According to the complaint, filed on June 30, 2008, this case concerns an international fraudulent securities scheme based on the illicit purchases of hundreds of millions of dollars of securities in illiquid U.S. penny stocks in the names of multiple Absolute Capital hedge funds. When the truth about these purchases was revealed in September 2007, the value of the hedge funds promptly plunged by up to 40%, or by hundreds of millions of dollars in the aggregate.
In September 2007, the Chief Investment Officer of Return Europe Fund, East West Fund, European Catalyst Fund, Octane Fund, Activist Fund and other funds within the Absolute Capital family of funds suddenly disappeared. Similarly, the Chairman and CEO suddenly resigned. As reported in the press, "many Absolute investors found themselves looking at big losses after it emerged in the days after the CIO’s disappearance that a substantial amount of his holdings had been in bulletin board, or 'pink' sheet stocks."
Stocks known as "bulletin board" stocks or "pink sheet" stocks are stocks in companies that cannot meet the requirements to be listed on a national securities exchange. Such stocks are universally recognized in the securities industry to be illiquid, thinly-traded, and speculative. They are often stocks in start-up companies. Such stocks are far more susceptible to market manipulation than stocks traded on a national exchange.
The "big losses" initially reported in the press were an understatement. In a September 19, 2007 press release by ACM, ACM revealed that the Absolute Capital Funds' investments in illiquid "US-based Over the Counter Bulletin Board/Pink Sheet" stocks were "approximately $440 million to $530 million of the equity funds' assets."
The sudden revelation that the missing CIO had invested roughly half a billion dollars in illiquid penny stocks, contrary to the provisions contained in the Funds' offering memoranda, caused the value of investments in the Absolute Capital Funds to plunge and to put ACM in a financial crisis.
On October 10, 2008, Cascade Fund LLLP was appointed lead plaintiff and the law firms of Sander, Ingebretsen & Parish, P.C. and Kohn, Swift, & Graf, P.C. were appointed as co-lead counsel. On October 21, 2008, the defendants filed a motion to dismiss for lack of jurisdiction. Before any order on that motion, the lead plaintiff filed a First Amended Complaint. The defendants responded by filing an amended motion to dismiss for lack of jurisdiction. On September 16, 2009, defendant Argo Group Limited filed a motion to dismiss the First Amended Complaint.
On March 31, 2011, the Court dismissed the claims against the defendants, however, stayed the effect of the order for 30 days for the plaintiff to file an amended pleading. On June 7, 2011, the plaintiffs filed a notice of voluntary dismissal, dismissing all claims.