The Securities and Exchange Commission has implemented a strategy of using computer analyses to identify hedge funds and other firms whose claimed investment performance figures warrant special scrutiny for possible fraud. Working on the theory that, if the performance seems too good to be true, maybe it is, the SEC has commenced lawsuits and investigations into a number of supposedly “outperforming” hedge funds. More than 20,000 funds have or will be screened by the SEC’s new system.
“There is serious fraud in this space, and we have been attacking it,” Bruce Karpati, co-chief of the SEC’s asset-management enforcement unit, was quoted as saying. (“SEC Ups Its Game to Identify Rogue Firms,” Wall Street Journal). The SEC’s system is reportedly designed to flag “returns that barely budge when markets are volatile.”
The SEC sued one firm flagged by its system that allegedly overvalued its assets, which included Nigerian bonds, by over 25 percent. In another case, a hedge fund of funds allegedly overrode its own internal controls to allow customer money to be invested into frauds that produced seemingly great returns.
The SEC’s system also recently flagged ThinkStrategy Capital Management LLP, which resulted in an investigation and a lawsuit. According to the article, the hedge fund reported positive returns six years in a row, including a “return” of 4.6 percent 2008 when the average hedge fund lost 19 percent. The SEC alleges the fund actually had a loss of 90 percent.
The hedge fund manager reportedly settled with the SEC (as always, without admitting liability) in exchange for a lifetime ban from the securities industry and an undetermined monetary penalty. His attorney called it a “favorable development that will allow him to focus on his new business outside the securities industry.” That new business may be legitimate, but what are the odds of that in light of the SEC’s allegations?
The SEC was apparently spurred to develop its high-tech system after letting Bernard Madoff operate a ponzi scheme under its nose for decades.
Page Perry is an Atlanta-based law firm with over 170 years collective experience protecting investor rights and fighting Wall Street greed.