Each business day HedgeCo.Net keeps you informed with the top hedge fund industry news, opinion and insight from around the globe. From the latest hedge fund launches, to the impact of regulation, competition, and investor activism - we track the topics and people that make a difference to you.
Reuters – U.S. securities regulators missed “numerous” red flags that may have led to Bernard Madoff’s $65 billion Ponzi scheme and never did a “thorough and competent” probe despite complaints dating to 1992, a federal watchdog has concluded.
The U.S. Securities and Exchange Commission’s inspector general said in a blistering report that despite five probes and having caught Madoff in “lies and misrepresentations,” the SEC failed to follow up on inconsistencies.
“Despite numerous credible and detailed complaints, the SEC never properly examined or investigated Madoff’s trading and never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme,” Inspector General David Kotz wrote.
Boston Globe – A Boston law firm has filed a class-action lawsuit against a hedge fund controlled by Massachusetts Mutual Life Insurance Co. for placing all of the fund’s assets with Bernard Madoff, who is facing life in prison for conducting a massive fraud.
The lead plaintiff is Lawrence J. Rothschild, a Needham businessman who invested about $1.1 million with the Rye Select Broad Market XL Fund, according to the lawsuit, filed yesterday in Massachusetts Superior Court.
The suit alleges that Rye did not explicitly say that it placed all of its assets with Madoff, and that the firm’s parent, Tremont Partners Inc. (also part of MassMutual), ignored red flags about Madoff’s activities.
Financial Times – The trustee charged with tracking down money for victims of Bernard Madoff’s alleged $50bn Ponzi scheme will target big investors – such as hedge funds – that pulled "substantial amounts" of "false profits" out of the broker’s operation.
Under federal and New York law, investors who withdrew either principal or profits in the 90 days before Mr Madoff’s December 11 arrest are particularly vulnerable to so-called "clawbacks", but the trustee will be able to reach back up to six years in some cases.
With billions in claims and only about $940m in recovered assets, Irving Picard, the trustee, must rely on money from investors who cashed out early as a source of restitution.
He and David Sheehan, a lawyer working with him, told a creditor meeting last week that they intended to focus on large investors, particularly if they had suspicions about Mr Madoff’s operation.
Mr Sheehan cited the example of "someone who may have been well informed and may have had red flags".
Herald Tribune – Partners of failed hedge fund trader Arthur Nadel said they were shocked to learn after Nadel disappeared on Jan. 14 that the six hedge funds for which he did the trading had been emptied of their purported $300 million in assets.
But what seems mysterious to them raised red flags in 2005 for the founders of HedgeCo.Net, a West Palm Beach hedge fund database site. HedgeCo dropped three funds run by Nadel’s Scoop Management Inc. — Valhalla Investment Partners LP, Viking Fund LLC and Viking IRA LLC. The concerns were: reported returns that were considerably higher than normal, no outside firm to verify the numbers and no outside administrator to monitor the accounts and send out statements to investors.
Bloomberg - Banco Santander SA’s hedge fund unit used risk software that according to its developer may have “waved red flags” about Bernard Madoff investments.
“You definitely would have seen it,” Riskdata SA Chief Executive Officer Ingmar Adlerberg said in a phone interview from Paris. Many of the company’s 80 customers have thanked it for flagging risks linked to Madoff, he said. He refused to name them or comment specifically on Santander.
Santander offered on Jan. 27 to pay 1.38 billion euros ($1.8 billion) to private banking clients hit by Madoff-related losses through the Spanish bank’s Optimal Investment Services hedge fund arm. Geneva-based Optimal said Riskdata’s FOFiX product was key to “quantitative risk analysis” for hedge fund investments in a 30-page due-diligence questionnaire filed last April with the Alternative Investment Management Association.
Examiner.com – David Kotz, Securities and Exchange Commission Inspector General, told the U.S. House Committee on Financial Services last week he was determined to learn "the reasons for the SEC’s apparent failure to act" on repeated warnings about Bernard Madoff’s massive $50 billion Wall Street swindle.
The SEC had first been warned about Madoff in 1999 and again in greater detail in 2005 by Harry Markopolos, a Boston accountant and securities consultant. Markopolos noted several dozen "red flags" in a 19-page memorandum he prepared for the SEC that should have triggered agency interest in Madoff’s ponzi scheme.
Markopolos, a former U.S. Army Special Operations commander who led clandestine teams in Europe and Africa in the mid-1990′s, had made it easy for SEC officials by titling his 2005 report The World’s Largest Hedge Fund is a Fraud.
New York (HedgeCo.Net) – New York University scored a victory yesterday, when they won a court order that sought an extension on a temporary ban that would halt J. Ezra Merkin from making any more transfers with the school’s funds. Merkin had millions of dollars of the University’s funds tied up in investments with Bernard Madoff.
Merkin, the man behind the Gabriel Capital LP fund and the Ariel Fund Ltd., is prohibited from withdrawing, transferring or liquidating assets, after a ruling from Supreme Court Justice Richard Lowe in a Manhattan courtroom yesterday.
