funds' value declined sharply during the 2008 financial crisis, prompting the SEC to launch an investigation and charge Jarkesy, Belesis and their companies with fraud for allegedly steering millions of dollars in bloated fees to Belesis to the detriment of the funds' investors.
According to the SEC's order, Jarkesy "inflated valuations of the funds' assets, causing the value of investors' shares to be overstated and his management and incentive fees to be increased," and "led investors to believe that as manager of the funds, he was solely responsible for all investment decisions."
In reality, the SEC claimed, Belesis at times directed the funds' investments into a company in which his firm, John Thomas Financial, was heavily invested.
Belesis also bullied Jarkesy into paying John Thomas Financial excessive fees when it "had done virtually nothing to earn them," the SEC said in its administrative order.
Belesis settled with the SEC in December in a deal that barred him from the brokerage business, and ordered him to pay more than $400,000 in disgorgement and civil penalties.
The SEC investigation also shuttered Belesis' company, John Thomas Financial.
Jarkesky tried to use the settlement as leverage to dismiss the SEC's administrative action against him. He claimed the agency's order accepting the deal "entered detailed and unqualified findings of fact and conclusions" against him that were "totally unnecessary" and "establishe[d] that the commission has conclusively prejudged the case" against him.
When that did not work, Jarkesy filed a federal lawsuit in Washington, D.C., seeking a temporary restraining order to stay an SEC administrative hearing scheduled for Feb. 3 and a declaration that the SEC had violated his due process rights.
U.S. District Judge Beryl Howell dismissed the case Monday, finding that district courts do have jurisdiction over the complaint.
"The statutory and regulatory regime under which the SEC's enforcement division brought the instant matter against the plaintiffs precludes the court from exercising subject matter jurisdiction to hear the plaintiffs' claims" Howell wrote, referring to the Securities Exchange Act.
The judge specified that two factors guided her decision.
"The statute presents two insurmountable obstacles for the plaintiffs' case: first, no final order has yet been entered by the SEC, which raises substantial questions about the ripeness of this action for review; and, second, even were this action ripe, federal court review must take place in one of the courts of appeals," Howell wrote.
Jarkesy's attorney, Karen Cook of Dallas, was not immediately available for comment.