A jury recently handed down a sentence which found that the Galleon Group’s founder Raj Rajaratnam was convicted of insider trading. Bloomberg is reporting that jury never argued during 12 days of secret deliberations that he was innocent.  Instead the focus was on what sentence to give Rajaratnam. Here is a post about the Galleon verdict entitled, Galleon’s Fait Accompli : Investor’s Move the Dial Towards a Conservative Approach to Hedge Fund Research, on the Corgentum Consulting blog and some videos from the trail and verdict:

http://youtu.be/YKbqdE_BA5w

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Details are still emerging regarding JPMorgan Chase’s alleged knowledge of the Madoff fraud. Here is a video about the investigation:

It is  being reported that the latest avenue being pursued by Madoff trustee Irving Picard is that one of the many operational due diligence red flags which should have alerted JP Morgan Chase & Co. to the Madoff Ponzi scheme was the number and volume of suspicious transactions by one of Madoff’s so-called “surrogate father” a man named Norman F. Levy. Mr. Levy, who is now deceased, was a real estate broker who made transfers from1998 to 2001 to the tune of more than $83 billion in and out of his account with Madoff. Levy’s  supermodel girlfriend, supermodel Carmen Dell’Orefice, would lose her life savings with Madoff. Here is a video showing Ms. Dell’Orefice modeling:

Levy’s estate is being pursued by the IRS as a result of revelations from the Madoff fraud.

The other so-called “surrogate father” to Madoff was, according to Vanity Fair, philanthropist Carl J. Shapiro. Shaprio (who’s wife is also named Ruth) lives in both Boston and Palm Beach and was the founder of Kay Windsor, Inc. a maker of women’s apparel.

Despite heavy Madoff losses for Shapiro personally, and his charities, Shapiro agreed to return $625 million to Irving Picard which included $38 million which was paid by Shapiro’s son in-law (Robert M. Jaffe).

In other Madoff news, it is being reported that Ruth Madoff was turned away from a memorial service for her son Mark by Mark’s widow. Apparently there are still hard feelings from when Ruth chose to visit Bernie in jail after he was reportedly beaten in prison.

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The recent comments of Jason Scharfman, Corgentum Consulting Managing Partner regarding the enhanced focus being placed by investors on hedge fund operational risk were outlined in Risk.net’s Operational Risk & Regulation Journal in an article entitled, Operational infrastructure at hedge funds comes under closer scrutiny .

Topics outlined by Mr. Scharfman in the article include:

• Continued failures of many hedge fund with in regards to documenting operational policies
• Benefits of hedge funds emphasizing their operational strengths and openly discussing operational weaknesses
• The false artifical operational floor of Dodd-Frank legislation
• Inherent benefits of investors develop dialogues concerning operational risks with their hedge fund managers

The full article can be read on the Risk.net’s Operational Risk & Regulation website (subscription required).

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A recent Opalesque article outlined the recet the comments of Jason Scharfman, Corgentum Consulting Managing Partner on the subject of trends in hedge fund operational risk.

In the article, which is entitled 20% of marketing presentation should be dedicated to investor education , Mr. Scharfman outlines in part that, “[managers] need to have a robust operational policy (from pricing sources, to valuations, to how the administrator receives that information, to cash management policies).”

The full article can be read on the Opalesque website (subscription required).

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Corgentum Consulting has released a new paper entitled, Hedge Fund Operational Due Diligence Education Series – Understanding Material Nonpublic Information in the United States.

With the recent raids of the offices of three hedge fund managers by the Federal Bureau of Investigation and the on-going prosecution of Raj Rajaratnam’s Galleon Group, cracking down on allegedly illegal insider trading is clearly on the forefront of the U.S. government’s financial regulatory agenda. Here is a video from CNBC concerning the recent FBI raids:

Hedge Fund Operational Due Diligence Education Series – Understanding Material Nonpublic Information in the United States provides an introduction to the ways in which hedge fund’s may interact, either directly or indirectly, with material nonpublic information. Areas addressed in this paper include a hedge fund’s use of expert networks as well as other third-party firms which provide information to hedge funds. Also discussed in this paper are several questions investors should address during the operational due diligence process in order to diagnose both a fund’s potential exposures to the risks associated with material nonpublic information as well as what preventative measures, if any, a hedge fund may have taken to insulate themselves for the liability associated with receiving or trading on such information.

The paper can be found in the Research section of the corgentum.com website, or via direct link here.

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Specifically, hedge funds with at least $150 million in assets will be required to register with the SEC. As a reminder hedge funds were previously required to register with the SEC but that requirement was lifted after Philip Goldstein sued the SEC (and won) in 2006 to lift the registration ban – here is the decision. Despite the Goldstein rule the hedge fund industry, via groups such as the Managed Funds Association, have expressed support for hedge fund registration:

Drawing a distinction between hedge fund and private equity compliance risks, the article quotes Mr. Scharfman in part as saying,

” Some of the compliance problems that could arise in a transaction-based business model, such as a hedge fund, aren’t likely to crop up at private equity funds, said Scharfman. The risk is very low, for example, that private equity fund employees would trade equities from their own accounts ahead of the fund, he said. Developing and monitoring insider trading restrictions, however, will be necessary for both types of firms, said Scharfman. “

The full article can be read on the Wall St. Journal website (subscription required).

