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Federal securities regulators have ousted the management team at Beacon Hill Asset Management -- a big New Jersey hedge fund that lost millions in the mortgage-backed security market -- after charging the fund with deceiving its wealthy investors.

The Securities and Exchange Commission made the move Thursday as part of an ongoing investigation into the $2 billion hedge fund, which last month said it was

closing two of its three investment funds because of those steep losses.

The Summit, N.J.-based hedge fund said the action was being taken after it had to admit to investors that its estimated $400 million in losses were far worse than the figure they had been given in September.

At the time, it was believed Beacon's greater-than-expected losses were due to a series of bad bets it made on the spread, or difference, between the interest rates charged on U.S. Treasuries and the interest rates on mortgage-backed securities. It appeared that Beacon simply had gotten squeezed between an unforeseen acceleration in the rate of mortgage prepayments and a simultaneous spike in Treasury prices.

But it appears, according to the SEC, that the problems at Beacon were much worse than simply making bad market bets.

The SEC, in a complaint filed in Manhattan federal court, contends that Beacon "materially overstated" the net asset values and returns it was earning on all of its funds for a period from July 31 through Sept. 30. Regulators contend that during those months, the hedge fund allegedly misled investors by sending them a series of email messages that purported to be a true picture of the performance of the various funds.

In conjunction with the filing of the complaint, Beacon agreed to enter into an agreement with the SEC that enabled regulators to find a new management team to operate the affairs of the three funds. The funds are in the process of being moved to Ellington Management Group, a rival hedge fund.

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The former Beacon funds are the Safe Harbor Fund, the Bristol Fund and the Milestone fund. The two funds that Beacon said it was closing in October were the $600 million Bristol and the $140 million Safe Harbor funds. At the time, Beacon reported that both funds had lost more than half of their value.

"The people running Beacon Hill have been replaced as the investment managers," said Brian Ochs, an SEC attorney. "This is still in the very early stages, but we wanted to take quick action for the benefit of the investors."

Beacon was formed in 1997 by Jack Barry and three other principals, Tom Daniels, Mark Miscowitz and John Irwin. The firm has a total of 17 employees. But under the agreement with the SEC, none of those people can now work win the funds in questions.

One of the biggest investors in Beacon is Asset Alliance, a $4 billion New York investment management firm that has a 50% equity stake in Beacon. Asset Alliance provides seed money and capital to hedge funds. Last year, it began investing in 11 different hedge funds, including Beacon.

A spokesman for Beacon said it has "agreed to effect an orderly transition of the funds to a new investment manager pursuant to an agreement with the SEC."

Although hedge funds, unlike mutual funds, are largely unregulated investment vehicles, the SEC can take action in cases of fraud or misrepresentation.

Now that the management team at Beacon has been replaced, an attorney representing the interests of some of the funds and investors said regulators will be trying to determine just how much money was lost. Also, regulators may begin looking at the individual managers at Beacon.

As of this moment, none of the principals or investment managers at Beacon have been charged. But Ochs said "it's very early in the fact-finding."