The man at the centre of an inquiry into an alleged $200 million (£96 million) hedge fund fraud that has embroiled a former Man Group subsidiary has been charged with two counts of commodities fraud.

Paul Eustace, 42, founder of Philadelphia Alternative Asset Management (PAAM), was charged with defrauding clients, causing them to lose at least $200 million between spring 2001 and June 2005.

According to the US Department of Justice, Mr Eustace produced fictitious accounts purporting to show that he was making money for clients when he was actually losing it.

He also increased management fees charged to clients based on the phoney profits, the DoJ said.

In addition, Mr Eustace allegedly used $500,000 of client money to pay a settlement in a legal case.

Man Group’s then brokerage house, Man Financial, was prime broker to PAAM. It has been accused by the receiver seeking to recover money on behalf of burnt PAAM investors of assisting in the alleged fraud.

The division, which was spun off as a separately New York listed company MF Global earlier this year, has denied any wrongdoing.

Last week it set aside $70 million to cover the cost of settling the matter. MF Global has a partial indemnity for most of the risk of the affair from Man Group.

The creditors are seeking up to $525 million in aggravated damages.

MF is understood to have earned $4.5 million in commissions from PAAM before it was closed down by the Commodity Futures Trading Commission, which investigated the case alongside the Federal Bureau of Investigation.

The fund, based in King of Prussia, Pennsylvania, solicited investors’ money to trade commodity futures and options, but was not registered with federal regulators as mandated, according to an indictment by Patrick Meehan, US Attorney for Eastern Pennsylvania.

Among his activities, Mr Eustace solicited about $250 million from at least 60 investors in 2004 and 2005 for two of the funds over which he had complete control, the indictment said.

He also recorded money-losing trades in a separately concealed account.

MF is alleged to have helped in the setting up of this account, known as the 50 account.

By June 2005 this account contained losses of $175 million.

Falling stars

Long Term Capital Management the granddaddy of collapses. Its implosion shook the financial world in 1998 and led to lifeboat rescue by the New York Federal Reserve.
Bayou Management the principals of this fund, Samuel Israel III and Daniel Marino, pleaded guilty in 2005 to defrauding investors of $450 million (£262 million), in part by using fictitious auditors.
KL Financial this Florida-based hedge fund was forced to close in February after the FBI and the SEC found that investors had lost $250 million.
Philadelphia Alternative Asset Management collapsed in 2005, with its founder, Paul Eustace, accused of defrauding investors.

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