How to Extort Your Hedge Fund – And get caught in the process…
Here is an interesting story with a slightly different twist. In echoes of Mark Dreier, it is the story of someone extorting a hedge fund.
This is the story of Milton Balkany, the dean of Bais Yaakov day school in Borough Park (Brooklyn), New York. Mr.
Balkany, who is an Orthodox rabbi, allegedly tried to extort a hedge fund with knowledge that the fund was allegedly participating in insider information. Mr. Balkany is charged with wire fraud, extortion, blackmail and making false statements. The wire fraud count alone carries a sentence of up to 20 years.
This case was being led by U.S. Attorney Preet Bharara, who also led the investigation into Galleon.
Looks like Mr. Bhara is looking to make a name for himself like the infamous Sherrif of Wall Street, Eliot Spitzer (aka: Client #9)
Here is an alleged quote from Mr. Balkany from the complaint (which is available here):
“I think it’s a very minor price for the package over here. I think if this ever got into what [the government] wants to bring, it would cost [the Hedge Fund Manager] ten million [dollars] in lawyers…It’s a very inexpensive way out. You know what I mean? …I’m not holding up anybody here”
Mr. Balkany apparently has a past with the government. A few years ago, Balkany walked away from another federal arrest for stealing $700,000 in federal grants intended to help disabled students at his Brooklyn girls school. The feds cut a rare deal, allowing Balkany to pay back $400,000 and pledge not to seek any more federal grants.
In a criminal complaint filed in federal court in Manhattan, prosecutors said that Mr. Balkany, 63, had recently been serving as a “spiritual adviser” to a federal inmate who told him that a Connecticut hedge fund had used inside information to profit from a number of stock trades.
The complaint alleges that Mr. Balkany went to lawyer for the fund and demanded $4 million ($2 million of which would go to Bais Yaakov) or he would tell the inmate to tell the authorities about the insider trades. In total Mr. Blakany received two checks totalling $3.25 million, he was arrested this afternoon.
Mr. Balkany’s lawyer, Benjamin Brafman, would not comment on the complaint. Mr. Balkany has been released on bail.
Unfortunately, the name of the fund was not released in the complaint. This article has some suggestions… With the name of the fund not yet being released, I would be very curious if investors in the fund:
1) Knew the fund had connections with incarcerated inmates?
2) Know about the insider trading allegations?
3) Knew that Mr. Balkany approached the fund regarding these allegations?
4) Have the ability to redeem from the fund in a timely manner when the fund name is released and there is likely a flood of redemptions?
As these questions demonstrate, on-going operational due diligence is extremely important. For all we know an investor may have performed due diligence on this fund and at the time it may have been operationally sound. Yet hedge funds, like most things, evolve over time. With this evolution a shifting operational risk profile also develops. Without monitoring the on-going operational risks of the hedge fund all the initial work is of decreasing value over time.
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