Due diligence and operational risk in hedge funds&#187; Operational Risk

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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.

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.

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

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)

Due Diligence Lessons – What the Goldman Sachs’s Resignation Letter Can Teach About Hedge Fund Operational Risk

HedgeFundOperationalDueDiligence.com — Fri, 16 Mar 2012 14:49:12 +0000

Corgentum Consulting Managing Partner Jason Scharfman has written an article for Pensions and Investments entitled, “Due diligence lessons from the Goldman Sachs resignation letter,” for Pensions and Investments. This article outlines some of the operational due diligence lessons investor’s can learn from the recent resignation letter by former Goldman Sachs Executive Director Greg Smith has received a great deal of media attention.

Analyzing organizational culture is a key part of the operational due diligence process. Mr. Scharfman’s article discusses how evaluating a hedge fund’s corporate culture can detect meta risks, such as problems in organizational culture, that may lead to future operational issues. The op-ed piece also discusses how the operational due diligence process can provide cues to red flag due diligence issues (such as those in the AIJ scandal in Japan).

The article, Due diligence lessons from the Goldman Sachs resignation letter is available at the Pensions & Investments website or via direct link here.

Gorden Geckko Grows Up – Michael Douglas Makes Insider Trading Infomercial for FBI

HedgeFundOperationalDueDiligence.com — Wed, 07 Mar 2012 13:57:36 +0000

Actor Michael Douglas, who famously played the Wall St. icon Gordon Geckko in the Oliver Stone film Wall St., has had a change of heart. The fictional fund manager once famously touted, “Greed is good.” Here is a video of some of the more notable quotes from Mr. Geckko in the movie:

The actor has recently teamed up with the FBI to create a video which encourages would be tipsters to come forward with any insider trading news, and outlines, that greed is not good. Here is the video:

Tipsters who decide to turn into rats and go to the government might do better then to follow Douglas’ advice. Whistleblower lawyer David K. Colapinto outlines that, “If they just go to the FBI, they are probably going to get zero,” Colapinto said. “The FBI’s not obligated to do anything for them.”

Colapinto said that if informants want a reward for information that exposes financial fraud, they should consult a lawyer — and file a whistleblower claim with the SEC.

Under the SEC’s , tipsters are entitled to 10 to 30 percent of the money the SEC collects if the whistleblower’s information leads to an enforcement action in which sanctions of more than $1 million are ordered. The bounties were ordered by Congress in the aftermath of the financial crisis and were intended to be powerful weapond in the war on Wall Street fraud. That being said Harry Markopolos, who reported the Madoff fraud to the SEC for years, got nothing.

Attempting to diagnose whether or not a hedge fund has the potential to be exposed to insider trading scandals can be a critical part of analysis of a fund’s compliance and trading functions during the operational due diligence process. Investors should attempt to evaluate such risks during a review of operational risk factors including personal trading policies.

Hedge Fund Executive’s “Assistant” Accused of Stealing HF Manager’s Credit Cards for Personal Purchases

HedgeFundOperationalDueDiligence.com — Tue, 06 Mar 2012 21:36:41 +0000

According to a recent article in the New York Post, famous hedge fund manager Todd Meister has accused his personal assistant, Russia native, Renata Shamrakova of opening up credit cards in his name and charging almost $1 million to it within a ten month period. Questions are being raised as to whether or not Shamrakova had a romantic relationship with Meister. If she is found guilty, Shamrakova could serve up to a year in prison for her felony offense. Shamrakova is also charged with tampering and obstruction of evidence.

Defense lawyer, Marc Agnifilo, believes that Meister allowed her to use the credit cards to purchase endless amounts of jewelry, clothes and trips.

Meister, who is known for his partying and fleeting marriage to Paris Hilton’s sister Nicky, denies participating in any romantic relationship with Shamrakova. The prosecution claims that Shamrakova sold a large amount of the jewelry that was purchased with Meister’s credit card on her business website.

Whether or not Meister and Shamakova were lovers, the situation highlights the importance of evaluating and monitoring reputational risk during the operational due diligence process. By performing operational due diligence, you can dive deeper on issues such as this that may affect the operational and reputational components of a fund.

Meister is a Harvard graduate who used to manage $2 billion in assets at his hedge fund, Priderock.

Shamrakova is being held on $450,000 bail.

Corgentum Consulting Releases Hedge Fund Newsletter: Operational Due Diligence Insights

HedgeFundOperationalDueDiligence.com — Wed, 15 Feb 2012 15:04:05 +0000

Corgentum Consulting has today released the first issue of its new operational due diligence newsletter entitled, Operational Due Diligence Insights. This newsletter will bring investors unique operational due diligence news and insights . Topics covered in this issue include:

How will SEC registration influence investor due diligence on hedge funds?
Tools for investors to evaluate financial statement risk
Considerations when analyzing administrator independence in the valuation process
Diagnosing information security risks

This newsletter will be available on Corgentum Consulting’s website via direct link here.

