The Securities and Exchange Commission announced it has obtained an emergency court order to halt an attempt by Connecticut-based fund manager Marlon M. Quan to divert to himself and others settlement funds intended for U.S. victims of a Ponzi scheme operated by Minnesota businessman Thomas Petters.

In its emergency court action, the SEC alleges that Quan, despite a glaring conflict of interest, recently negotiated an agreement to divert a settlement payment of approximately $14 million relating to a receivership and a bankruptcy of Petters’ entities. Although he purportedly negotiated on behalf of his U.S. fund investors, Quan’s U.S. victims would receive no money under this agreement.

In the attempt blocked by the SEC, Quan had arranged for nearly $6 million of the settlement amount to be paid to a German bank, more than $7 million to be paid to a liquidator appointed by a Bermuda court for certain overseas fund investors, and approximately $862,500 to be directed to pay Quan’s lawyers and other expenses.

The SEC has charged Quan with facilitating the Petters fraud and funneling several hundred million dollars of investor money into the scheme. The SEC alleges that Quan and his firms (Stewardship Investment Advisors and Acorn Capital Group) invested hedge fund assets with Petters while pocketing more than $90 million in fees. They falsely assured investors that their money would be safeguarded by “lock box accounts” to protect them against defaults. When Petters was unable to make payments on investments held by the funds that Quan managed, Quan and his firms concealed Petters’ defaults from investors by concocting sham round trip transactions with Petters.

At the SEC’s request, the Honorable Ann D. Montgomery of the U.S. District Court for the District of Minnesota ordered that the money – paid into a firm affiliated with Quan’s Acorn Capital Group – be placed into a segregated account and frozen until further order of the court. A hearing will be held on April 14 to determine the SEC’s request for additional emergency relief for investors.

“Quan falsely assured his fund investors about safeguards that did not exist and made up phony transactions to hide Petters’ defaults, all while he pocketed millions of dollars in fees,” said Robert Khuzami, director of the SEC’s Division of Enforcement. “Our action shows that we will relentlessly pursue illegal profits stolen from innocent investors through Ponzi schemes.”

The SEC previously charged Petters and Illinois-based fund manager Gregory M. Bell with fraud and filed additional charges against Florida-based hedge fund managers Bruce F. Prévost and David W. Harrold for facilitating the Petters Ponzi scheme.

According to the SEC’s complaint, Petters sold promissory notes to feeder funds like those controlled by Quan and his firms. Petters used some of the note proceeds to pay returns to earlier investors, diverting the rest of the cash to his own purposes. Petters had promised investors that their money would be used to finance the purchase of vast amounts of consumer electronics by vendors who then re-sold the merchandise to such retailers as Wal-Mart and Costco. In reality, this “purchase order inventory financing” business was merely a Ponzi scheme. There were no inventory transactions.

The SEC alleges that Quan and his firms funneled money into the Petters Ponzi scheme beginning as early as 2001 and continuing through 2008. Quan sold interests in his stewardship funds to individuals, charities, companies and other hedge funds. He falsely assured investors of several procedures that Acorn Capital Group purportedly undertook to protect the investors in his hedge funds. However, Quan and his firms implemented none of these safeguards.

The SEC further alleges that Quan falsely assured existing and new investors that the Quan Hedge Funds were doing well when in reality Petters began defaulting on the investments they held. Instead of disclosing these defaults to his fund’s investors, Quan embarked on a series of convoluted transactions in which he exchanged $187 million with Petters in “round trips” that created the false appearance that Petters was making his payments.

The SEC seeks entry of a court order of permanent injunction against Quan and his firms as well as an order of disgorgement, prejudgment interest and financial penalties. The SEC also seeks equitable relief against relief defendants Florene Quan, wife of defendant Quan, and Asset Based Resource Group, an affiliate of Acorn Capital Group.

Sally J. Hewitt, Donald A. Ryba, Charles J. Kerstetter and Peter K.M. Chan of the SEC’s Chicago Regional Office conducted the SEC’s investigation. Frank Hooper and Marie Hagelstein of the SEC’s Boston Regional Office’s examination staff also assisted in the SEC’s investigation. The SEC’s litigation is led by John E. Birkenheier of the SEC’s Chicago Regional Office. The SEC acknowledges the assistance of the Bermuda Monetary Authority.

The SEC’s investigation is continuing.