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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Here is the trailer:

Mr. Gecko is most famous for the line, “Greed, for lack of a better word, is good.“ Here the clip where Mr. Gecko says the famous line at a stockholder’s meeting:

This new movie revisits Mr. Gecko 23 years later, after he is released for stock manipulation and other securities crimes.

In this film, Mr. Gecko tries to warn the world of the 2008 financial crisis (before it happens). Along the way he crosses paths with a hedge fund’s prop trader, Jacob, (played by Shia LeBouf). In a plot twist Jacob suspects, who else but the hedge fund manager for the death of his mentor….

In the pre-Madoff environment, and particularly in the 1980′s when the first Wall St. film takes place, business and operational shenanigans, may have foolishly been subject to lesser degrees of due diligence – which is perhaps why they either went undetected or grew out of control (i.e. – Ivan Boesky)

All this made me think in the post-Madoff environment if the Gordon Gecko’s of the world would still stand up to modern due diligence techniques? ….

Perhaps maybe this theatrical shareholder’s speech sums it up best:

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In particular it is being reported that Chimay, the CEO of Chimay Capital Management, utilized lies about his claims to the Belgian royal family to scammed clients out of more than $6 million, federal prosecutors said.

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After the news of this broke, a series of emails between Ms. Hoxie and Mr. Sebbag surfaced. It is widely believe that the pair really had know idea what they were doing. As an example, here is an email exchange between Hoxie and Sebbag where Sebbag became frustrated when Hoxie was not able to obtain Disney financial information fast enough.

The email also shows that Ms. Hoxie has expensive tastes – she wanted Sebbag to purchase $700 Stella McCartney handbags and shoes. The NY Daily News, however reports that Hoxie dressed quite modestly for her court appearance. In her defense, Patrick Hoxie (Bonnie’s father) says his daughter was duped by Mr. Sebbag. Ms. Hoxie was released on bail but Sebbag was denied bail.

Here is a video from Bloomberg describing the case:

And from CNBC:

Despite the sensationalism of this case, the facts involved contain a few important lessons regarding operational due diligence and hedge fund’s.

Information Security:

As noted above, Ms. Hoxie was a secretary to Zenia Mucha, Disney’s head of corporate communications. Zenia has a background in public relations and marketing for politicians including former New York Governor George Pataki and former United States Senator Alfonse D’Amato. In politics, as with hedge fund’s, certain information should be kept confidential. Regardless of who was responsible for information security at Disney, in the modern workplace information is the currency of the future. It is vital to maintain and protect proprietary information.

During the hedge fund operational due diligence process evaluating the systems in place for information security are vital. Can any employee simply plug in an external hard drive and walk away with the portfolio holdings, or proprietary models? What checks are in place to prevent this? How does the firm make sure people are looking into parts of the firm (i.e. – accounting, payroll etc.) that they have no legitimate reason to? Regardless of all the checks in the world, a dishonest employee can still steal certain types of information however, a number of physical (i.e. – non-computer) barrier to information leakage can also be established.

Insider Trading and Compliance:

In the wake of the Galleon scandal, the hedge fund community has undergone increased scrutiny in regards to insider trading. Fortunately in this case it seems that the hedge fund’s which received Ms. Hoxie’s email offering insider information reported the communication to the authorities.

These communications, and the hedge fund’s responses relate to the area of compliance. This is another aspect of a hedge fund’s operational infrastructure which should be reviewed during the operational due diligence process.

An investor must be able to diagnose not only what policies and procedures a hedge fund manager has in place to deal with the potential for insider trading within the firm (i.e. – employee self-dealing) but also, as in this case, from external information sources as well. Hedge fund’s generally receive a great deal of unsolicited information on a daily basis. It is the job of both the compliance department, administrative assistants and all employees to have enough common sense to raise a flag when this type of communication is received. If not, a hedge fund receiving (and potentially acting) on such unsolicited insider information could easily become an unintended accomplice simply because of lack of administrative assistance oversight.

Perhaps hedge fund’s should show bizzare videos like this (in which the people look like they are all from South Park) which I’m sure would prevent anyone even thinking about insider trading…

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Corgentum Consulting has released a new research paper which provides an overview of the role due diligence questionnaires (“DDQ’s”) and request for proposals (“RFP’s”) play in the hedge fund operational due diligence process. This paper also outlines some key questions and other considerations investors should bear in mind before asking a manager to complete a customized due diligence questionnaire.

