Bermuda-based fund management company Lake Shore Asset Management Ltd. has been ordered to pay a fine of $25,000 a day by a US judge for failing to cooperate with an investigation into trading losses that have left investors being owed tens of millions of dollars.

The Lake Shore Group of Companies, also comprising entities set up in the Turks and Caicos Islands and the British Virgin Islands, owes investors more than $270 million and is insolvent by more than $100 million, according to a report by its receiver, Robb Evans & Associates LLC.

Robb Evans' report was filed at the US District Court for the Northern District of Illinois on December 5, 2007 and was highlighted in the latest edition of Internet newsletter "OffShore Alert", published by KYC News. Preliminary records indicate that, from January 28, 2002 until August 31, 2007, Lake Shore raised approximately $312.8 million from investors and returned about $38.3 million, "resulting in about $273.5 million in principal currently owed to investors", stated Robb Evans.

To pay this obligation, the receiver "is informed" the group has approximately $76 million held by three UK-based Futures Commission Merchants, plus a claim of approximately $164 million in the bankruptcy of US-based cash manager Sentinel Management Group.

"Overall, if there is a 50 percent recovery from the Sentinel bankruptcy and the funds are recovered from the three FCMs, on a preliminary basis it appears there will be a shortfall against principal owed in excess of $100 million," Robb Evans concluded in its report.

Tens of millions of dollars of investors' funds have gone as a result of trading losses and payments to entities apparently controlled by the group's principal, Phillip Baker, stated the receiver. From 2002 to 2007, Lake Shore's trading losses were approximately $37.5 million and approximately $10.2 million was transferred to a Baker-controlled company in the Turks and Caicos Islands called Hanford Investments, Ltd., according to Robb Evans.

In mid-2007, an additional $1.1 million was transferred to another Baker-controlled company called Anglo International Associates Ltd., "located in the Isle of Man", it was alleged. "The receiver is investigating the nature of these transfers," stated Robb Evans.

The receiver was appointed on October 4, 2007 - just over four months after the Commodity Futures Trading Commission (CFTC) filed a complaint against the Lake Shore group and Baker on June 6, 2007 in an attempt to inspect its books and records, which was subsequently amended to include allegations that the defendants defrauded "at least 500 individuals and entities worldwide".

Meanwhile, on December 10, 2007, US District Judge Blanche M. Manning imposed a civil penalty of $25,000 per day against Mr. Baker and Bermuda-domiciled Lake Shore Asset Management after previously holding them in civil contempt of orders requiring them to co-operate with the CFTC investigation into their activities.

"In short, based on their past conduct, even the most inveterate gambler would not bet on the chance that Lake Shore Ltd. [Lake Shore Asset Management Ltd.] and Mr. Baker will have a voluntary change of heart and comply with the court's orders without an extremely weighty additional incentive to do so," commented the judge. "The court thus does not believe that the CFTC's suggested fine of $1,000/day or $5,000/day will have any sort of meaningful coercive effect. For a multi-millionaire, such a fine would be insignificant. The court, indeed, harbours serious doubts that any fine, no matter how large, will have any coercive effect as long as Mr. Baker is able to keep his whereabouts unknown.

"Accordingly, based on the court's intimate familiarity with this complex case, the history of egregious and intentional defiance exhibited by Lake Shore Ltd. and Mr. Baker, the evidence in the record about Mr. Baker's resources, and the burden that the chosen sanctions will have on Lake Shore Ltd. and Mr. Baker, the court finds in its discretion that the receiver's suggested fine of $25,000/day is both reasonable and necessary."

In levying the penalty, the judge stated she rejected the "bald assertion" by Lake Shore Asset Management Ltd. that it "lacks the financial ability to pay any fine, especially in a situation where it lacks clean hands given that all indications are that it is affirmatively hiding its own records.

"Moreover, its unsubstantiated claims of poverty are inconsistent with evidence showing that Mr. Baker has been footing Lake Shore Limited's legal bills. He has caused Lake Shore Ltd. and/or other Lake Shore entities to retain lawyers in numerous locations around the globe who have participated in the defence of this action...

"Lake Shore Limited thus has shown that it has the ability to pay for expenses it chooses to incur.... Therefore, the court concludes that financial sanctions should be payable jointly and severally by Mr. Baker and Lake Shore Ltd."

Judge Manning has also indicated she is contemplating taking action against Alexandre J. Schwab, an attorney in Switzerland who is acting for Lake Shore, for allegedly helping the group to conceal records.

Judge Manning described as "very troubling" allegations by the receiver that Schwab "directly participated" in the transfer of 20 boxes of Lake Shore-related documents from Bermuda to Switzerland on or about September 11, 2007 in "direct violation" of a court order. "The CFTC has requested Mr. Schwab to turn over the documents immediately, but the receiver does not anticipate Mr. Schwab's cooperation in this or any other regard," according to the receiver.

Schwab's conduct will be discussed at a status hearing scheduled for this Thursday. If documents are not produced soon, the judge has indicated she will recommend that the US Attorney's Office initiate criminal contempt proceedings against Lake Shore Asset Management and Mr. Baker.