The commission also filed a civil fraud lawsuit against Shasta founder Vincent J. Firth of Medford; Shasta's attorney Robert B. Shimer of Leesport, Berks County; and Tech Traders Inc., of Gastonia, N.C.
The suit alleges that Shasta's claims of huge commodities trading profit through the North Carolina firm - profit the fund said was verified by certified public accountants - masked millions in actual losses.
The hedge fund told investors it returned 132 percent in the year ended Feb. 28; in fact, the fund lost more than $3.5 million in that period, according to the commission.
Through their attorney, Firth and Shimer denied wrongdoing and blamed Tech Traders for the gap between reported and actual performance. Tech Traders through its attorney declined comment.
Since Shasta's suspension, the probe has broadened, as commission investigators and Chicago lawyer Stephen T. Bobo, appointed by Kugler as receiver for Shasta's assets, try to follow the fund's weedy financial trail across state and national borders.
They are paying special attention to clients and owners of Tech Traders, accountants on both the East and West Coasts who passed Shasta's performance numbers along to investors and hedge-fund promoters, and a network of small, private Caribbean financial institutions whose assets were mixed with Shasta's and have been frozen along with them, according to the Commodity Futures Trading Commission.
The commission regulates trading in farm, metal and financial futures, just as the better-known Securities and Exchange Commission monitors stocks and bonds.
The April 1 suspension order by Kugler froze accounts for Shasta and firms it did business with, snarling at least $20 million belonging to more than 100 investors - from Pennsylvania retirees to private offshore companies. The investigators say they believe tens of millions more may have been placed with Tech Traders by as-yet-unidentified investors.
Hedge funds use sophisticated investment strategies to try to wring higher, or at least steadier, profit than traditional investments such as mutual funds. Designed for wealthy and knowledgeable investors, many hedge funds are exempt from registering with the government or filing public financial reports. Critics say that makes hedge funds easier to abuse.
The Shasta fraud suit is the latest in a string of cases that shine light on the margins of the fast-growing hedge-fund industry and show the lengths some investors will go to, and the risks they will take, for the lure of bigger profits.
But unlike earlier hedge-fund disasters, in which alleged fraud cost sophisticated Wall Street firms and their pension and university clients many millions, Shasta's troubles appear to have snagged prosperous middle-class citizens who do not fit the profile of hedge-fund buyers as ultra-wealthy.
Its investors include a South Jersey engineer who befriended fund founder Firth in Presbyterian church classes; a $17-an-hour mechanic from the suburbs of Reading who shared a passion for boating with Shasta attorney Shimer and invested his retirement savings in the fund; and a New Jersey state college administrator, who invested $195,000.
All three said they had believed the fund's financial accounting statements; each asked not to be identified because they are embarrassed and do not want neighbors to know about their losses. The three investors did not blame Shasta's operators, preferring to pin responsibility on the fund's commodities traders in North Carolina, or on its accountants.
The accused have unusual backgrounds for money managers. Shasta founder Firth, 49, went to music school in Boston and played the vibraphone for a living before entering the financial service world as a mortgage broker; he filed for Chapter 13 bankruptcy protection last year even as his hedge fund was reporting monthly profit of 10 percent and more.
Shimer is a former U.S. General Services Administration lawyer who practiced law in Boston before returning to his native Berks County to be near family, according to Firth's and Shimer's attorney, Samuel F. Abernethy of New York.
Firth ran the Shasta fund from his home in a pond-studded corner of Medford where the streets curve gently through the pine-and-oak woods and the homes have three garages and sell for $700,000 and up.
Dark-eyed and soft-spoken, Firth answered his door one day this month and said his reputation had been hurt by the government's accusations. He referred questions to Abernethy.
Firth and Shimer "are as shocked and appalled as anyone," Abernethy said. "These guys did not engage in knowing fraud. They are out significant amounts of money."
They blame their codefendant, Tech Traders, the North Carolina firm that invested Shasta's money in commodity pools using what it said was a proprietary system that generated impressive profits.
