Operational due diligence focus – Corgentum to present on hedge fund opportunities at Opal 2012 Investment Consultants Forum
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.
Focus on Valuation – Hedge Fund Manager Michael Balboa Charged with Fraud
In the world of operational due diligence, valuation is one of the most important subjects. The way in which a hedge fund values its positions directly effect the NAV of a fund. When questions arise concerning a hedge fund’s valuation procedures investors can be responsible for paying back 
previously earned false profits via clawback efforts.
During the operational due diligence process investors can take a number of measure to evaluate the quality and robustness of a firm’s valuation policies and procedures. Additionally, investors should inquire as to how transparent such valuation procedures are and whether any testing of such procedures is conducted. A key element of any valuation process should be independent oversight and pricing sources.
A recent example which demonstrates the importance of valuation is the case of Michael Balboa. It is being reported that Mr. Balboa was charged with fraud and conspiracy. It has been alleged that he made investments in illiquid bonds in Nigeria and Uruguay. Prosecutors allege that he worked with two brokers to inflate the values of the bonds. One of the brokers Gilles De Charsonvillne (as well as Balboa) was also sued by the Securities and Exchange Commission. The SEC received help from the Bermuda Monetary Authority with the investigation. This article talks about how such efforts are part of the SEC’s new risk analytics division. The events allegedly took place in 2008 while Balboa ran a fund for Millennium Global Investments. Balboa reportedly earned 40% of the fees from from the fund’s $844 million under management or approximately $6.5 million. Millennium Global said it had reported Balboa’s “rogue behavior” to both U.S. and British authorities.
According to this website for the Russia Forum 2010, “Michael Balboa has over 15 years of experience in EM instruments. Prior to establishing ARAM Global, he was Managing Director of Emerging Credit and the Millennium Global Emerging Credit Fund at Millennium Global.
Mr. Balboa’s career began at Salomon Brothers (1992-95), after which he co-managed the Strategos Fund, an EM hedge fund founded in 1995. He then joined Greenwich Europe and was actively involved in the management of the top performing Rainbow Advisor’s EM funds (2003-06) as well as the Rainbow Macro Fund. Mr. Balboa is a graduate of Hofstra University.”
Balboa parted ways with Millennium Global in 2009. His current employer, ARAM Global, said he is currently on leave from the firm….
The Dr. Will See You Now – Skowron’s Bad Diagnosis for FrontPoint and Galleon
A hedge fund manager for FrontPoint Partners was sentenced to five years in prison on Friday, November 18th. Joseph Skowron pled guilty in the summer of 2011 to insider trading which resulted in Morgan Stanley avoiding $30 million in trading losses. According to the New York Times, Skowron enticed French doctor, Yves Benhamou, to give him “confidential results about clinical drug trials.” In addition to selling HGSI Human Genome Sciences stock before the news of its downfall was made public, Skowron and Benhamou agreed to deceive the Securities and Exchange Commission (SEC) by withholding information from them regarding their endeavors. Dr. Benhamou also pled guilty to charges he was brought up on, and will be sentenced next month.
Here is a video about the arrest:
Because Skowron obtained access to material non-public information and took advantage of it to benefit himself, he caused many people to lose their jobs and money. Although it is possible to receive non-public information legally, it is what you choose to do with that information that can become a potential problem. In the case of 
Skowron, not only did he go searching for insider information, but he also acted upon the information he received. It was the action he chose to take, that led him down the path he is now traveling. Ironically, Chip, as he is referred to in the industry, made Galleon Group one of his victims. Galleon Group was the hedge fund managed by Raj Rajaratnam, who was sentenced to 11 years in prison for insider trading not long ago. The charges that surrounded Skowron destroyed FrontPoint, which was one of the most prestigious firms on Wall Street. Skowron is forced to pay $8 million in forfeiture and fines to the government.
This is a perfect example of the need for operational due diligence firms. A simple list of investigative procedures, if properly executed, could have prevented Skowron, and several others, from committing this white-collar crime. By conducting a comprehensive review of a hedge funds’ exposure to, operational strengths and weaknesses regarding the hedge fund manager, and a hedge fund’s exposure to material nonpublic information, it will decrease the chance of insider trading as well as other operational risks. It is with due diligence that we can identify any below-the-surface issues within a fund, and find out about people like Skowron, so that investors can make more informed decisions before investing.