Operational Due Diligence Insights also includes a section about Corgentum’s upcoming events like their new webinar: Operational Due Diligence Survival Kit for 2012. This webinar will be on March 15 from 2-3 pm EST and will give attendees vital information to asses and uncover operational risk in hedge funds, private equity and traditional funds. Click here to signup for the upcoming webinar.

Readers can also visit Corgentum’s contact page to sign up to receive future issues as well as other Corgentum news and upcoming events.

Greenlight Capital Fined by FSA – David Einhorn’s Insider Tips

HedgeFundOperationalDueDiligence.com — Wed, 25 Jan 2012 21:16:34 +0000

David Einhorn’s Greenlight Capital has run into trouble in the UK for insider trading.

Reuters is reporting that Britain’s Financial Services Authority (FSA) said on Wednesday it had fined Einhorn 3.64 million pounds ($5.67 million) and his Greenlight Capital 3.65 million pounds for market abuse.

Greenlight rose to prominence in credit crunch for shorting Lehman Brothers bank.

The story goes that Einhorn (a prolific poker player) learned from a telephone conversation, held with a broker in 2009, that British pub company Punch Taverns was on the verge of a significant equity fundraising, prompting Einhorn to sell down his holdings before an expected fall in the shares, the FSA said in a statement.

This decision allowed Einhorn (who wrote a book called Fooling Some of the People All of the Time, A Long Short Story) to avoid losses of around 5.8 million pounds, the FSA said. “The FSA accepted that Einhorn’s trading was not deliberate because he did not believe that it was inside information. However, this was not a reasonable belief,” the FSA said. “This was a serious case of market abuse by Einhorn and fell below the standards the FSA expects, particularly due to Einhorn’s prominent position as President of Greenlight and given his experience in the market.”

According to the Wall St. Journal, Mr. Einhorn stated, “We believe that this action is unjust and inconsistent with the law and with prior FSA enforcement precedent. However, rather than continue an arduous fight, we have decided to put this matter behind us and concentrate on managing our business.”

Mr. Einhorn continued, “We have always strived to set an example of good conduct and ethics, and we take compliance very seriously. We didn’t believe in 2009, and we don’t believe now, that there was anything wrong with our conduct and our actions. The fine is for trading in advance of a decision that had not been made, and the FSA concedes we did not believe we had any inside information. We did not enter into any confidentiality agreement, we explicitly requested that we not be given confidential information, and we do not believe we were given any such information. Further, all the witness testimony supports our view.”

Reportedly, ts he FSA said Einhorn gave instructions to sell all of Greenlight’s holdings in Punch a “matter of minutes” after the telephone call, on June 9 2009. At the time these instructions were given Greenlight held 13.3 percent of Punch’s issued equity, and over the next four days Greenlight sold 11,656,000 Punch shares, thereby reducing its holding in Punch to 8.89 percent.

Punch announced a fundraising of 375 million pounds on June 15 2009. Following the announcement the price of Punch shares fell by 29.9 percent, the FSA said. While the regulator said the trading infraction was inadvertent and not deliberate, the fine may put some tarnish on 43-year-old Einhorn, a stalwart of the hedge fund community who is known for public crusades against abuses by public companies. Einhorn has targeted Green Mountain Coffee Roasters, claiming the company’s accounting practices and long-term earnings power are questionable.

Here is a video calling his views about Green Mountain Coffee into question:

While the average U.S. hedge fund lost about 5 percent in 2011, last year Einhorn’s flagship fund rose 2.9 percent. However, the hedge fund manager lost out on a high-profile bet last year when his effort to buy a significant minority stake in the New York Mets broke down over the summer. He is a life-long fan of the baseball team.

Einhorn isn’t the first fund manager to be fined in the UK for insider trading. In 2006 the FSA fined former GLG fund manager Philippe Jabre a then-record 750,000 pounds after he was found guilty of insider trading on a convertible bond sale for Japan’s Sumitomo Mitsui Financial Group. ($1 = 0.6416 British pounds)

Here are some videos of Einhorn talking about his investing style and views:

Understanding a hedge fund’s compliance procedures and the way in which it deals with and may be exposed to material non-public information is an important part of the operational due diligence process.

Allen Stanford’s Back – Slow to Justice R. Allen Stanford’s Trial Slogs On

HedgeFundOperationalDueDiligence.com — Wed, 25 Jan 2012 03:04:31 +0000

Our good friend R. Allen Stanford is back in the news. His trial for the $7 billion dollar fraud he allegedly perpetrated.

To refresh memories regarding Mr. Stanford’s alleged crimes and his passion for cricket see the previous post here and here – and some good lessons on operational due diligence.

The first day of jury selection has ended in the oft-delayed trial of jailed Texas financier R Allen Stanford, who is accused of bilking investors out of $7billion in a vast Ponzi scheme. A federal judge spent Monday questioning 80 potential jurors. Stanford emerged in chains.

In other Stanford news, Bloomberg is reporting that the SEC is asking a judge to determine a payout plan for Stanford victims.

Here are old videos of Stanford in his own words talking about Antigua:

And video of Stanford being treated after being beaten by fellow inmates in prison: