Schmitt gets 41/2 years jail for hedge fund fraud

Former NYSE manager also banned as director for 10 years

Former New York Stock Exchange manager Charles Schmitt has been sentenced by the High Court to 41/2 years in jail and was banned as a company director for 10 years for false accounting in a HK$363 million hedge fund fraud.

The sentence came after Schmitt, 61, last month pleaded guilty to 19 charges of false accounting related to forging accounting documents and quarterly statements to cover a loss of HK$363 million on his CSA Absolute Return Fund.

Deputy High Court Judge Esther Toh Lye-ping said Schmitt was the mastermind of the 'well planned and sophisticated' fraud as she gave the jail sentence yesterday.

Schmitt had taken advantage of the trust of investors who put money into the funds he managed, the judge said. Instead of investing for clients, he used part of the money for his own pleasure by spending US$3.1 million to buy a property in Hawaii.

'This is a very serious case and involves a large amount of money. It has affected public confidence in the local fund industry and has shaken the image of Hong Kong as an international financial centre,' Deputy Judge Toh said.

She decided not to impose the maximum 10-year imprisonment term for Schmitt due to his age, his contribution to his church and the community.

She has also taken into consideration Schmitt's co-operation with the police to recover the money to help cut investors' losses.

A total of 230 investors of the CSA Absolute fund were fully repaid while 894 are expected to get 60 per cent of their investment.

Full repayment is unlikely as there is still a US$32.5 million shortfall in the CSA Absolute fund which was liquidated after the arrest of Schmitt in June 2004. Schmitt declared bankruptcy in December last year.

Schmitt made a brief apology at the court to his former clients. 'I am very sorry [that] so many investors have been hurt by my action, especially the shareholders of the fund and my family,' he said.

Liquidators have recovered US$164.7 million of the missing funds and after commission fees and costs of US$14.1 million, there is still a US$46.6 million loss. The liquidators are also demanding compensation of US$206.67 million from the fund's custodian, HSBC Institutional Trust Services (Asia), formerly Bermuda Trust (Far East), and Ernst & Young, the auditor of CSA Absolute, for their role in the fund's failure.


1977-1980: Charles Schmitt is a senior business manager at New York Stock Exchange, responsible for investing the exchange's pension fund

1992: Sets up Charles Schmitt & Associates in Hong Kong

2001: Starts CSA Absolute Return Fund

June 2004: Jennifer McLennan, a director of Charles Schmitt & Associates, informs the Securities and Futures Commission some of the names of the funds managed by CSA Absolute seem to be wrong. The SFC bans Schmitt from removing the company's assets and refers the case to the police, who arrest him. CSA Absolute put into liquidation

December 2005: Declares bankruptcy

February 2006: SFC revokes licences for Schmitt and Charles Schmitt & Associates

September: Pleads guilty in the High Court to 19 counts of false accounting

October: SFC bans Schmitt from re-entering the industry for life. The High Court sentences him to 41/2 years in jail and bans him from being a company director for 10 years

Sources: Bloomberg, SFC, SCMP