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:

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During the operational due diligence process investors can take a number of measure to evaluate the quality and robustness of a firm’s valuation policies and procedures. Additionally, investors should inquire as to how transparent such valuation procedures are and whether any testing of such procedures is conducted. A key element of any valuation process should be independent oversight and pricing sources.

A recent example which demonstrates the importance of valuation is the case of Michael Balboa. It is being reported that Mr. Balboa was charged with fraud and conspiracy. It has been alleged that he made investments in illiquid bonds in Nigeria and Uruguay. Prosecutors allege that he worked with two brokers to inflate the values of the bonds. One of the brokers Gilles De Charsonvillne (as well as Balboa) was also sued by the Securities and Exchange Commission. The SEC received help from the Bermuda Monetary Authority with the investigation. This article talks about how such efforts are part of the SEC’s new risk analytics division. The events allegedly took place in 2008 while Balboa ran a fund for Millennium Global Investments. Balboa reportedly earned 40% of the fees from from the fund’s $844 million under management or approximately $6.5 million. Millennium Global said it had reported Balboa’s “rogue behavior” to both U.S. and British authorities.

According to this website for the Russia Forum 2010, “Michael Balboa has over 15 years of experience in EM instruments. Prior to establishing ARAM Global, he was Managing Director of Emerging Credit and the Millennium Global Emerging Credit Fund at Millennium Global.

Mr. Balboa’s career began at Salomon Brothers (1992-95), after which he co-managed the Strategos Fund, an EM hedge fund founded in 1995. He then joined Greenwich Europe and was actively involved in the management of the top performing Rainbow Advisor’s EM funds (2003-06) as well as the Rainbow Macro Fund. Mr. Balboa is a graduate of Hofstra University.”

Balboa parted ways with Millennium Global in 2009. His current employer, ARAM Global, said he is currently on leave from the firm….

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It is also being reported that Madoff claims that many of the large banks and fund of hedge funds who invested with him were “wilfully blind” and “chose to ignore con.” Here is a video about it:

It also seems a secondary market has developed for betting on how successful Irving Picard will be in recovering Madoff claims…

Finally, the Financial Times is reporting that motivated by continued paranoia (is it paranoia if the government really is out to get hedge funds?…) surrounding government oversight of insider trading hedge funds have begun to hire security firms to perform sweeps their offices and homes for electronic bugs (aka: listening devices). Here’s a video about some of the technology used in these sweeps including hidden camera detectors, fiber optic cameras, spectrum analyzers, and non-linear junction detectors:

So what happens when they find one? Maybe it would be like when a man named Yasir Afifi found an FBI tracking device on his car and asked the Internet community to tell him if he was being spied upon. Perhaps hedge funds familiar with reverse engineering strategies could similarly reverse engineer the technology and begin spying on the government – or would that be considered insider trading….?

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Specifically, hedge funds with at least $150 million in assets will be required to register with the SEC. As a reminder hedge funds were previously required to register with the SEC but that requirement was lifted after Philip Goldstein sued the SEC (and won) in 2006 to lift the registration ban – here is the decision. Despite the Goldstein rule the hedge fund industry, via groups such as the Managed Funds Association, have expressed support for hedge fund registration:

Drawing a distinction between hedge fund and private equity compliance risks, the article quotes Mr. Scharfman in part as saying,

” Some of the compliance problems that could arise in a transaction-based business model, such as a hedge fund, aren’t likely to crop up at private equity funds, said Scharfman. The risk is very low, for example, that private equity fund employees would trade equities from their own accounts ahead of the fund, he said. Developing and monitoring insider trading restrictions, however, will be necessary for both types of firms, said Scharfman. “

The full article can be read on the Wall St. Journal website (subscription required).

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Photos recently surfaced of Stanford beaten in prison over a dispute related to using the telephone.

Since the allegations against Stanford broke a number of interesting facts have come out regarding his business and operations including many operational risk red flags.

Here is part one of the BBC Panorama special on Stanford:

Part two:

Part three:

And here’s a video about Stanford being sued for gambling losses. This video also talks about allegations by James M. Davis, Mr. Stanford’s former CFO who has since agreed to a plea deal with the government, that Stanford participated in a  bizarre blood brothers ritual with Leroy King, Antigua’s chief banking supervisor – where Stanford’s offshore bank was located:

And here is a video of Stanford victims and former employee:

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It is expected that Mr. Scharfman will discuss the developing role of operational due diligence, considerations for integrating operational risk into the asset allocation process, and techniques for family offices to integrate operational due diligence into their investment process.

The event will take place on December 2, 2010 at the W Hotel Lakeshore, Chicago, IL. To register for the event here, please click here.

