Due diligence and operational risk in hedge funds» Hedge Fund Fraud

Corgentum Consulting Discusses the Risks of Form ADV Disclosures with Institutional Investor

HedgeFundOperationalDueDiligence.com — Thu, 17 May 2012 19:57:06 +0000

Corgentum Consulting Managing Partner, Jason Scharfman has written an op-ed piece for Institutional Investor entitled, “New Fund SEC ADV Disclosures: A Wolf in Sheep’s Clothing?” This piece discusses the challenge investors face in balancing mandatory regulatory disclosures with fund transparency.

The SEC is now requiring fund managers to report more information by revising Form ADV disclosures. In this article, Mr. Scharfman explains that it is still important to perform operational due diligence regardless of changes made to ADV disclosures and the yellow flags to look for when doing so. The piece also encourages investors to be aware of the fact that just because the SEC might require more information from funds, does not mean that there is as much quality in the documents as there is quantity.

To read the full Institutional Investor article, please click here.

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Madoff’s Daughter-In-Laws will Pay the Price for Notorious Ponzi Scheme

HedgeFundOperationalDueDiligence.com — Thu, 10 May 2012 17:25:59 +0000

There has been new developments regarding the ongoing case of Bernard Madoff. While Madoff is serving a 150 year sentence in prison, his daughter-in-laws will now be paying the price for him and his son’s infamous Ponzi scheme.

Just last week, new claims were filed against the Madoff family in an Irving Picard $255 million complaint. The case has been revised to include both Deborah Madoff and Stephanie Mack to the “$54.5 million in claims for unjust enrichment,” The Washington Post reported. The wives are also being sued for $3 million that was given to them.

Although it has been said that a judge might end up barring these claims, Picard could still sue for unjust enrichment and constructive trust, said US Bankruptcy Judge Burton Lifland in Manhattan. It is, however, too late to charge the Madoff son’s wives with all of the other past charges brought up on the family.

Picard is still trying to retrieve investor money lost during Madoff’s Ponzi scheme.

Mark Madoff, the son of Bernie Madoff, committed suicide in December 2010.

Stephanie Mack, Mark Madoff’s wife, speaks out about her husband’s suicide after Madoff Ponzi Scheme

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SEC Sues a Utah Hedge Fund Owner for Inflating Assets…

HedgeFundOperationalDueDiligence.com — Thu, 03 May 2012 15:52:51 +0000

Russell K. Cannon has been sued by the SEC, along with three others, for charging disproportionate fees and inflating assets. Cannon is being sued because he apparently inflated a stock detained by RKC Matador Funds by way of trading on the final day of the month and “by dictating the price the stock was listed at on Matador’s financial reports to clients.”

The fees and assets, as well as the outside members affiliated with the fund, would have been looked at more carefully during an operational due diligence review.

It seems that because Cannon’s pay rested on the performance of Matador, Cannon felt the need to inflate Global’s share price when it wasn’t doing as well as he’d hoped. Cannon also went as far as to put a false share price on Matador’s monthly brokerage statements.

It is unclear just how long Cannon was getting away with these discrepancies in fund data and trading, but perhaps a deeper look into the fund would have raised yellow flags for investors seeking transparency among the funds they were choosing to invest in.

Cannon’s lawyer is refuting the allegations brought up against his client and says that Russell Cannon did not do anything wrong and that they disagree with charges.

“The SEC asks that Cannon be ordered to halt the allegedly fraudulent activities, pay a fine and disgorge profits.”

Investors cannot solely rely on the SEC to detect fraud and other issues within hedge funds. This is why it is important for the investor to take it upon themselves to work with an operational due diligence consultant that will look use their expertise to focus in on the small details that may sometimes slip between the cracks, causing more serious problems in the long run.

