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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Edward T. Stein’s Life Settlement – A Ponzi Scheme
Hedge fund manager Edward T. Stein was recently sentenced to nine years in prison. Mr. Stein ran a Ponzi scheme which took in at least $30 million ($46 million according this website) that preyed upon friends and acquaintances.
According to Bloomberg, Mr. Stein admitted today to four counts of securities fraud and one charge of wire fraud. Stein told the court:
“I used very poor judgment and I know what I did was wrong, I want to explain to the court how sorry and ashamed I am. Somewhere in the last 10 years I lost my sense of reality and as a result, everyone has suffered. I do want to offer my sincere apologies. I do regret the bad decisions I made.”
Stein will remain free on $2 million bail. He is being represented by attorney Brian Maas.
He was initially accused March 31 of cheating a client out of $6.5 million. Stein faces as much as 19 years and seven months in prison. In April of last year the SEC froze Mr. Stein’s assets.
The SEC also filed a separate civil action that accused Stein, who controls Gemini Fund I hedge fund, DISP LLC and Prima Capital Management Corp., of moving millions of dollars from at least 83 investors through accounts he controlled, according to the complaint filed in federal court in Manhattan.
Stein, who founded DISP, a firm investing in life- settlement policies, deceived clients since 1992 and resorted to stealing their assets, the SEC said in its civil suit.
Here is a sample chart how the life settlement process works. So simple amazing more people couldn’t spot the fraud in this process via operational due diligence….. :
Without telling investors, Stein arranged for Gemini to make its main investment in Detour Media Group Inc., the fashion-magazine publisher that filed for bankruptcy in 2003, the SEC said. Since then, he has used money from new investors to pay returns to “selected” Gemini clients, the agency claimed. He also used investor funds to buy a $1 million condominium in Manhattan, the SEC said.
Stein ran Prima Capital Management Corp. from his offices in Roslyn, New York. He agreed in his plea that he won’t appeal if he’s sentenced to less than 21 years and nine months in prison. Sentencing by U.S. District Judge Jack B. Weinstein is scheduled for September 28.
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Operational Due Diligence Job Market Grows: More Job Postings
With the increased focus dedicated towards hedge operational due diligence there have been a flurry of organization
s seeking to hire operational due diligence professionals. I have posted some recent links to some of these jobs below. I do not know if these positions have been filled and I do not vouch for or endorse any of these positions. With all the legal mumbo jumbo out of the way I thought this list might be of interest to some of this website’s readers:
Operational Due Diligence Specialist (Abu Dhabi)
Bessemer Trust – Operational Due Diligence Analyst (NY)
KPMG – Manager, Operational Due Diligence (Chicago)
Operations Due Diligence Consultant (Stamford, CT)
RBC – CFO and Director of Operational Due Diligence (NY)
If you have an operational due diligence position you would like posted on this blog please submit them via email to
info@hedgefundoperationalduediligence.com
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