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New York (HedgeCo.net) – Hedge fund manager Michael C. Regan was sentenced in a federal court in Brooklyn, N.Y. to seven years in prison for fraud.
Just last June, Regan settled charges with the SEC on another of his hedge funds, Regan and Regan & Co., which the SEC alleged, he fraudulently obtained at least $15.9 million and ultimately caused investors to lose at least $6.69 million through Regan’s misappropriation and trading losses. The settlement was closed without Regan admitting or denying the allegations.
When his hedge fund, River Stream Fund collapsed in April 2008 Regan turned himself in in May 2008 and pleaded guilty to one count of fraud the following month. He began the fund in 1998 with money from friends and acquaintances, according to the prosecution.
While Regan agreed to pay restitution, he filed for bankruptcy protection after turning himself in. The government said it is unlikely his victims will ever be compensated.
The SEC is also filing a civil suite. Regan could face additional criminal charges for failing to file tax returns for 10 years.
New York Times – The managing director of a collapsed Chicago hedge fund, Lake Shore Asset Management, was indicted by a federal grand jury. Prosecutors say the director, Philip J. Baker, operated a $300 million fraud.
The 27-count indictment was unsealed on Monday, said Patrick J. Fitzgerald, a United States attorney, in a statement on Tuesday. An arrest warrant has been issued for Mr. Baker, but his whereabouts are unknown, Mr. Fitzgerald said.
The Commodity Futures Trading Commission accused Mr. Baker in a civil lawsuit last year of having defrauded at least 700 investors by hiding trading losses. The commission won court orders banning Lake Shore from commodities trading.
Mr. Baker said that Lake Shore had a long history of trading success, though it lost about $38 million from 2002 to 2007, according to the indictment.
West Palm Beach (HedgeCo.net) – Morningstar reported a summary of hedge fund performance for January 2009 as well as asset flows for 2008. As stocks and government bonds got clobbered in January, hedge funds held up relatively well, the report said.
The Morningstar 1000 Hedge Fund Index declined only 1.2% and the currency-hedged Morningstar with MSCI Hedge Fund Composite Asset-Weighted Index rose 1.2%, against the MSCI World Index’s 8.9% drop and the BarCap Global Aggregate Index’s 3.3% decline.
"Some liquidity returned to the credit markets in January, helping certain hedge fund strategies, but even hedge funds trading equities persevered through January’s tough markets," said Morningstar Hedge Fund Analyst Nadia Papagiannis. "Overall, hedge funds held their own in January."
The rise in the U.S. dollar created profits for some price-trend-following and global-macro non-trend funds in January, but volatility across equity, government bond, and commodity markets throughout the month led to trading losses. The Morningstar Global Non-Trend Hedge Fund Index rose 0.1% while the Morningstar Global Trend Hedge Fund Index declined 1.6%.
Investors continued to pull out of hedge funds, withdrawing $26 billion in December and $70 billion for the year. Europe- and U.S.-equity hedge funds saw the largest redemptions, losing $14.8 and $18.3 billion respectively in 2008.
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Reuters – The New York Hedge Fund Roundtable is seeking to establish professional standards to self-police the lucrative industry, both to prevent future scandals and avert the imposition of new laws on the $2 trillion industry.
"It’s a great industry. We don’t want to see it blown up because of a few bad guys," said Stanley Goldstein, founder of the ad hoc group, which meets regularly to discuss industry issues. "The industry has a public relations problem. It’s hard to find good press for hedge funds."
Goldstein, 73, the retired founder of accounting firm Goldstein Golub Kessler & Co and of several hedge funds, said professional associations — like the New York State Society of Certified Public Accountants — can exert powerful peer pressure on those who work in an industry.
Many hedge fund managers belong to self-policing financial industry groups, but none of those groups provide the imprimatur of the NYSSCPA, the American Institute of Architects or the American Medical Association.
Bloomberg – Bear Stearns Cos. didn’t investigate the financial health of a hedge-fund client that later collapsed because its claim of an annual 20 percent return on investment “made perfect sense,” a former executive at the firm said.
Bear Stearns was sued in 2001 by a bankruptcy trustee on behalf of creditors of the now-defunct Manhattan Investment Fund Ltd. U.S. Trustee Helen Gredd alleged New York-based Bear Stearns was liable in part for $400 million in investor losses because it didn’t properly inspect the fund’s books, according to a complaint originally filed in a Manhattan bankruptcy court.
A senior Bear Stearns executive learned in 1998 that the fund was claiming a 20 percent return when the securities firm’s records showed a $190 million loss, the trustee said in court papers. The executive, Fred Schilling, was head of prime brokerage sales in 1998 when an investor in the hedge fund praised its returns to him at a cocktail party, he said.
“With the information I had, that Ernst & Young was a third-party administrator, and there were other prime brokers involved, it made perfect sense,” Schilling, referring to the New York-based auditor, testified today during a trial of the case in Manhattan federal court. The executive said he learned an affiliate of the accounting firm aggregated losses and gains from other parties to arrive at the final return rate.
Under U.S. bankruptcy law, if Gredd can prove the securities firm failed to diligently investigate the fund, she can recover around $141 million on behalf of creditors.
Bear Stearns spokeswoman Elizabeth Ventura declined to comment.