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On the TV Show Larry Wilcox portrayed Officer Jonathan A. Baker a California law enforcement highway patrol officer. He starred in the show with Erik Estrada who played Officer Francis (“Frank”) “Ponch” Poncherello.

Here’s a copy of the SEC Complaint against Wilcox et al.

Here’s the introduction from the TV show CHiPS:

And here’s Officers Ponch and Jon in action:

According to the SEC’s complaints filed in U.S. District Court for the Southern District of Florida, the schemes generally involved the payment of kickbacks to purportedly corrupt pension fund managers or stockbrokers, who would use their clients’ accounts to purchase the publicly traded stock of microcap issuers controlled or promoted by the individuals and companies charged today. What the promoters and insiders did not know was that the people with whom they arranged these illegal transactions were actually undercover FBI agents or confidential sources participating in undercover operations.

These allegations relate to Wilcox’s role as President and Chief Executive Officer of The UC Hub Group, Inc, a public company on the Pink-OTCBB under the symbol

(UCHB.PK) which is a mining company on the Montana Mine project, a sapphire and gold production mine. The company was also drilling oil wells in Illinois.

Interestingly UC Hub’s website features the following ominous disclaimer,  “UC Hub and management value their reputation for integrity and honest dealing adn take seriously any statements which seek to impugn directly or indirectly UC Hub’s reputation. UC Hub therefore reserves the right to seek legal redress against parties which repeatedly, intentially make false statements which cast UC Hub, its officers and directors in a false light or otherwise  unfairly impugn UC Hub’s reputation in any way.“….

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This paper provides an introduction to some key considerations for investors to consider during the operational due diligence process, as they begin to evaluate hedge funds in the new Dodd-Frank environment.

The paper can be found in the Research section of the www.corgentum.com website, or via direct link here .

Here is a video featuring the bill’s sponsors Rep. Barney Frank (D-Mass.) and Sen. Chris Dodd (D-Conn.) discussing the passage of the legislation:

Here is a video from a panel discussion about whether Dodd-Frank will work:

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Echoing shades of the deceased Jeffry Picower and Rene-Thierry Magon de la Villehuchet in the Madoff scandal, Mr. Frerichs proved to be an interesting character in the K1 scandal whose full story will never be revealed. He

Mr. Frerichs, 72, died of a gunshot wound on Saturday after police officers went to his home in Palma, Majorca to serve a warrant for extradition to Germany, the Spanish police said Monday.

According to a police spokeswoman, three officers went to Mr. Frerichs’s home on the island at 11:30 a.m. on Saturday and found him sunbathing nearby on rocks overlooking the sea. When the officers identified themselves, they said, Mr. Frerichs took a gun from a bag that was lying beside him and leapt into the water.

Mr. Frerichs fired two shots, the spokeswoman said. The first, presumably to test the gun, the authorities said, was fired in the air; with the second, he shot himself in the head. Mr. Frerichs was picked up by a rescue boat and taken to the Son Dureta hospital in Palma. He died not long after arrival.

According to the New York Times, the case has sent shock waves through Spain, where Mr. Frerichs’s stepdaughter, Fiona Ferrer Leoni, initially told the media that the police had shot Mr. Frerichs. She also questioned the police account of him sunbathing with a gun.

Ms. Ferrer, a prominent television personality and model, is married to Jaime Polanco, a Spanish tycoon whose family controls Promotora de Informaciónes, or Prisa, the media group, whose assets include the newspaper El País.

She also told the Spanish news media that Mr. Frerichs had been sought only for his relationship to K1 Group executives and that he was innocent of any fraud.

The police spokeswoman, who cannot be identified because of department policy, denied that officers had fired at Mr. Frerichs. She said his weapon had been retrieved and would be used, along with an autopsy, to determine the exact circumstances of his death.

“It is not normal to be sunbathing with a bag that has a gun,” the spokeswoman said. “But that’s what he did.”

Dietrich Güder, the state prosecutor in Würzburg, declined to comment beyond confirming that the Spanish police had informed him of the events.

Lutz Libbertz, a lawyer in Munich for Mr. Kiener, argued in a November court filing that Mr. Kiener could “at the most be accused of making bad investment decisions, but not of actions constituting breach of trust.” Mr. Libbertz declined to comment on Monday, saying through an associate that “he had nothing to add to what’s already been said.”

Mr. Kiener promoted the power of his “K1 Fund Allocation System,” and is accused of taking advantage of lax lending oversight by banks during the credit boom. He claimed his investments had returned more than 700 percent from 1996 and the end of 2008.

Mr. Kiener, K1′s founder, is equally interesting. He was a former telephone book salesman and psychologist (who graduated from Johann Wolfgang Goethe-University in Frankfurt, Germany in 1987) who founded a seemingly successful and large asset management organization.

The case has been an embarrassment for Germany, as BaFin, the market regulator, had several times sought to stop Mr. Kiener’s activities because of significant legal questions but had its enforcement overturned on appeal.

Mr. Kiener has been in custody in Würzburg, Germany, since October on suspicion of operating a pyramid scheme, defrauding thousands of privat

e investors and banks including JPMorgan Chase, Barclays and BNP Paribas of more than 300 million euros, or $375 million. The F.B.I. is also investigating the group; so are authorities in the British Virgin Islands, Liechtenstein and Switzerland.

The two highly leveraged funds had a combined 421 million euros ($529 million) of liabilities when the accounting firm Grant Thornton was retained in November to liquidate them. The authorities say the prospects for recovering most of the money are poor.

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