The U.S. Securities and Exchange Commission (SEC) has sued a Connecticut hedge fund and its manager in connection with money they sent to convicted fraud scheme operator Tom Petters and pocketed in fees.

Marlon Quan and Greenwich, Connecticut-based Acorn Capital Group, LLC, “funneled hundreds of millions of dollars to Thomas Petters and his notorious Ponzi scheme,” according to a complaint filed Thursday in U.S. District Court in Minneapolis. The complaint also names Stewardship Investment Advisors, LLC, as a defendant.

According to the complaint, Quan joined forces with Petters around 2001. Through Acorn and Stewardship, he purchased notes from Petters for several of his hedge funds. The notes Quan purchased were all issued by Petters-controlled special purpose vehicles-including PAC Funding, LLC.

From 2001 until 2008, Quan allegedly took in close to $460 million from at least 165 investors-and he transferred “the majority” of it to entities controlled by Petters. Meanwhile, Quan, Acorn, and Stewardship received more than $93 million in fees from the hedge funds, according to the suit.

Quan allegedly assured investors that he was taking specific precautions to protect them even though he knew those safeguards weren't in place or weren't being properly carried out.

When PAC Funding began to default on notes held by Quan's hedge funds in late 2007, Quan continued to assure investors that the funds were doing well instead of disclosing the defaults, the suit said. He also “embarked on a series of convoluted transactions in which he exchanged $187 million with Petters Co. in 'round trips'” in order to dupe investors and the funds' outside auditor that PAC Funding was paying off the notes.

The complaint alleges that Quan has continued to defraud investors. Within the next few business days, ABRG-a successor to Acorn that's controlled by two people who were once employed by Quan-will receive approximately $14 million from Petters' receiver in order to settle various claims made by Quan's entities.

“Quan, despite his glaring conflict of interest, through ABRG has negotiated settlement agreements on behalf of his U.S. investor-victims,” the suit said. But Quan has agreed to provide the bulk of the funds to a German lender and a Bermuda liquidator for his offshore funds, and the remaining $862,500 will be directed to pay his lawyers and other expenses-which will leave nothing for U.S. victims.

The SEC seeks disgorgement of Quan's funds and asked for his assets to be frozen-including the $14 million that will soon be provided from the Petters receivership. A judge on Friday approved the motion to freeze the ABRG settlement proceeds, and a hearing on the matter has been scheduled for April 14.

Petters is currently serving a 50-year prison sentence for running a Ponzi scheme that defrauded investors of an estimated $3.65 billion. Petters filed an appeal shortly after he was sentenced, and he told federal judges last month that his trial was tainted and he deserves another.