The paper entitled, Hedge Fund Operatinal Due Diligence Questionnaire – To Use or Not To Use? can be found in the Research section of the www.corgentum.com website, or via direct link here .

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Here is a series of interviews conducted at the end of 2009 with Erin Arvedlund. Ms. Arvellund first wrote about Bernie Madoff for Barrons in 2001 and published her book, Too Good to be True- The Rise and Fall of Bernie Madoff in August of 2009.  The interviews are conducted by Lawrence R. Velvel, the Dean of Massachusetts School of Law at Andover and himself a Madoff victim.

Part 1 –

Part 2-

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And a profile from earlier this year on CNBC’s American Greed:

Mr. Israel is in jail until 2030 (two years were added to his 20 year sentence as a result of his faked suicide attempt).

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1) the demand for operational due diligence seems to be global in nature (i.e. – USA, Asia and Europe);

2) direct hedge fund operational due diligence experience is (foolishly) not always required, but rather an industry qualification is sufficient in some cases;

3) based on some job descriptions it is clear that certain operational due diligence functions will be understaffed to performed a thorough operational due diligence review;

4) In certain other cases, the operational due diligence position may be part of a larger role which will require the operational due diligence analyst to both perform due diligence and oversee other internal operational processes

In short, based on the continued apparent misperception among certain hedge fund allocation groups as to the time and effort required to perform operational due diligence, I would highly encourage all those seeking an operational due diligence role to perform some sort of due diligence on your potential employer to ensure they actually understand the appropriate effort required to thoroughly perform operational due diligence on a hedge fund.  If not,  an under resourced and overworked operational due diligence analyst may find themselves serving as a scapegoat in the event a hedge fund failure occurs (a fund which they may not have had the opportunity to thoroughly vet). Here’s a video about scapegoating:

Some recent links to some operational due diligence jobs are posted below. As I stated in the previous post, I do not know if these positions have been filled and I do not vouch for or endorse any of these positions. Now with all of this hokum out of the way I thought this list might be of interest to some of this website’s readers:

Operational Due Diligence Researcher (Seattle, Washington, USA)

Hedge Fund Due Diligence Analyst (New York, New York, USA)

Operational Due Diligence Associate (New York, New York, USA)

Director, Operational Due Diligence (New York, New York, USA)

Operational Due Diligence Analyst (London, United Kingdom)

Head of Operational Due Diligence (United Arab Emirates)

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It’s worth noting that in a separate case, Kovachev in 2006 was ordered to pay $350,000 in a civil suit brought by the U.S. Securities and Exchange Commission accusing him and 11 others of defrauding more than 600 investors of more than $28 million in a Ponzi scheme. The SEC said that Kovachev and others sold unregistered securities structured as hotel timeshare rental interests.

Mr. Dreier was a graduate of  Yale as well as Harvard Law School. He previously ran Dreier LLP which had offices in five cities, employed over 250 lawyers and annual revenues of over $90 million. the firm’s client’s included Bill Cosby, Andy Pettitte and Justin Timberlake. The firm is now defunct.

Notable quotes from the video, which investors might want to keep in the back of their mind during the operational due diligence process include:

“The more money you look for the fewer questions people ask sometimes.”

“It was clear to me the more you showed people you didn’t need money, the easier it was to attract money”

“A $20 million dollar mistake had grown into a $100 million mistake”

“Do I have chutzpah? Yes!”

He further goes onto describe part of the reason he finally was caught was that a potential investor, who was attempting to defraud, had acted diligently and made some phone calls (i.e. – performed due diligence) which had raised his suspicions.  If that isn’t an endorsement for operational due diligence I don’t know what is.

The video describes how Dreier lived a lavish lifestyle to create the illusion that he already was a billionaire before his empire crumbled. Some of his assets included an $11 million ocean front compound in the Hamptons, his $10.5 million apartment, an art collection that included a Picasso, three Matisse’s and 12 Warhol’s. Also just like Madoff, Dreier had a yacht. His was a 120 foot yacht called “Seascape” staffed by a full-time crew of 10, which Dreier paid $18 million for.

The video also describes how Dreier tried to further add an air of credibility to his persona by hosting charity events with former New York Giants (American football) player turned actor Michael Strahan, which were attended by such celebrities as Diana Ross, Jon Bon Jovi, Alicia Keys and William Shatner.

Dreier is serving 20 years at a Federal Correctional Institution in Sandstone, Minnesota. He is scheduled for release on October 26, 2026.

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