A bad day for financial engineers in Chicago continued Wednesday, when the Securities and Exchange Commission said the assets of a quantitative trading firm were frozen.

The SEC said that Belal K. Faruki of Aurora, Ill., and his advisory firm Neural Markets LLC had solicited “highly sophisticated individuals” to invest in the "Evolution Quantitative 1X Fund," on false premises.

The fund, the federal regulator said, supposedly used a proprietary algorithm to carry out an arbitrage strategy involving exchange-traded funds (ETFs).

Faruki and Neural Markets “falsely represented the existence of investor capital and that trading was generating profits when, in fact, losses were being incurred,’’ the SEC said.

Faruki could not be reached at the phone of an address in North Aurora that property records and other litigation indicate belong to an individual of that name.

The SEC said Faruki and Neural Markets defrauded at least one investor out of $1 million before confessing the losses, and were soliciting other wealthy investors before the SEC obtained a court order to halt the scheme.

A federal court today entered a preliminary injunction order in the case, which was unsealed earlier this week.

The SEC announcement follows the disclosure that the Chicago-headquartered hedge fund Citadel won a temporary restraining order against a quantitative financial engineer it claims downloaded confidential information on trading strategies to help a rival.

Cook County Judge Rita Novak on Tuesday ordered 23-year old Yihao Ben Pu, who worked in Citadel’s tactical trading unit, not to disclose any confidential information or destroy any evidence.

In its complaint filed against the 23-year old Pu in the circuit court of Cook County, Illinois, Citadel alleged that Pu installed unauthorised programs on its computer systems to bypass security measures so he could move "massive amounts" of "highly confidential" information relating to its core tactical trading business to two external devices. Pu called the charges an overreaction by Citadel.

The asset freeze appears to be the second enforcement action taken against Faruki in the last two years.

The Securities Department of the Secretary of State in Illinois in January 2010 received a temporary order of prohibityion against Belal K. Faruki of North Aurora, Ill., for allegedly failing to honor the terms of a loan agreement with an investor. In that case, Faruki was listed as operating as Logisol Inc.

No contact information for Neural Markets or Faruki can be found at the company’s website.

"Faruki and Neural Markets lied throughout this elaborate scheme in order to attract capital from sophisticated investors," said Bruce Karpati, Co-Chief of the Asset Management Unit in the SEC's Division of Enforcement. "Even sophisticated institutional investors should be wary of unscrupulous hedge fund managers who cloak their misrepresentations in lofty pitches about a complex investment strategy."

Faruki and Neural Markets “distorted the hedge fund's performance track record, misrepresented that wealthy investors had invested $5 million in the fund, and misstated that it had engaged a top-tier auditor to assist in preparing the fund's quarterly and annual financial statements,’’ according to the SEC. Faruki also told investors that he had invested his own money in the hedge fund.

The SEC filed its complaint under seal on Aug. 10, 2011, and that same day the court granted the SEC's request for emergency relief including a temporary restraining order and asset freeze.

The court lifted the seal order on August 29, and the preliminary injunction order entered Wednesday continues the terms of the temporary restraining order until the final resolution of the case.

The SEC said the order was entered “with the defendants' consent.”