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MIT Professor and Son Agree to Pay $4.8 mill to Settle a Case of Fraud

HedgeFundOperationalDueDiligence.com — Wed, 25 Apr 2012 19:46:10 +0000

Professor Gabriel Bitran, who teaches at MIT’s Sloan School of Management, and his son Marco Bitran, who is a 1997 MIT graduate, have been charged by the SEC for hedge fund fraud. They have agreed to pay $4.8 million to settle the case against Bitran’s firm, GMB Capital Management.
The Securities and Exchange Commission said that both Gabriel Bitran and his son gave misinformation regarding GMB Capital’s strategy, investments and historic performance to investors as well as the media. The SEC said that although Bitran claimed to trade liquid securities, the majority of his strategy dealt with investing in illiquid investments, some of which were funds managed by Bernie Madoff.
Once GMB split between GMB Management and GMB Partners, the SEC found that GMB Management provided false documents. The fund was also affected by a fraud and did not inform their investors of losses.
Finally, after countless counts of fraudulent activity, GMB Partners shut down. The Bitran’s were barred from the securities industry.
This situation would likely have posed dozens of yellow flags for investors who performed operational due diligence on GMB. For one, by taking a closer look into the funds’ counterparty oversight, an operational due diligence consultant would have reached out to service providers to confirm their relationship with the fund as well as gather further information on the scope of the work that was being done.
Cash Control and Management would have also allowed for more transparency between this fund and their investors. Even the reputation of employees might have been a helpful piece to look at while reviewing GMB.
Many cases similar to this are only being settled now, even though they were taking place during the days of the Madoff scandal. Perhaps the hundreds of surfacing stories will motivate investors to pay the small cost of operational due diligence, instead of the larger cost for major capital losses.

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Corgentum Consulting Quoted in Waters Technology Piece “Undue Diligence”

HedgeFundOperationalDueDiligence.com — Wed, 28 Mar 2012 19:01:36 +0000

Corgentum Consulting has been featured in an article for Waters Technology entitled, “Undue Diligence”, written by Anthony Malakian. This article discusses the importance of operational due diligence. Malakian points out that when operational due diligence does not occur, situations like AIJ or the recent, entirely made-up fund, Market Neutral Trading can happen, causing investors to lose millions of dollars.

Mr. Scharfman is quoted in the piece explaining how Japan’s regulatory structure is a bit behind the United States and Europe.

“The Securities and Exchange Surveillance Commission (SESC) hasn’t accused AIJ of any wrongdoing, but that will change if it’s proven that AIJ hid funds overseas in the Cayman Islands. And it should be noted that Japan’s regulatory structure is only now catching up to those of the US and Europe.”

Mr. Scharfman also points out:

“Japanese investors, culturally, have been less inclined to put the screws to fund managers,” he says. “In other regions, post-Madoff, investors have realized that they have to look past any cultural hang-ups or not wanting to embarrass somebody or not be forward and ask certain questions. Japan has been behind the curve a little bit and they’re only now catching up.”

Furthermore, this article raises other due diligence issues pertaining to technology. Now, more than ever, investors are looking for specific documents from fund managers as a means to diving deep on the due diligence process. Mr. Scharfman was also quoted saying, “People are struggling with what to do with all the documents they receive when conducting due diligence and then how they analyze those documents. The solution will come down to how to organize and mine data that is generated in the due diligence process.”

To read the entire article, click here (subscription required).

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Corgentum’s Managing Partner, Jason Scharfman Discusses Due Diligence Techniques for Success on TabbForum

HedgeFundOperationalDueDiligence.com — Tue, 27 Mar 2012 14:20:55 +0000

Corgentum Consulting’s, Jason Scharfman’s article, “Due Diligence Techniques for Success: Why Fund Managers Try to Manipulate Due Diligence,“ was featured on TabbForum, a news and opinion hub for the financial industry.

In this article, Mr.Scharfman discusses the importance of transparency between fund managers and clients. He explains how in situations like the AIJ scandal, fund managers would not even allow investors to perform any type of due diligence and that this is a red flag for investors.

