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Reuters – Forensic accountants, former prosecutors and private investigators list some potential red flags at hedge funds that might indicate irregularities and should make investors take notice and probe further.
*Returns that seem too good to be true. If a fund is reporting spectacular returns at a time most of the industry is suffering, industry experts urged investors to be skeptical and dig below the top line numbers.
New York (HedgeCo.Net) – Paul Eustace, former head of Philadelphia Alternative Asset Management Company, has been ordered to pay back nearly $300 thanks to his fraudulent ways.
According to a statement by the Commodity Futures Trading Commission, the Canadian resident was able to swindle clients by constructing false account statements and exaggerating the fund’s portfolio worth.
Prosecutors alleged that Eustace was able to hide losses from his clientele while the fund experienced trouble from October 2002 to May 2005, when the fund collapsed. He has been indicted on two criminal counts of commodities fraud.
Philadelphia Alternative Asset Management was a commodity fund that was peddled as a hedge fund. Eustace was able to raise about $230 million, despite the fact that his company never traded options or futures on the investor’s behalf.
The Philadelphia-based law firm of Stradley, Ronon, Stevens & Young will act as the collector and has already recovered $96 million. In addition to returning the money to investors, Eustace has also been ordered to cough up $12 million in civil penalities.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
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Boston Globe – A federal judge barred Samuel Israel, the convicted founder of hedge fund firm Bayou Group LLC, from entering a plea to bail jumping, saying his addiction to methadone may have impaired his judgment.
A US judge cited Bayou Group founder Samuel Israel’s methadone addiction and his ability to understand the proceedings.
Israel, who sought to plead guilty yesterday in US District Court in White Plains, N.Y., told US District Judge Kenneth Karas that his ability to understand the proceedings was "60 to 70 percent."
Prosecutors said the 49-year-old faked suicide and fled the day he was to begin a 20-year sentence for his conviction in a $400 million fraud.
"I have to be satisfied that you’re competent," Karas said, rejecting the plea to one count of failure to appear. "The fact that there is some doubt about that makes it imprudent to go forward today."
Seattle Post- Incriminating messages allegedly sent by two ex-Bear Stearns Cos. hedge fund managers indicted on fraud charges that even sophisticated professionals disregard the dangers of putting sensitive information in e-mails, ex-prosecutors said.
Ralph Cioffi, 52, and Matthew Tannin, 46, were charged last week with misleading investors by saying two funds were thriving while knowing subprime-mortgage investments threatened their collapse. The indictments, the first relating to the subprime crisis, cited e-mails from both business and personal accounts describing looming problems. Investors in the funds ultimately lost $1.6 billion.
"It is pretty dumbfounding that people still use e-mail in such a casual way," said Carol Bruce, a former federal prosecutor now with law firm Bracewell & Giuliani in Washington. "But they do — and they will into the foreseeable future."
