The SEC is bringing charges against 66-year old Michael Hershey, manager of the top-ranking small-cap growth Henlopen fund. The Commission alleges that Hershey "egregiously misused client funds and breached his fiduciary duty to a wealthy client."

The SEC complaint was filed in the United States District Court for the Eastern District of Pennsylvania.

The SEC says that Hershey made multiple cash infusions of private client's money into the struggling start-up Tremont Medical, Inc. Hershey was a director and shareholder of Tremont, which is also named as a defendant in the complaint.

"Hershey continued to make these investments long after it was clear that the Defrauded Client’s account was Tremont’s only source of capital and that these investments were worthless," the complaint states.

Hershey allegedly abused his fiduciary position, arranging for $8.1 million in interest-free cash advances and a $4.5 million line of credit for Tremont through its CFO Robert Lear.

Hershey also allegedly claimed that his client's account held 9.9 million in Tremont shares. In fact, the unnamed client only owned 1.9 million Tremont shares - all of them worthless. The result of these fraudulent representations, according to the SEC, was that the client's account was overvalued by $30 million. By the time the client closed his account in 2001, it had lost almost 70 percent of its value.

Hershey is charged with violating several securities laws and abusing "means and instruments of transportation or communication of interstate commerce" and the mails. The SEC is asking that the defendants disgorge any ill-gotten gains and pay civil penalties.

David Horowitz at the SEC office in Philadelphia said the Commission isn't seeking to bar the defendants from the industry. However, if the SEC wins the case or if the defendants settle with an injunction, Hershey would have to step down as manager of Henlopen.

"If an investment advisor is permanently enjoined from violations of a security act, then pursuant to the investment company act, they can no longer be an advisor to a mutual fund," Horowitz explained.

The Henlopen Fund manages assets for Landis Associates, LLC. Morningstar pegs Henlopen's assets under management at $318 million. 

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