Author Archives: Zabrina

About Zabrina

Zabrina is a Principal and Vice President at HedgeOp Compliance, LLC in charge of the Due Diligence Department. Zabrina joined HedgeOp in August 2004. Prior to joining HedgeOp, Zabrina worked contractually in the Senior Risk Management Division of Dresdner Kleinwort and Wasserstein. At DRKW, she supported the division in creating and reviewing reports related to credit risk borrowers and long term funding policies. Zabrina also served as a legal intern for Honorable Leslie Crocker Snyder - Court of Claims, NY State Supreme Court Criminal Term. Zabrina graduated from Fordham University in 1998 with a B.A. and received a J.D. from Saint John's University School of Law in 2001.

SEC Database Improves Tracking of Tips and Complaints

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The SEC received heavy criticism for their failure to conduct a proper investigation into early tips received relating to the Madoff scandal.   In response, they have developed the Tips, Complaints and Referrals Database (the “TCR Database”) which significantly improves their ability to track and respond to tips and complaints on potential wrongdoers.  The TCR Database has emerged alongside a new program by the FBI’s criminal profiling group in Quantico, Va. that is creating a series of behavioral composites to help agents investigate white collar crime.

In recent years, financial crimes have been on the rise.

In the US government’s 2010 fiscal year, the FBI’s economics crime unit reports the bureau had 1,703 active securities and commodities fraud investigations, a 41 percent increase over the number of active investigations in 2008.  Over the past year, the amount of monetary penalties the SEC has imposed on wrongdoers has almost tripled…

Prior to the creation of the TCR Database tips would come in via phone calls, e-mails, faxes and even handwritten letters into the SEC’s 11 regional offices and Washington headquarters and often were not properly recorded or followed up. The TCR database now provides a systematic and organized approach to reviewing the information provided by tipsters, whistle-blowers and self-regulatory organizations.  Once a tip or complaint is entered into the system through the online questionnaire available in the TCR Database portal, about 2,300 SEC employees can see it, analyze the information and add to it.

While the TCR Database can not yet be cross-checked against other internal databases or against trading activity, company filings or news feeds, it is a start and a positive reform and improvement for the SEC.

Analyst Exposes Names of Contacts and Clients in a Blast Email

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John Kinnucan, a research analyst and principal at Broadband Research, gained industry notoriety when he refused to cooperate with the Federal Bureau  of Investigation’s widespread investigation into insider trading and would not wiretap conversations with one of his clients. 

Mr. Kinnucan who has been very vocal in the media, also circulated a blast email to clients and contacts informing them of his decision not to work with federal authorities.  Reuters  gained access to Kinnucan’s email recipient list (which failed to use blind carbon copy) and noted that in addition to those associated with hedge funds and mutual funds, the email may have gone to some individuals in finance not previously considered by federal authorities for investigation into insider trading.   Advisory firms like Friess Associates and Sonar Capital Management, giant hedge fund Citadel Group, and money manager Ameriprise Financial are just a few that have been revealed.

 According to an article published by Reuters,

“Officials for a few of the funds said that Kinnucan, in disclosing the identity of his clients, may have violated an expectation of privacy that traders and analysts had when they signed up with him.”

Some of Mr. Kinnucan’s current or former clients include SAC Capital Advisors and mutual funds Janus Capital Group and Wellington Management, all of whom have already either been subpoenaed or asked by federal prosecutors to provide information.  As such, it is likely that those email recipients who were not previously affected by the recent insider trading probe are probably anxiously wondering if they too may now receive a visit from federal authorities.

SEC Charges Man for Posing as Portfolio Manager

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Stephen C. Bond of Walnut Creek , California was charged by the Securities and Exchange Commission (“SEC”) for  fraudulently holding himself out to be a portfolio manager of  the “Asenqua” and “Fireside” hedge funds.  This elaborate hedge fund scheme was carried out alongside  Silicon Valley hedge fund manager Albert K. Hu from 2001 through 2008 .

The SEC compliant filed in federal district court for the Northern District of California alleges,

Bond attended investor meetings along with Hu to solicit investments  in the “Asenqua” and “Fireside” hedge funds. According to the SEC, Bond was portrayed at these meetings and in written materials as the funds’  portfolio manager.

While it does not appear Mr. Bond actually carried out any trades or implemented any of the trading strategies he and Mr. Hu discussed with investors, they believed him to be a legitimate professional with apparent insight into the securities market.

Mr. Bond made almost a million dollars for his part in defrauding investors.   The SEC has charged him with violations of the anti-fraud provisions of the federal securities laws and seek to have him pay financial penalties and repay any gains illegally obtained.

With regards to Mr. Albert K Hu, he too was sued by the SEC in March 2009 for his involvement in the scheme.  This case currently remains pending.   In the meantime, he  remains in custody following the filing of a related criminal action.

Ex-HedgeFund Manager Pleaded Guilty to Fraud

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This past Friday the sole managing member of Westgate Capital Management LLC (the “Fund”), James Nicholson, pleaded guilty to securities fraud, investment adviser fraud and mail fraud  which are subject to the following maximum penalties:

The fraud allegedly began back in 2004 with Nicholson falsely representing to investors that Westgate’s funds had assets under management ranging from $600 million to $900 million, when in fact only about $50 million to $60 million were actually invested.   These misrepresentations came to light last December when checks totaling around $5 million for nearly two dozen investors bounced during their attempt to redeem.  Prosecutors and Nicholson himself  admitted that:
  • financial records were falsified,
  • no legitimate and independent accounting firm auditing the Fund existed,
  • there was no actual office verifiable for the supposed auditor

Had a thorough due diligence check on the Fund and Mr. Nicholson been conducted earlier on, perhaps investors may have been spared the $133 million loss that occured as a result of Mr. Nicholson’s fraudulent activities.

1 Year Later…

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One year ago today, Bernard Madoff was arrested and charged with securities fraud in a $50 billion Ponzi scheme that affected thousands of investors.   It was an investment scandal that rocked Wall Street and raised concerns and awareness on all levels.  As a result, stricter regulations and much needed reforms and due diligence on how the Securities and Exchange Commission intends to respond to and review allegations of fraud have been implemented.

Briefly stated those reforms include:

Continue reading →

Preliminary Background Check Due Diligence

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Now more than ever, there is an increased awareness of the importance of due diligence in the hedge fund community. While there are many different levels of due diligence (investment and risk management, investigative, operational etc.), at minimum a preliminary background check should be performed prior to making any allocations to a hedge fund.

What does a preliminary background check consist of?  Generally speaking, before making an investment the following basic steps should be taken: Continue reading →

Are Hedge Fund Managers Misrepresenting the Facts?

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A recent Financial Times article made note of a revealing report  based on research conducted  at the New York University Stern School of Business.   Based on a review of over 400 confidential reports, that were compiled by a major due diligence investigative firm,  findings  indicate that statements and materials provided by hedge fund managers contain factual misrepresentations in a number of key areas. Continue reading →