According to the original complaint filed by NYU in late December, Merkin “was explicitly told” to stay away from Madoff related investments. Merkin then allegedly invested with Madoff regardless of the orders, losing an estimated $24 million of the University’s funds with the Ponzi-schemer.
"In the face of an extraordinary number of red flags, Merkin, for years, simply turned over a substantial portion of Ariel’s funds to Madoff for management,” NYU alleges.
The University, who had $94 billion total invested with Merkin, fears that it may lose the entirety of its investment.
“Mr. Merkin has always acted in good faith and did not deceive NYU or any other investors,” said Andrew Levander, Merkin’s lawyer.
Gabriel Capital, which manages about $1.5 billion but posted losses of 39 percent in 2008, was planning to liquidate amidst the aftermath of the Madoff debacle, along with Ariel, but must have permission from the courts to do so first.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
New York (HedgeCo.Net) – Investors in the hedge fund Fairfield Greenwich Group have sued the company after about $7.5 billion in potential losses stemming from ties to Bernard Madoff.
The investors claimed that Fairfield sustained “avoidable losses,” by not practicing proper due diligence and failing to manage their investments properly. The lawsuit, filed by Pasha and Julia Anwar in New York State Supreme Court on Friday, is one of many attempts lately to salvage some of the estimated $50 billion lost by Madoff through his infamous Ponzi scheme. The Anwars are residents of Illinois and had an interest in Greenwich Sentry LP.
Massachusetts Mutual Life Insurance is also facing a scrutiny from angry investors. On Monday, Arthur E. Lange of Connecticut and Arthur C. Lange of New York filed a lawsuit in the Southern District of New York, claiming that the company “breached their fiduciary duties by failing to conduct adequate due diligence and/or numerous red flags,” regarding their investments with Madoff.
Massachusetts Mutual has denied the claims and plans to “vigorously defend itself,” according to a spokesman for the company.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
New York (HedgeCo.Net) – As the investigation continues into what has turned out to be the largest fraud in history, more and more investors are coming forward who saw the red flags early, refusing to do business with Bernard Madoff.
According to a report published by the Independent, investigators are now hearing stories from many banks and investors who believed early on that Mr. Madoff had been faking his stellar track record. These investors complained to the Securities and Exchange Commission, only to have the agency merely give him a slap on the wrist.
According to a complaint sent to the SEC in 2005 by Boston accountant Harry Markopolos, a few hedge fund managers who did business with Madoff Investment Securities were weary that Madoff was “eating the losses” and doctoring returns.
Markopolos also allegedly warned the SEC that Madoff was in fact, running a giant Ponzi scheme. This of course, turned out to be the case when he was arrested last week after confessing to his sons that Madoff Investment Securities was essentially “one big lie,” and had bilked about $50 billion out of trusting investors.
Other red flags included the fact that his returns were steady and always on the up and up, posting returns of over 10 percent a year, while most legit funds experience some sort of down time. In addition, his company used a small, relatively unknown auditing firm whose list of clients was not very impressive.
The SEC forced Madoff to register as an investment advisor in 2006, which he did while avoiding further scrutiny. Investment advisors are not subject to routine SEC investigations; rather they are performed based on their potential risk.
Many believe he was able to evade investigations due to in part to his high-profile role on Wall Street. As one of the founders of the Nasdaq stock exchange, he regularly advised the SEC on electronic trading issues.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
A posh part of London or New York can be suitable, as in Pershing Square Capital, Cheyne Capital and Thames River Capital.
Or you could choose something slightly aggressive such as Tiger Capital, Citadel Capital or Centaurus. Among the big financial firms, it is voguish to squeeze as many meaningless words as possible into the title of a hedge fund. Length is not a sign of quality, however; a Bear Stearns hedge fund which went from $642m to zero was called the "high-grade structured credit strategies enhanced leverage fund".
2 Get a brass plaque in the Cayman Islands
Nearly all hedge funds are legally registered in tax havens to avoid both the taxman and to skirt regulatory hurdles – the sunny climes of the Caymans and Bermuda are particularly popular. Theoretically, a fund registered in London would have to register with the Financial Services Authority, but this has never actually happened. An FSA spokeswoman says: "Nobody ever registers hedge funds in the UK. If somebody did, we’d be scratching our heads over how to deal with it. We’d have to devise something."
3 Set your fees
The real fun starts here. Hedge funds are enormously lucrative – their standard fee arrangement is "two and 20". This means that as a fund manager, you can take 2% of clients’ money up front before you do anything, then keep 20% of any appreciation on the value of your fund. For successful hedgies, that means a phenomenal payday. For example, if a fund raises $1bn from investors and achieves a 30% rise in value over a year, the fund’s management earns $78.8m. Crispin Odey – one of London’s leading hedge fund managers – has just paid himself £28m after his firm successfully negotiated the credit crunch to make more than £55m profit in the past financial year. Most of the remaining £27m will be shared among Odey Asset Management’s 11 other partners. The fund manages around £2.7bn of assets.
