Corgentum Consulting Discusses the Risks of Form ADV Disclosures with Institutional Investor
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. 
SEC Sues a Utah Hedge Fund Owner for Inflating Assets…
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.
MIT Professor and Son Agree to Pay $4.8 mill to Settle a Case of Fraud
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.
