Due diligence and operational risk in hedge funds» Operational Due Diligence

Corgentum Consulting Discusses the Risks of Form ADV Disclosures with Institutional Investor

HedgeFundOperationalDueDiligence.com — Thu, 17 May 2012 19:57:06 +0000

Corgentum Consulting Managing Partner, Jason Scharfman has written an op-ed piece for Institutional Investor entitled, “New Fund SEC ADV Disclosures: A Wolf in Sheep’s Clothing?” This piece discusses the challenge investors face in balancing mandatory regulatory disclosures with fund transparency.

The SEC is now requiring fund managers to report more information by revising Form ADV disclosures. In this article, Mr. Scharfman explains that it is still important to perform operational due diligence regardless of changes made to ADV disclosures and the yellow flags to look for when doing so. The piece also encourages investors to be aware of the fact that just because the SEC might require more information from funds, does not mean that there is as much quality in the documents as there is quantity.

To read the full Institutional Investor article, please click here.

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Madoff’s Daughter-In-Laws will Pay the Price for Notorious Ponzi Scheme

HedgeFundOperationalDueDiligence.com — Thu, 10 May 2012 17:25:59 +0000

There has been new developments regarding the ongoing case of Bernard Madoff. While Madoff is serving a 150 year sentence in prison, his daughter-in-laws will now be paying the price for him and his son’s infamous Ponzi scheme.

Just last week, new claims were filed against the Madoff family in an Irving Picard $255 million complaint. The case has been revised to include both Deborah Madoff and Stephanie Mack to the “$54.5 million in claims for unjust enrichment,” The Washington Post reported. The wives are also being sued for $3 million that was given to them.

Although it has been said that a judge might end up barring these claims, Picard could still sue for unjust enrichment and constructive trust, said US Bankruptcy Judge Burton Lifland in Manhattan. It is, however, too late to charge the Madoff son’s wives with all of the other past charges brought up on the family.

Picard is still trying to retrieve investor money lost during Madoff’s Ponzi scheme.

Mark Madoff, the son of Bernie Madoff, committed suicide in December 2010.

Stephanie Mack, Mark Madoff’s wife, speaks out about her husband’s suicide after Madoff Ponzi Scheme

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SEC Sues a Utah Hedge Fund Owner for Inflating Assets…

HedgeFundOperationalDueDiligence.com — Thu, 03 May 2012 15:52:51 +0000

Russell K. Cannon has been sued by the SEC, along with three others, for charging disproportionate fees and inflating assets. Cannon is being sued because he apparently inflated a stock detained by RKC Matador Funds by way of trading on the final day of the month and “by dictating the price the stock was listed at on Matador’s financial reports to clients.”

The fees and assets, as well as the outside members affiliated with the fund, would have been looked at more carefully during an operational due diligence review.

It seems that because Cannon’s pay rested on the performance of Matador, Cannon felt the need to inflate Global’s share price when it wasn’t doing as well as he’d hoped. Cannon also went as far as to put a false share price on Matador’s monthly brokerage statements.

It is unclear just how long Cannon was getting away with these discrepancies in fund data and trading, but perhaps a deeper look into the fund would have raised yellow flags for investors seeking transparency among the funds they were choosing to invest in.

Cannon’s lawyer is refuting the allegations brought up against his client and says that Russell Cannon did not do anything wrong and that they disagree with charges.

“The SEC asks that Cannon be ordered to halt the allegedly fraudulent activities, pay a fine and disgorge profits.”

Investors cannot solely rely on the SEC to detect fraud and other issues within hedge funds. This is why it is important for the investor to take it upon themselves to work with an operational due diligence consultant that will look use their expertise to focus in on the small details that may sometimes slip between the cracks, causing more serious problems in the long run.

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MIT Professor and Son Agree to Pay $4.8 mill to Settle a Case of Fraud

HedgeFundOperationalDueDiligence.com — Wed, 25 Apr 2012 19:46:10 +0000

Professor Gabriel Bitran, who teaches at MIT’s Sloan School of Management, and his son Marco Bitran, who is a 1997 MIT graduate, have been charged by the SEC for hedge fund fraud. They have agreed to pay $4.8 million to settle the case against Bitran’s firm, GMB Capital Management.
The Securities and Exchange Commission said that both Gabriel Bitran and his son gave misinformation regarding GMB Capital’s strategy, investments and historic performance to investors as well as the media. The SEC said that although Bitran claimed to trade liquid securities, the majority of his strategy dealt with investing in illiquid investments, some of which were funds managed by Bernie Madoff.
Once GMB split between GMB Management and GMB Partners, the SEC found that GMB Management provided false documents. The fund was also affected by a fraud and did not inform their investors of losses.
Finally, after countless counts of fraudulent activity, GMB Partners shut down. The Bitran’s were barred from the securities industry.
This situation would likely have posed dozens of yellow flags for investors who performed operational due diligence on GMB. For one, by taking a closer look into the funds’ counterparty oversight, an operational due diligence consultant would have reached out to service providers to confirm their relationship with the fund as well as gather further information on the scope of the work that was being done.
Cash Control and Management would have also allowed for more transparency between this fund and their investors. Even the reputation of employees might have been a helpful piece to look at while reviewing GMB.
Many cases similar to this are only being settled now, even though they were taking place during the days of the Madoff scandal. Perhaps the hundreds of surfacing stories will motivate investors to pay the small cost of operational due diligence, instead of the larger cost for major capital losses.

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Corgentum’s Operational Due Diligence Webinar Series Featured in the Hedge Fund Law Report

HedgeFundOperationalDueDiligence.com — Sat, 21 Apr 2012 17:34:47 +0000

Corgentum Consulting’s operational due diligence webinar series continues to fuel the discussion surrounding investor operational due diligence challenges and trends.

Corgentum’s Consulting’s operational due diligence webinar series was recently featured in the Hedge Fund Law Report .

The first webinar in the series, Operational Due Diligence Survival Kit for 2012: Essential skills for uncovering and evaluating operational risk in hedge funds, private equity and traditional funds, outlined key trends for investors to consider when performing operational due diligence. The Hedge Fund Law Report article, “Corgentum Webinar Highlights Trends, Challenges and Best Practices for Hedge Fund Investors in Conducting Operational Due Diligence” can be read on the Hedge Fund Law Report
website (subscription required) in Vol. 5, No. 16 (Apr. 19, 2012).

Corgentum has also recently posted a replay of the webinar on the Videos section of Corgentum.com. .

Readers can sign up for news related to upcoming Corgentum webinars focused on operational due diligence via the firm’s Contact page.

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Jason Scharfman Speaks with PE Manager about Corgentum Consulting’s Latest Private Equity Study

HedgeFundOperationalDueDiligence.com — Wed, 11 Apr 2012 18:33:18 +0000

Managing Partner, Jason Scharfman of Corgentum Consulting recently spoke with PE Manager about Corgentum’s most recent private equity study entitled, Private Equity Operational Due Diligence Trends – Navigating the Path Forward.

The private equity study showed that 78% of those who perform operational due diligence on hedge funds do not perform due diligence on private equity. 68% of those 78% plan to do operational due diligence on private equity funds in the future- and most plan to do so in the next year.

Mr. Scharfman was quoted in the article, PE Manager: LPs back office inspection set to rise, written by Nicholas Donato. He said, “Institutional investors exhibit a post-Madoff type mentality where tougher questions are being asked around fund operations; the kicker being better relations for those GPs able to pass their expectations.”

It is evident that even the most basic level of an operational due diligence review is becoming more common and essential within the private equity space.

To read the full PE Manager article, click here. (Subscription required)

Also, to read Corgentum’s private equity study, visit their website at www.Corgentum.com or click here.

