Compliance Avenue

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.

A Connecticut hedge fund manager has pleaded guilty to lying to investors about the size of his funds and their performance.

More here:

Hedge Fund Manager Pleads Guilty In Conn.

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:

COUNT	OFFENSE	COUNT OFFENSE MAXIMUM PENALTY
One	Securities Fraud	20 years in prison; fine of greater of $5 million or twice gross gain or loss from offense
Two	Investment Adviser Fraud	5 years in prison; fine of $10,000
Three	Mail Fraud	30 years in prison; fine of greater of $1 million or twice gross gain or loss from offense

• 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.

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:

Read the rest of this entry »

With all the recent attention on insider trading, I thought it would be useful to take a quick look at some of the basic concepts involved.

The term “insider trading” itself is not defined in the federal securities laws, but generally is used to refer to the use of material non-public information to trade in securities (whether or not one is an “insider”), or the communication of material non-public information to others.  Section 204A of the Investment Advisers Act requires that all investment managers adopt formal policies which forbid any member, officer, director or employee from “insider trading.”

Although not specifically defined, it is generally understood that the law prohibits:

• trading by an insider, while in possession of material non-public information;
• trading by a non-insider while in possession of material non-public information, where the information either was disclosed to the non-insider in violation of an insider’s duty to keep it confidential or was misappropriated; or
• communicating material non-public information to others in breach of a fiduciary duty.

Next we’ll examine a few steps that advisers can take in order to minimize the risks of insider trading. Read the rest of this entry »

There has been certainly no dearth of hedge fund related news past month.  Among the news of the complex web of insider trading involving Galleon, we learn of a less high profile but yet still surprising hedge fund related scheme involving Ezra Levy, the CFO/Trader of Boston Provident, stealing over a million dollars from the fund.

According to Reuters, Ezra is being accused of of 11 counts of wire and securities fraud in two schemes to defraud Boston Provident.  Specifically, Ezra is accused of wiring $726,000 to his personal bank account from Boston Provident in monthly installments from January to October this year.  He is also accused of generating a $600,000 profit for himself by having Boston Provident buy shares of Atlas Energy Inc (ATLS.O) and Atlas Energy Resources at inflated prices from an account he controlled.  Boston Provident is run by Orin Kramer, chairman of the New Jersey State Investment Council, which oversees that state’s pension fund.  In a recent statement, Boston Provident said it has fired Levy and intended to seize his partnership assets.   It is claimed that Orin Kramer would personally replace the stolen funds and cover the firm’s legal fees.

In my view, this certainly highlights the importance of ensuring proper money movement controls at hedge fund firms.  The requirement of dual signatories at both the management company level and fund level is but one small step in preventing such types of improper and fraudulent transfers from occurring.

The founder of the K1 Group, a German fund-of-funds manager, was arrested on October 28^th as part of a joint US and German investigation.  Helmut Kiener faces charges of fraud and breach of trust in German courts after evidence amounted that he may have deceived the likes of Barclays, BNP Paribas, JP Morgan Chase & Co. and Societe Generale into lending a combined $400 million to facilitate fraudulent investments and supporting his lavish lifestyle.  Read the rest of this entry »

Last week’s big enforcement news was that Galleon Group founder, Raj Rajaratnam, was charged  with insider trading in the stocks of several companies, including Advanced Micro Devices, Clearwire and Akamai, earning millions of dollars in the process.

Federal prosecutors for the Southern District of New York accused Raj Rajaratnam with illegally obtaining and trading on information on these companies, which also included Polycom, Hilton Hotels, Google and People Support. He has been charged with four counts of conspiracy and eight counts of securities fraud. Others charged by prosecutors include Rajiv Goel, an executive Intel Capital, the venture capital arm of Intel, and Anil Kumar, an executive at McKinsey & Company.

You can view the full complaint here.

According to FINalternatives, this is just the tip of the Insider-Trading Iceberg:

Other hedge fund managers are among those expected to be charged, according to Bloomberg News, the result of a two-year-long investigation. Among those likely to be charged are individuals who came up during the surveillance of Rajaratnam, which included wiretaps. Authorities are also being helped by at least three former Rajaratnam colleagues, including California-based hedge fund managers Ali Far and Choo Beng Lee, according to The Wall Street Journal.

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. Read the rest of this entry »

As many of you may know, former SEC Chairman Christopher Cox contacted the SEC’s Office of Inspector General (OIG) on or about December 16, 2008 requesting that the Office undertake a full investigation into: (i) the allegations made to the SEC regarding Bernard Madoff going back to at least 1999, (ii) the SEC’s internal policies that govern when allegations of fraudulent activity should be brought to the Commission, and (iii) if SEC Staff contacts with the Madoff family and firm had any impact on the Staff’s decisions regarding the firm.  The results of the SEC’s Office of Inspector General’s extensive investigation were recently published in an over 450 page report.  This report goes into great detail of how the SEC failed on numerous occasions to uncover Bernard Madoff’s jaw dropping Ponzi scheme.  Read the rest of this entry »