Investors who are new to the due diligence process are often hesitant to ask tough questions of the fund managers, however they should take control of the process. The main goal of due diligence is to avoid risk. By performing due diligence correctly, investors can insure that they are investing their capital with the right manager.

To read the full article click here (subscription required).

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Corgentum’s Managing Partner, Jason Scharfman Discusses the Importance of Operational Due Diligence with Bloomberg

HedgeFundOperationalDueDiligence.com — Thu, 22 Mar 2012 20:48:13 +0000

Corgentum Consulting’s Managing Partner, Jason Scharfman, was recently quoted in a Bloomberg piece entitled,” AIJ Beckoned Japan Pensions With 50-Year-Old Return Targets.” This article was written by Tomoko Yamazaki and Komaki Ito. Mr. Scharfman discussed the role of operational due diligence in the developing AIJ scandal.

This recent AIJ story has pushed operational due diligence into the forefront of important trends for investors. Because of the AIJ crisis, operational due diligence is on the minds of allocators looking to invest in hedge funds, private equity funds as well as other traditional funds.

Mr. Scharfman stresses the importance of operational due diligence regardless of fund size, reputation or popularity. He was quoted in the article saying, “In the case of AIJ, underfunded Japanese pension funds seemed to have placed profits ahead of common sense.” He also commented on the crucial roles pension fund managers should play when it comes to overseeing assets. “The job of pension fund managers is to exercise due diligence and protect assets, not simply chase high returns.”

The full article is available on Bloomberg website or via direct link here.

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Corgentum Consulting releases their February Edition of Due Diligence News

HedgeFundOperationalDueDiligence.com — Thu, 23 Feb 2012 19:27:41 +0000

Corgentum Consulting has released their February issue of Due Diligence News. Due Diligence News covers the most recent articles on hedge fund operational due diligence, fraud and insider trading.

It also includes industry events and links to hedge fund operational due diligence blogs. Due Diligence News is where you can go for the latest in operational due diligence.

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Hedge Fund Operational Due Diligence Webinar – Corgentum Consulting Outlines Investor Challenges for 2012

HedgeFundOperationalDueDiligence.com — Thu, 09 Feb 2012 18:11:01 +0000

In recent months, there have been a variety of new challenges for hedge funds. Between the new regulatory requirements such as SEC registration, further news of hedge fund frauds, and continued revelations of insider trading scandals in the media spotlight, it seems that there is no better time to learn about upcoming operational due diligence trends in the market for 2012.

On Thursday March 15, from 2:00-3:00pm EST, Corgentum Consulting will launch their inaugural webinar: Operational Due Diligence Survival Kit for 2012. This webinar will feature essential skills for assessing and uncovering operational risk within hedge funds and other alternatives. Investors are urged to attend this crucial discussion, which will cover everything from new industry statistics to the five key steps to constructing an operational due diligence plan.

In only an hour, investors will gain a stronger knowledge base of what operational due diligence is and why it is such an important part of their asset strategy. To sign up, please visit: http://www.corgentum.com/contact/webinar1.html

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Operational due diligence focus – Corgentum to present on hedge fund opportunities at Opal 2012 Investment Consultants Forum

HedgeFundOperationalDueDiligence.com — Sun, 01 Jan 2012 22:51:49 +0000

Operational due diligence is coming into focus in 2012. It has been announced that Corgentum Consulting Managing Partner, Jason Scharfman will moderate the hedge funds panel at the upcoming Opal 2012 Investment Consultants Forum.

The panel will be entitled, “Hedge Fund Opportunities” will take place on Friday March 2, 2012 at the Crowne Plaza Times Square in New York, NY.

It is anticipated that Mr. Scharfman will discuss evolving trends in hedge fund operational due diligence for 2012, the benefit to investors towards working with operational due diligence consultants such as Corgentum, and the benefits of incorporating risk considerations into the hedge fund portfolio construction process.

To register for the event here, please click here.

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