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.
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
Blast from the Past – Brian Hunter and Amaranth’s Manipulation
Does anyone remember Brian Hunter? Just a few short years ago he was the famed (or 
is it infamous?) Amaranth lead energy trader who allegedly tanked the firm via massive trading losses. In a famous case of where was the risk manager – in September 2006 Amaranth collapsed after approximately $6 billion in losses in a single week largely due to bad bets in the natural gas market.
For some perspective here is a video about Amaranth from CNBC:
The Huffington Post has a nice description of Mr. Hunter’s “trading strategy” which it refers to a banging the close:
“By flooding the NYMEX with Sell orders in Nat Gas in the last 10-15 minutes of trading (the Close), Hunter found that he could manipulate the price downward as there were no likely buyers for the type of size he was representing for sale.
Hunter concurrently held similar Nat Gas positions at the ICE that were much larger. Those positions are called look alikes, because they a not physically settled like their counterparts at the NYMEX are. After First Notice, those long contracts can be delivered against. This is true for any commodity.
Conversely, ICE contracts are settled financially, like the S&P 500 for example, so a trader does not have to worry about getting delivered against. Hunter was short his contracts, so he did not have to worry about delivery in this case. His goal, however, was to artificially depress NYMEX Nat Gas contracts so as to lower his larger ICE look alike Nat Gas contract position and burgeon his account balance. Herein is the manipulation.“
The notoriously secretive Mr. Hunter, he reportedly won’t allow his picture to be taken by journalists, is back. It should be known that accordingly to New York magazine (which refers to Mr. Hunter as an “international jerk of mystery”) denies that he is the root of all evil. This is (supposedly) one of the only pictures available of him (yet it remains unconfirmed) – nice catch!:
In July 2007 the Federal Energy Regulatory Commission (“FERC”) had Amarath and two of its former traders Brian Hunter and Matthew Donohoe of violating federal anti-manipulation regulations in natural-gas futures trades in March, April and May of 2006 on the New York Mercantile Exchange.
In August 2009 FERC approved a settlement with Amaranth and Donohoe which required the parties to pay $7.5 million. Mr. Hunter did not participate in the settlement. Maybe he should have in light of these instant messages….
A federal administrative judge, Carmen Cintron, ruled last week that Mr. Hunter 
violated market-manipulation rules. Judge Cintron’s decision will now go onto the Federal Energy Regulatory Commission (“FERC”) for a final decision.
Mr. Hunter, who is certainly lawyered up, has been fighting FERC every step of the way since 2007 during which time there was his interesting attempt to reinvent himself at Solengo.
A recent example of Mr. Hunter trying to fight FERC was on August 14, 2009 he filed a motion seeking to disqualify Judge Cintron because she may have been engaged in improper ex parte consultations, citing certain sections of the Administrative Procedure Act. Mr. Hunter’s motion was denied.
It is anticipated that FERC could take about two months two make a decision but the Wall St. Journal, quoting a FERC spokeswoman, said the final timetable is set by the commission.
Matthew Menchel, a lawyer who represents Mr. Hunter said in repsonse to Judge Cintron’s ruling, “The FERC should never have presided over this matter which is outside its competence and jurisdiction. Its decision means nothing in our view, and the FERC will have to accept the consequences when we get to the DC Circuit, which the FERC has been trying to avoid for the last few years.” Sounds like fighting words to me and that this case is turning into the things’ Administrative and Constitutional Law Professor’s dream about at night.
Here is an interesting perspective arguing for trader’s personal responsibility, and subsequently Mr. Hunter’s personal responsibility for his own actions.
If that is the case, and the decision really does mean nothing to Mr. Hunter and Mr. Menchel, why indeed show up to defend yourself in from of FERC? or is this just another case of delaying the inevitable of what many feel are just desserts.
