Lawyer Representing Hedge Fund Charged With Collecting Ill-Gotten Gains Resents SEC's Use Of The Term 'Fraud' As A Description Of Client's Actions

On Friday, the Securities and Exchange Commission charged former hedge fund manager-cum-selectman Forrest Fontana with illegally selling short shares of Merrill Lynch, XL Capital and Wells Fargo in 2008. Fontana's lawyer, Lisa Wood, doesn't deny this happened. Having said that, she does take issue with the use of the term "fraud" as it relates to her client, whose "crime," if you can even call it that, was an accidental technical violation that only happened once.

Fontana, who started Fontana Capital LLC after having worked at industry powerhouse SAC Capital Advisors, violated Rule 105 of Regulation M, the U.S. Securities and Exchange Commission said in an order instituting administrative cease and desist proceedings. The rule prohibits investors from participating in public offerings after having shorted the same securities. According to the government, Fontana, who traded mainly in financial stocks, violated the rule on three occasions, helping his investors earn unlawful profits of about $1,101,000.

Fontana's lawyer, Lisa Wood, said the matter is not a fraud case and relates to "isolated, inadvertent, technical violations of Rule 105." "We disagree over the measure of damages," Wood said.

Given that Fontana started off with a "buzz" after being seeded with $50 million from Steve Cohen in 2005 and as of 2010, managed zero dollars for clients and effectively closed its doors, maybe it'd be better to go with the poor shlub just trying to make a buck defense? In unrelated news:

This is not the first time Fontana has been embroiled in a regulatory issue. While at SAC, he had frequent contact with a research analyst at Morgan Keegan Inc before the firm issued a negative research report on Fairfax Financial Holdings Ltd. Fairfax promptly sued a group of hedge funds, including SAC, claiming they conspired to drive down the company shares.

SEC: Boston Hedge Fund Fontana Broke Rule [Reuters]
SEC Accuses Fontana Capital of Breaching Short-Sale Restrictions [Bloomberg]