Due diligence and operational risk in hedge funds&#187; Operational Risk

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.

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).

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.

Due Diligence Lessons – What the Goldman Sachs’s Resignation Letter Can Teach About Hedge Fund Operational Risk

HedgeFundOperationalDueDiligence.com — Fri, 16 Mar 2012 14:49:12 +0000

Corgentum Consulting Managing Partner Jason Scharfman has written an article for Pensions and Investments entitled, “Due diligence lessons from the Goldman Sachs resignation letter,” for Pensions and Investments. This article outlines some of the operational due diligence lessons investor’s can learn from the recent resignation letter by former Goldman Sachs Executive Director Greg Smith has received a great deal of media attention.

Analyzing organizational culture is a key part of the operational due diligence process. Mr. Scharfman’s article discusses how evaluating a hedge fund’s corporate culture can detect meta risks, such as problems in organizational culture, that may lead to future operational issues. The op-ed piece also discusses how the operational due diligence process can provide cues to red flag due diligence issues (such as those in the AIJ scandal in Japan).

The article, Due diligence lessons from the Goldman Sachs resignation letter is available at the Pensions & Investments website or via direct link here.

Gorden Geckko Grows Up – Michael Douglas Makes Insider Trading Infomercial for FBI

HedgeFundOperationalDueDiligence.com — Wed, 07 Mar 2012 13:57:36 +0000

Actor Michael Douglas, who famously played the Wall St. icon Gordon Geckko in the Oliver Stone film Wall St., has had a change of heart. The fictional fund manager once famously touted, “Greed is good.” Here is a video of some of the more notable quotes from Mr. Geckko in the movie:

The actor has recently teamed up with the FBI to create a video which encourages would be tipsters to come forward with any insider trading news, and outlines, that greed is not good. Here is the video:

Tipsters who decide to turn into rats and go to the government might do better then to follow Douglas’ advice. Whistleblower lawyer David K. Colapinto outlines that, “If they just go to the FBI, they are probably going to get zero,” Colapinto said. “The FBI’s not obligated to do anything for them.”

Colapinto said that if informants want a reward for information that exposes financial fraud, they should consult a lawyer — and file a whistleblower claim with the SEC.

Under the SEC’s , tipsters are entitled to 10 to 30 percent of the money the SEC collects if the whistleblower’s information leads to an enforcement action in which sanctions of more than $1 million are ordered. The bounties were ordered by Congress in the aftermath of the financial crisis and were intended to be powerful weapond in the war on Wall Street fraud. That being said Harry Markopolos, who reported the Madoff fraud to the SEC for years, got nothing.

Attempting to diagnose whether or not a hedge fund has the potential to be exposed to insider trading scandals can be a critical part of analysis of a fund’s compliance and trading functions during the operational due diligence process. Investors should attempt to evaluate such risks during a review of operational risk factors including personal trading policies.

Hedge Fund Executive’s “Assistant” Accused of Stealing HF Manager’s Credit Cards for Personal Purchases

HedgeFundOperationalDueDiligence.com — Tue, 06 Mar 2012 21:36:41 +0000

According to a recent article in the New York Post, famous hedge fund manager Todd Meister has accused his personal assistant, Russia native, Renata Shamrakova of opening up credit cards in his name and charging almost $1 million to it within a ten month period. Questions are being raised as to whether or not Shamrakova had a romantic relationship with Meister. If she is found guilty, Shamrakova could serve up to a year in prison for her felony offense. Shamrakova is also charged with tampering and obstruction of evidence.

Defense lawyer, Marc Agnifilo, believes that Meister allowed her to use the credit cards to purchase endless amounts of jewelry, clothes and trips.

Meister, who is known for his partying and fleeting marriage to Paris Hilton’s sister Nicky, denies participating in any romantic relationship with Shamrakova. The prosecution claims that Shamrakova sold a large amount of the jewelry that was purchased with Meister’s credit card on her business website.

Whether or not Meister and Shamakova were lovers, the situation highlights the importance of evaluating and monitoring reputational risk during the operational due diligence process. By performing operational due diligence, you can dive deeper on issues such as this that may affect the operational and reputational components of a fund.

Meister is a Harvard graduate who used to manage $2 billion in assets at his hedge fund, Priderock.

Shamrakova is being held on $450,000 bail.

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.

Corgentum’s Inaugural Monthly Email Blast- Due Diligence News

HedgeFundOperationalDueDiligence.com — Thu, 26 Jan 2012 23:05:47 +0000

Corgentum Consulting recently sent out their first-ever email blast- Due Diligence News!

Due Diligence News is a look into the world of operational due diligence. It contains current articles relevant to the industry, as well as links to different blogs. The email also contains a listing of industry events and news specific to Corgentum. It will be issued on a monthly basis.

You can become a subscriber by clicking on the Contact section of the Corgentum Consulting website.

Corgentum will also release its new monthly newsletter, Operational Due Diligence Insights in February. The newsletter will contain original content featuring accounting and back office due diligence insights, fund regulatory and compliance developments, information security, and Corgentum Managing Partner Jason Scharfman’s Private Equity Operational Due Diligence book release details.

Check out the Corgentum Consulting website for future information on their quarterly webinar series planned for March.