Stephen Kim’s Spyglass Ponzi: A Sea of Red Flags in Texas
Stephen Kim has issues. The SEC claims that the 38 year old Houston, Texas based manager of Spyglass Management, L.P lied about his educational background from the University of Texas, his industry reputation and his previous employment in order to steal $1.5 million from investors.
Essentially if any of the above items are indeed true we can stop this story right here. There are certain basic red flags that should come up during the operational due diligence process. Confirming employment, reputation and education history should be a core part of any basic due diligence process. I would be more interested to learn which “investors” forked over the approximately $4.7 million that Houston in investors gave to Spyglass between 2004 and 2006.
The SEC complaint, filed in Texas, alleges that between in 2004 and 2006, Kim and Spyglass raised approximately $4.7 million from investors located primarily in Houston, Texas using offering materials that contained misleading information relating to Kim’s education, business experience, and compensation. I would hazard a guess to say that if any of those investors knew about any (or even knew about allegation of) any of these red flags (i.e. – educational, employment and reputation discrepancies) they wouldn’t have invested – or at least I hope they wouldn’t. If Mr. Kim’s Spyglass Management, L.P. presented such a compelling investment story that it seemed investors wanted to bear any supposed additional risks or questions that remained unresolved relating to Mr. Kim or Spyglass, at a very minimum investors who would have performed these basic operational due diligence screens, they would at least be mak
ing an informed decision.
The problem was, as is the case in most alleged hedge fund frauds, when everyone was making money operational due diligence took a seat on the back burner. As Hedgefund.net reports, problems arose when Kim’s Collateralized Mortgage Obligations (aka: CMO) hedge fund counted on an interest rate climb which never came. That misstep
wiped out Spyglass Management, as Kim named his company. He continued his fund, providing misleading performance data, the SEC said. Here is a link to the SEC press release and the complaint. Notable quotes from the complaint include:
- “In reality, Kim was simply a day-trader who lost money.“
- “The offering materials represented that Kim had degrees in finance and economics from the University of Texas, and that he had 12 years of experience in the securities industry with several well-known brokerage firms. Although Kim had a degree in economics from the University of Texas, he did not have a finance degree.“
- “Kim failed to disclose that one of the brokerage firms listed in his biography had terminated Kim for engaging in unauthorized trading.“
- “In November 2006, after the investors became aware of Kim’s other business ventures and the dearth of information concerning the fund, Kim had Spyglass Management produce a false statement valuing the fund at $1.9 million, when in reality the fund only had approximately $1,000.“
And my favorite:
- “In addition, Kim told investors and potential investors that he would not take any compensation until investors in Spyglass Partners received a one-hundred percent return of their original investment.“
Information Overload Red Flags – When a hedge fund doesn’t know when to say when to due diligence information requests
Corgentum Consulting has released a new paper entitled, 
Information Overload Red Flags – When a hedge fund doesn’t know when to say when to due diligence information requests.
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.
Corgentum to moderate: The Changing Landscape of Alternative Investments and what opportunities lie ahead?
Corgentum Consutling Managing Partner Jason Scharfman, will moderate a panel at the upcoming Opal 
Investments Consultants Forum entitled, “The Changing Landscape of Alternative Investments and what opportunities lie ahead?”
Mr. Scharfman will address topics including the increasing resources being dedicated towards due diligence, the evolving nature of operational due diligence and the effect of the global recession on due diligence.
The conference will take place on March 11, 2010 at the Princeton Club of New York .
For more information regarding the conference or to register please visit Opal’s website.
