Veras Investment Partners, the Texas hedge fund identified by Federated Investors as a big late trader in its mutual funds, closed its doors and returned between $400 million and $500 million to investors last month.

The Sugar Land statistical arbitrage fund sent investors' money back with profits, according to a former investor. The abrupt closing happened after Veras received subpoenas from the New York Attorney General and the

Securities and Exchange Commission

as it investigated allegations of illegal late trades in mutual funds. The fund is owned by James McBride and Kevin Larsen, and started two years ago.

Officials at Veras referred calls to the fund's lawyer, Richard Zabel, of Akin Gump Strauss Hauer & Feld, who declined to comment. "I think it's in their interest that I don't talk about their case," he said. The firm is owned by James McBride and Kevin Larsen.

Veras also figured prominently in New York Attorney General Eliot Spitzer's prosecution of James Connelly, an executive at Fred Alger Management, who last month pled guilty to evidence tampering after attempting to get his colleagues to destroy emails that detailed the mutual fund manager's market-timing arrangements with the hedge fund. Connelly, 40, faces up to three years in jail. He also paid a $400,000 fine in civil case brought by the SEC.

"Veras is cooperating fully with the Attorney General and the SEC," the firm said in a brief statement issued Oct. 16.

According to the investor, Veras was bringing annual returns of between 10% and 15% in a strategy he described as very conservative. While market-timing -- a frowned-upon arbitrage strategy -- isn't illegal, late trading is.

Federated said it found about 100 instances of improper trading, and that Veras did 15 of them. The hedge fund investor said it was possible brokers hadn't processed Veras' orders until after the pricing window closed at 4 p.m.

"If you're making that each year, and you have $500 million and you keep 20% of those profits, why would you need to cheat?" the investor asked. "They made money very steadily. They were one of my best investments."

Federated announced Wednesday that Veras market-timed its funds, making a profit of $175,000 on a $12 million investment, the company said. In a statement, it said some customers had engaged in market-timing and late trading, including Veras and Canary Capital Partners, which paid a $40 million settlement to New York State over allegations of illegal late trading.

Veras' arrangements with Fred Alger were made through Connelly, the SEC said. He allowed the hedge fund to time a small-cap stock fund, giving them permission to exceed the annual six-trade limit the mutual fund company allowed its investors.

In exchange for keeping 20% of their investment in buy and hold positions, also know as "sticky assets," Connelly allowed Veras and other investors to time Alger funds. The SEC said he invoked this arrangement in February of this year, securing $10 million for a small-cap fund and allowing Veras to time $50 million in the Alger Fund. In July, the hedge fund was granted an additional $30 million of capacity in exchange for an additional $12 million buy and hold position, the SEC said.