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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The study, ‘The Madoff Effect – An Analysis of Operational Due Diligence Trends’, is available for download at www.Corgentum.com or directly here.

For this study Corgentum collected data from over 200 global hedge fund allocation organizations including fund of hedge funds, endowments, foundations, corporate pensions, family offices, large independent financial advisory practices, ultra high net worth investors and private banking organizations. “The data shows that frauds such as Madoff are an important, but potentially misleading guiding light around which investors tend to focus their due diligence on hedge funds” said Jason Scharfman, Managing Partner.

Investors, influenced by recent hedge fund failures, have refocused their due diligence efforts on operational risk areas where leading operational red flags were present. In particular, since the Madoff scandal broke, this study shows that the number of fund of hedge funds reviewing hedge funds cash management policies and controls increased by almost 60%.  Other operational risk areas covered in the Corgentum study that have realized double-digit increases in attention from investors include transparency in reporting and the role of service providers such as auditors and administrators.

Corgentum’s analysis also demonstrates that certain operational risk areas continue to be dangerously neglected during the investor due diligence process. Less than 2% of the fund of hedge funds included in this study considered the independence of a hedge fund’s board of directors during the due diligence process. Other frequently overlooked operational risk areas included information technology infrastructure, personnel turnover and the quality of overall operations management.

“Investor’s must not only understand historical red flags, but be prepared to anticipate new ones. By incorporating proprietary benchmark studies of hedge fund fraud and models of operational inefficiency into our evolving operational due diligence process, Corgentum’s approach ensures investors keep up with the changing nature of hedge fund operational risk” said Scharfman. “Corgentum will continue to partner with fund of hedge funds, pensions, family offices and other investors to create tailored comprehensive hedge fund operational due diligence and ensure that their operational due diligence reviews are not misguided by fraud.”

Opalesque, published an article regarding the study . The article is entitled, “Madoff Effect continues to see investors focus more on fraud risk than operational risk” and is available at www.Opalesque.com or via direct link here (subscription required). Additionally, the press release regarding this study is available  here. HedgeCo.Net and HedgeWeek also covered the study in this post.

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From some recent media coverage… “Former Société Générale chief Daniel Bouton, who resigned amid intense criticism just over a year ago, branded Kerviel “a terrorist” at the time. But Kerviel quickly became a romantic underdog – a clever anti-hero seen to be caught in the massive cogs of finance, who was only trying to do his job. T-shirts around Paris read, “I am Jerome’s girlfriend,” and he wrote a tell-all book, published last month.”

His book is called L’engrenage, Mémoires d’un trader . Kerviel even had a graphic novel comic book made about his escapades (Le Journal De Jérôme Kerviel).

Here is a video about Kerviel back in court:

Here is an interview from French television (in French) with Kerviel:

But I think these British puppets might describe the whole rogue trader situation the best:

Or perhaps this sums it up more succinctly:

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This paper discusses the importance of understanding and diagnosing the hedge fund due diligence document distribution process as part of the overall operational risk evaluation of a hedge fund manager. Questions posed by this paper for investors to consider include:

• Are response requests pro-active or reactive?

• How is investor information protected?

These questions are particularly relevant in light of increased concerns over the way in which hedge funds come across and utilize material non-public information.

Also highlighted in this paper are the potential for increased operational risks in hedge funds which do not effectively manage due diligence related document distribution. This paper can be found in the Research section of the www.corgentum.com website, or via direct link here .

Here is a link to the paper on HedgeCo.net.

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In 2003 Mr. Fishman and two partners decided to launch a “hedge fund” of their own, A.R. Capital Global Fund.

Fishman is a 50year-old Ukraine native who resides in Brooklyn’s Brighton Beach. Last week Fishman pleaded guilty to conspiracy to commit securities fraud and is scheduled to be sentenced on June 18, according to a spokeswoman for the U.S. Attorney’s office in Manhattan. He also agreed to pay a $160,000 penalty.

Crain’s is reporting that according to his attorney, Don Savatta, Mr. Fishman came to the U.S. nearly 20 years ago and attended Temple University, where he majored in Russian literature and business administration. Around the turn of the millennium, his job was driving investment bankers and corporate lawyers to meetings or back to their homes. He decided to take a crack at his customers’ game.

A gentleman named Gary Gelman, who is Mr. Fishman’s nephew, was trying to launch a hedge fund. Although Mr. Fishman had no prior experience managing money, in 2003 he became president of the A.R. Capital Global Fund, which operated from a small office on 39 Broadway in lower Manhattan. Using cold calls, the fund lured in 70 clients who invested about $20 million. I am still amazed to this day that people respond to these cold calls. I doubt any of these investors did any due diligence or if they did they likely didn’t make it far enough to inquire why a limo driver was running a hedge fund. Simply amazing.

The fund managers told investors they would buy shares in overseas real estate companies and trade currencies, oil, gas and other commodities while using “active, leveraged trading” and “fundamental and technical analysis” to make money. None of this was true, according to prosecutors. Instead, client money was invested in three Ukrainian stocks or parked in a Ukrainian money market fund. Millions more were wired to bank accounts in Lithuania, including one held by a company located in St. Kitts and Nevis.

When one client visited New York to check on his investment, fund officials refused to meet at their office because they said it was being renovated—and met instead held at a nearby deli. Operational due diligence red flag anyone?

Mr. Fishman had primary responsibility for investment decisions, according to the government. His lawyer, Mr. Savatta, says Mr. Fishman continued working at the limousine company and served mainly as an administrator at the hedge fund.

Two of Mr. Fishman’s hedge fund colleagues, Daniel Ledven and Edward Veisman, also pleaded guilty last week. Veisman (according to this NASD bulletin) was barred from associating with any NASD member and fined $20,000 for failing to respond to NASD requests. I doubt this came out in any investor due diligence. The fourth defendant, Mr. Gelman, is a fugitive and believed to be in Ukraine. Good luck getting them back, or investors getting their money back.

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The article, which is featured in the publication’s Regulation & Legislation section, is entitled, “Investing in hedge funds just got harder” . In the piece, Mr. Scharfman writes, “In the post-Madoff environment, sponsors of pension and other funds face a number of complex challenges with respect to performing due diligence on hedge funds..with all of these potential pitfalls, what are pension funds to do? There are a number of basic steps that can be taken to ensure a pension fund is adequately insulated from bearing unnecessary operational risks when investing in hedge funds through separately managed accounts structures.”

Mr. Scharfman goes onto highlight the benefits and pitfalls of separately managed accounts including, the fact that such structures do not completely remove operational risk. The full article can be read on the Pension & Investments website .

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Highlighting the increased importance of due diligence, Mr. Scharfman additionally was quoted as stating, “Rating agencies will be viewed more as a guide, rather than the be-all-end-all, and you’ll see more due-diligence, whether for banks or their clients.” Mr. Scharfman also discussed the importance of sufficient capital adequacy requirements in the wake of the events of Barings Bank and Long-Term Capital Management. The full article can be read on Forbes.com.

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He further goes on to clarify that “hedge funds aren’t trying to avoid tough regulation so they can commit fraud. Rather, they are trying to avoid the bureaucratic red tape that can cost managers lots of time and money, and ultimately dent investors’ returns.” The full article can be read on the Wall Street Journal website (subscription required).

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