A California-based investment advisor allegedly defrauded investors by using a bogus auditing firm to verify his hedge fund's performance, according to the SEC.

“An independent financial audit is one of the best protections available to investors,” according to Marc Fagel, director of the SEC’s San Francisco Regional Office. The advisor, James Michael Murray, “conjured up an accounting firm and deliberately faked the audit to induce investors into believing the fund was in better shape than it actually was.”

Murray’s lawyer, Ed Swanson of Swanson & McNamara, did not return calls for comment. Murray could not be reached for comment.

The SEC has filed charges in federal court in California against Murray for raising more than $4.5 million from investors in his various funds including Market Neutral Trading, a purported hedge fund that claimed to invest primarily in domestic equities. Murray allegedly provided Market Neutral Trading investors with a report he told them was prepared by independent auditor Jones, Moore & Associates, the commission says. However, Jones Moore is not a legitimate accounting firm but rather a shell company that Murray secretly created and controlled, according to the SEC. The phony audit report allegedly misstated the financial condition and performance of the fund to investors.

The SEC’s complaint seeks injunctive relief and financial penalties from Murray.

In a separate criminal case, the U.S. Attorney’s Office in Northern California also has filed criminal charges against Murray in a complaint recently unsealed.

Murray began raising the funds from investors in 2008, according to the SEC complaint. The following year, Market Neutral Trading distributed the phony audit report to investors claiming the audit was conducted by a legitimate third-party accounting firm, the complaint alleges. However, according to the SEC, Jones Moore is not registered or licensed as an accounting firm in Delaware, where it purports to do business. Instead, its website was allegedly paid for by a Murray-controlled entity and listed 12 professionals with specific degrees and licenses who were said to work for Jones Moore. However, at least five of these professionals do not exist, the complaint continues, including the two named principals of the firm: “Richard Jones” and “Joseph Moore.”

The SEC says that Murray has attempted to open brokerage accounts in the name of Jones Moore, identified himself as Jones Moore’s chief financial officer and called brokerage firms falsely claiming to be the principal identified on most of the supposed auditing firm's documents.

The SEC claims that the bogus audit report provided to investors understated the costs of Market Neutral Trading's investments and thus overstated the fund’s investment gains by approximately 90%. Furthermore, according to the commission, the Jones Moore audit report also overstated Market Neutral Trading's income by approximately 35%, its member capital by approximately 18% and its total assets by approximately 10%.

--Ann Marsh writes for Financial Planning