Hedge Fund May Be Next to Pay in Fund Scandal

Veras Investment Partners, a Texas hedge fund that securities regulators contend engaged in improper trading of mutual fund shares, has set aside more than $100 million to cover the cost of a possible settlement with state and federal regulators, according to several sources.

The Sugar Land, Texas-based fund, which ceased operations a few weeks ago, notified its investors about the reserve account during a recent conference call, said sources familiar with the hedge fund and the mutual fund industry trading investigation.

Veras, which is being investigated by New York Attorney General Eliot Spitzer and the Securities and Exchange Commission, has not been charged with any wrongdoing. But the 2-year-old hedge fund, which may have had $1 billion in assets at its height, has been linked to possible improper and illegal trading in shares of several mutual fund companies.

Sources said the amount of money set aside for settlement purposes far exceeds the $40 million the Canary Capital Partners hedge fund paid as a fine to settle with Spitzer's office. The Canary settlement and the revelations about illegal trading in mutual funds share sparked a firestorm on Wall Street and has led to a far-reaching investigation into the $7.1 trillion mutual fund industry.

Veras may have set aside up to $200 million in a settlement reserve, said sources familiar with the hedge fund and the fund industry investigation. An investor in the hedge fund said a Veras executive told him that the SEC advised the hedge fund to place as much as $100 million in an escrow account for a possible settlement with regulators.

Officials at Veras, which was started by James McBride and Kevin Larsen, declined to comment. Rich Zabel, a partner with Akin Gump Strauss Hauer & Feld, Veras' law firm, also declined to comment. Officials at the SEC and Spitzer's office also did not comment.