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On the TV Show Larry Wilcox portrayed Officer Jonathan A. Baker a California law enforcement highway patrol officer. He starred in the show with Erik Estrada who played Officer Francis (“Frank”) “Ponch” Poncherello.

Here’s a copy of the SEC Complaint against Wilcox et al.

Here’s the introduction from the TV show CHiPS:

And here’s Officers Ponch and Jon in action:

According to the SEC’s complaints filed in U.S. District Court for the Southern District of Florida, the schemes generally involved the payment of kickbacks to purportedly corrupt pension fund managers or stockbrokers, who would use their clients’ accounts to purchase the publicly traded stock of microcap issuers controlled or promoted by the individuals and companies charged today. What the promoters and insiders did not know was that the people with whom they arranged these illegal transactions were actually undercover FBI agents or confidential sources participating in undercover operations.

These allegations relate to Wilcox’s role as President and Chief Executive Officer of The UC Hub Group, Inc, a public company on the Pink-OTCBB under the symbol

(UCHB.PK) which is a mining company on the Montana Mine project, a sapphire and gold production mine. The company was also drilling oil wells in Illinois.

Interestingly UC Hub’s website features the following ominous disclaimer,  “UC Hub and management value their reputation for integrity and honest dealing adn take seriously any statements which seek to impugn directly or indirectly UC Hub’s reputation. UC Hub therefore reserves the right to seek legal redress against parties which repeatedly, intentially make false statements which cast UC Hub, its officers and directors in a false light or otherwise  unfairly impugn UC Hub’s reputation in any way.“….

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Stanley Chais was a Beverly Hills, California investment advisor who operated feeder funds which allocated capital to Madoff funds. He passed away on September 26, 2010 from a rare blood disease at the age of 84.

The Chais death is the third major death surrounding the Madoff scandal. The first was investor’s Rene-Thierry Magon de la Villehuchet’s suicide and the second being the death of Jeffry Picower (see previous post regarding Picower).

Chais was accused in a pending Securities and Exchange Commission lawsuit of feeding about $1 billion — virtually all the funds he collected from investors — into Madoff’s multibillion Ponzi scheme. Specifically Chais managed three funds which invested with Madoff: 1) the Lambeth Company, 2) the Brighton Company and the 3) Popham Company. Although he withdrew $500 million before the collapse of the Madoff funds, Chais maintained that he was also a victim and was not complicit. Here is the SEC complaint against Chais.

Chais also facing a lawsuit from the Madoff trustee, Irving Picard which was filed on May 1, 2009 Irving Picard, bankruptcy trustee for Madoff Securities, filed a lawsuit against Stanley Chais.  The complaint alleges he “knew or should have known” he was deep in a Ponzi scheme when his family investments with Madoff averaged 40% and
sometimes soared as high as 300%. It also claims Chais was a primary beneficiary of the scheme for at least 30 years, allowing his family to withdraw more than $1 billion from their accounts since 1995 – money that belonged to Madoff victims. The Picard complaint is here.

Chais was also facing a lawsuit from filed on September 23, 2009, California Attorney General Jerry Brown seeking $25 million in penalties and restitution for victims.

Chais was a large philanthropist and his philanthrophy, the Chais Family Foundation, closed in December 2008 as a result of losses associated with Madoff.

Here is a video from CNBC about the Chais death:

In other Madoff news, Bernard Madoff’s wife Ruth Madoff has been spotted in New York City at Midtown’s Le Pain Quotidien. Here’s the video:

Ruth Madoff had a new red harido (previously her hair was blond). Ms. Madoff was so dedicated to her previous blond hairstyle that she visited her salon, Pierre Michel, every six weeks for the last 10 years. After the Madoff scandal broker she was told that she could no longer enjoy her routine of sitting with a glass of Poland Spring water while Giselle, a colorist often cited in Vogue and Allure, wielded the foils. “Oh my g-d,” Madoff uttered, as ABC News advanced towards her. This video also features Madoff victims advocate Ronnie Sue Ambrosino. By the way the a website for the Madoff victim’s network is: http://bernardmadoffvictims.org.   When Ruth Madoff was asked if she had any words regarding her husband’s victims, she said nothing. Perhaps it makes sense she’s keeping mum, since no one knows what federal prosecutors may or may not be up to….

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This paper provides an introduction to some key considerations for investors to consider during the operational due diligence process, as they begin to evaluate hedge funds in the new Dodd-Frank environment.

The paper can be found in the Research section of the www.corgentum.com website, or via direct link here .

Here is a video featuring the bill’s sponsors Rep. Barney Frank (D-Mass.) and Sen. Chris Dodd (D-Conn.) discussing the passage of the legislation:

Here is a video from a panel discussion about whether Dodd-Frank will work:

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