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Corgentum Consulting’s Managing Partner Authors Essential Book for Investors Titled, ‘Private Equity Operational Due Diligence’

HedgeFundOperationalDueDiligence.com — Wed, 11 Apr 2012 04:10:37 +0000

Press release issued today to announce the release of new operational due diligence book: “Private Equity Operational Due Diligence: Tools to Evaluate Liquidity, Valuation and Documentation” -

Newly Released Handbook by Jason Scharfman is an Indispensable Guide for Assessing Essential Non-Investment Operational Risks and Mandatory Reading for Limited Partners

Managing Partner of operational due diligence consulting firm Corgentum Consulting and former senior team member at Morgan Stanley’s Graystone Research, Jason Scharfman, has authored a groundbreaking new book,

“Private Equity Operational Due Diligence: Tools to Evaluate Liquidity, Valuation and Documentation”, John Wiley & Sons, Inc., 371 pp , which is available today.

“Private Equity Operational Due Diligence” , addresses the unique aspects and challenges associated with performing operational due diligence reviews on both private equity and real estate funds. This essential guide provides readers with the tools to develop a flexible comprehensive operational due diligence program based on the author’s real world experience.

Corgentum is the preeminent global provider of independent operational due diligence reviews for investors. Scharfman is also the author of “Hedge Fund Operational Due Diligence: Understanding the Risks”, John Wiley & Sons, Inc., 300 pp, which is considered to be at the forefront of operational due diligence texts.

“Investors now have a comprehensive guide to develop and implement a functional operational due diligence program for private equity and real estate funds,” said Scharfman. “The techniques outlined in this book will allow limited partners to avoid risky funds and make better investment decisions.”

The 12 chapters of the book cover areas including techniques for analyzing private equity fund legal documents and financial statements, as well as methods for evaluating operational risks concerning valuation methodologies, pricing documentation and illiquidity concerns. The book is filled with case studies in operational fraud and other examples to help equip investors with the tools to avoid unnecessary operational risks and fraud. The book also outlines techniques for limited partners to incorporate operational due diligence into their private equity asset allocation and portfolio construction processes.

“Scharfman provides helpful insight into this emerging area of private equity risk,” said Francis X. Frecentese, Managing Director, Global Head of Alternative Investments, Citi Private Bank. “His guide offers limited partners the potential to efficiently identify and evaluate private equity operational issues and avoid unnecessary risk. Similarly, it offers general partners guidance as to best practices in light of institutional investors’ increasing demand to institutional-quality infrastructure and enhanced transparency.”

Additional topics covered include:

Private equity fund advisory boards
Valuation techniques, methodologies and standards
Operational due diligence concerns specific to real estate funds
Core issues to consider when beginning an operational due diligence review
Advanced operational due diligence techniques when conducting an expanded analysis

A companion Website to the book includes sample checklists, templates, spreadsheets, and links to laws and regulations referenced in the book.

Private Equity Operational Due Diligence: Tools to Evaluate Liquidity, Valuation and Documentation is available for purchase via Amazon.com.

About Corgentum Consulting:

Corgentum Consulting is a specialist consulting firm that provides investors with the industry’s most comprehensive and in-depth operational due diligence reviews. Corgentum partners with private equity and hedge fund investors, including fund of funds, pensions, endowments, investment banks, investment consultants, ultra-high net worth individuals and family offices to improve upon the efficiency and effectiveness of the operational due diligence process. The firm’s proprietary due diligence methodologies and innovative original research allows their clients to continually manage and mitigate their operational risk exposures. Corgentum’s sole focus on operational due diligence, veteran experience, innovative original research and fundamental bottom up approach to due diligence allows the firm to ensure that its clients avoid unnecessary operational risks. Corgentum is headquartered at 26 Journal Square, Suite 1005, in Jersey City, New Jersey, 07306. Phone 201-360-2430. More information is available at
http://www.corgentum.com.

About Jason Scharfman:

Jason Scharfman is the Managing Partner of Corgentum Consulting. He is recognized as one of the world’s leading experts in the field of private equity and hedge fund operational due diligence. Before founding Corgentum, Scharfman held positions focused on due diligence and risk management at Morgan Stanley, Lazard Asset Management, SPARX Investments and Research, and Thomson Financial. He has consulted with the U.S. House Judiciary Committee on the subject of hedge fund regulation. Additionally, he has provided training to financial regulators on the subject of hedge fund due diligence.

Link to this release on PRWeb.

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Corgentum Consulting Featured in Opalesque Article About the Importance of Private Equity Operational Due Diligence

HedgeFundOperationalDueDiligence.com — Mon, 09 Apr 2012 16:07:41 +0000

Corgentum highlights the need for private equity operational due diligence with statistical data based on approximately 150 Limited Partners surveyed in an Opalesque article, “Opalesque Exclusive: Due Diligence consulting firm calls for more checks on private equity funds, not just hedge funds,” written by Benedicte Gravrand.

Corgentum’s study shows that out of all Limited Partners surveyed, 87% of investors perform some sort of operational due diligence. However, only 24% use operational due diligence consultants. This means that 62% of the 87% who perform due diligence, use internal resources.

Often, employees who are performing operational due diligence internally, have other obligations, making operational due diligence far from their primary job. This could potentially allow small important details to fall between the cracks.

This study also shows that investors feel that they are at higher risk when investing in hedge funds as opposed to private equity funds. In fact, 74% of investors said that they perform operational due diligence on hedge funds, but not private equity funds.

Corgentum’s Managing Partner, Jason Scharfman, was quoted in the piece saying, “This study shows that private equity investors have not yet moved beyond Madoff, and are still lagging behind their hedge fund counterparts in the resources they are dedicated towards performing operational due diligence.”

In light of this recent research, Jason Scharfman will release his newest book, Private Equity Operational Due Diligence: Tools for Evaluating Liquidity, Valuation and Documentation (Wiley & Sons) on April 10, 2012.

Also authored by Mr. Scharfman, Hedge Fund Operational Due Diligence: Evaluating the Risks (Wiley & Sons).

Click here for the full Opalesque article. (subscription required)

Click here to reserve your copy of Private Equity Operational Due Diligence.

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Corgentum Releases Private Equity Operational Due Diligence Piece

HedgeFundOperationalDueDiligence.com — Fri, 06 Apr 2012 16:33:59 +0000

Corgentum Consulting has released their new private equity operational due diligence (ODD) guide. This guide was created to help investors learn the importance of operational due diligence.

The Benefits of Private Equity Operational Due Diligence- Paving the Way Ahead, covers the basics of an operational risk review as well as teaches you how to choose the right ODD consultant.

Topics covered include:
• Why Limited Partners should consider working with an operational due diligence consultants to assist in performing operational due diligence
• Why Limited Partners should perform operational due diligence on private equity funds, including a deeper look into government regulation and ongoing monitoring and the future of operational due diligence.

If you want to learn more about Private Equity Operational Due Diligence, pick up Corgentum’s, Managing Partner, Jason Scharfman’s new book, Private Equity Operational Due Diligence: Tools for Evaluating Liquidity, Valuation and Documentation, available everywhere April 10th.

For a must have book for hedge fund investors, Jason Scharfman’s Hedge Fund Operational Due Diligence book is also available.

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Corgentum’s Managing Partner, Jason Scharfman Discusses Due Diligence Techniques for Success on TabbForum

HedgeFundOperationalDueDiligence.com — Tue, 27 Mar 2012 14:20:55 +0000

Corgentum Consulting’s, Jason Scharfman’s article, “Due Diligence Techniques for Success: Why Fund Managers Try to Manipulate Due Diligence,“ was featured on TabbForum, a news and opinion hub for the financial industry.

In this article, Mr.Scharfman discusses the importance of transparency between fund managers and clients. He explains how in situations like the AIJ scandal, fund managers would not even allow investors to perform any type of due diligence and that this is a red flag for investors.

Investors who are new to the due diligence process are often hesitant to ask tough questions of the fund managers, however they should take control of the process. The main goal of due diligence is to avoid risk. By performing due diligence correctly, investors can insure that they are investing their capital with the right manager.

To read the full article click here (subscription required).

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