According to court documents and testimony, both Shasta and Tech Traders claimed profit of more than 100 percent a year for investors, while the government lawsuit claims the fund has actually lost $7 million since its inception three years ago.
Tech Traders' founder, Coyt E. Murray, did not return phone calls; his New York attorney, Melvyn Falis, declined comment.
According to the federal lawsuit, larger customers of Tech Traders also have been caught in the freeze imposed by the judge - even if they were not Shasta investors - because the trading firm mingled the money in its accounts.
The Bahamas-based Sterling group of companies, including a private bank on the Caribbean Island nation of St. Lucia and an insurer on Anguilla, has at least $13 million now frozen, according to its New Jersey-based attorney, Warren Faulk.
Sterling this month asked Kugler, the federal judge, to permit access to at least some of the money so the bank and the insurer would not be forced out of business by regulators in the Bahamas.
After three days of testimony, Kugler on May 14 said he would not release any funds pending further investigation by the commodities commission, Faulk said.
What attracted investors to an obscure New Jersey hedge fund?
They were impressed by performance numbers approved by Tech Traders' certified public accountant, Jack Vernon Abernethy, a former North Carolina state assemblyman and Republican candidate for state auditor.
(Samuel Abernethy, the attorney for Shasta's Firth and Shimer, said he was not related to the accountant.)
Jack Vernon Abernethy approved the performance numbers that enabled Shasta to be listed as one of the nation's most successful hedge funds by Futures magazine and the hedgeco.com Web site, according to the commodities commission and Shasta's own accountant, Elaine Teague of Portland, Ore. Jack Vernon Abernethy did not return messages left for him; two lawyers who have represented him recently had no comment.
Neither accountant has been accused of wrongdoing by the commission.
Given the commission's fraud allegations against Shasta's operators, "it seems those numbers were not accurately reflecting what was going on. It appalls me, because so much of the investment industry is based on trust," said Saul Waxman, owner of Barclay Trading Group Ltd.
Barclay is an Iowa firm that provided fund data to Futures magazine for a February story that listed Shasta among the nation's five top-performing hedge funds with $10 million or more in assets.
One problem with reporting investments from managers such as Shasta is that "it really is an honor system," said Ginger Szala, publisher of Futures. Investors should not pick funds "purely off a list. You have to do your homework."
Officials of Florida-based hedgeco.com, cited by the commission for naming Shasta as its "Hedge Fund of the Week" in March, hung up and later declined comment rather than explain why they posted what the commission says were inaccurate returns.
Investors and investigators alike say they want to know more about the role of Tech Traders' accountant, Jack Vernon Abernethy, in creating Shasta's controversial profit numbers.
According to court documents and testimony, Jack Vernon Abernethy, in checking Tech Traders' books and reporting its profit, had a potentially conflicting role: He was an officer of a Tech Trader client.
Jack Vernon Abernethy was president of Sterling Group's insurance company - until he was fired on May 6 after failing to produce company financial records, according to Vernice Woltz, an officer of the Sterling companies and wife of Sterling chairman Howell Woltz, in testimony before Kugler this month.
According to Firth's and Shimer's attorney, the Shasta fund operators did not know about Jack Vernon Abernethy's relationship to Sterling until it was disclosed in court papers.
The Woltzes are not the only former associates who had been looking for Jack Vernon Abernethy and the records he kept.
On April 22, the accountant sent an e-mail message to his fellow officers of the Gaston County, N.C., Republican Party, which Jack Vernon Abernethy served as treasurer for the last 10 years: "With the deepest regrets . . . I find that I am not in a position to serve any longer . . . Best regards, J. Vernon Abernethy." The reason for his departure was not disclosed.
Jack Vernon Abernethy cut off contact from his former associates for the next three weeks, said Gaston County Republican Chairman Neil Moore. Finally last weekend, Moore said, he received a box of financial documents sent by his former treasurer; it was all in order, as was the party's bank account.
"I hope he's all right," Moore said.
Contact staff writer Joseph N. DiStefano at 215-854-5957 or firstname.lastname@example.org.