Funds Sleuth sees Investors Digging Deeper |
Date: Monday, May 4, 2009
Author: Joseph A. Giannon, Reuters.com
The fund-of-hedge funds industry is under fire
after too many firms failed to steer clients clear of Bernard Madoff's
Ponzi scheme and other financial frauds.
But one veteran sleuth says investors are responsible for doing
their own digging, said Kenneth Springer, whose Corporate Resolutions
Inc. does background checks on fund managers and companies.
"Shame on the SEC for not having its act together, but their
mission is not fraud-prevention. Investors can't rely on the SEC all
the time to catch these things," said Mr. Springer, who before founding
his firm in 1991 was a former FBI agent focused on financial crimes.
The recent discovery of investment frauds such as Madoff,
Dreier LLP and Stanford Financial Group have eroded confidence in
fund-of-funds and other middlemen paid to screen and select fund
managers on behalf of rich families and institutions.
Investors got another nasty surprise last week, when regulators
said hedge-fund consultant Hennessee Group violated securities laws
when it recommended clients invest in Bayou Management, a hedge fund
that collapsed in 2005 after it was revealed to be a fraud.
Many frauds can be detected by reviewing public records and
filings, such as broker compliance reports produced by regulatory body
FINRA, he said. Mr. Springer's investigators also interviews employees
and investors, delving into a fund's operations and verifying
performance claims.
The fact that numerous investors did not invest with Mr. Madoff
shows the value of asking questions and double-checking claims, Mr.
Springer said.
"If something sounds too good to be true, it probably is," he said.
Short Memory
Yet it's a lesson that has to be repeatedly taught. The Bayou
scandal, barely four years old, was largely forgotten by many investors
by the time Mr. Madoff made headlines.
More recent was the case of Petters Co. Inc., which in October
went bankrupt amid allegations its founder swindled investors out of
about $3 billion through a Ponzi scheme.
"It's like we all have dementia: we forget the past," Mr. Springer said.
He said he expects investors will demand more information from
their fund managers. Even if they hire a middleman to screen out
investments, they must review the work and scrutinize the conclusions.
Checking up on fund-of-funds managers might have helped clients
of Fairfield Greenwich Group, a firm that passed on its investors' cash
to Mr. Madoff.
"Hennessee had the same issues as Fairfield Greenwich: they
were paid fees to conduct due diligence before they recommended funds,"
Mr. Springer said. "They didn't do what they said they did."
Funds regulation and enforcement is expected to get tougher
under the Obama Administration. Investors, too, are bearing down by
seeking more information from fund managers and demanding more
independent confirmation of a firm's claims.
"Hedge funds may resist these changes, but there's a new
sheriff in town—the more skeptical investor," Mr. Springer said. "Funds
have to play by the new rules."
By Joseph A. Giannone
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