Tags: aberrational performance, Edward Schinik, fraud, Mark Angelo, SEC, Yorkville Advisors
The SEC has a thing called the Aberrational Performance Inquiry that runs a screen of hedge funds, selects the ones whose performance looks too good to be true, then sees if it is. This raises questions from the empirical (what is the conversion rate of “looks too good to be true” to “is in fact too good to be true”?), through the practical (do they, like, investigate Bridgewater every quarter?), up to the philosophical, which goes something like “if your hit rate is, as theory predicts, above some threshold, where does that leave you?” I feel like this initiative stirs up deep questions and should have people worried, and not just the fraudsters. If I were advertising my hedge fund1 I would want to say “the SEC thinks we’re an aberration, but not the fraudy kind.” If your hedge fund can’t say that, why invest?
Anyway the screen came up aces with Yorkville Advisors:2
Securities regulators on Wednesday sued Yorkville Advisors LLC and its top executives, accusing the New Jersey hedge fund of reporting false and inflated values for some of its investments.
Named in the lawsuit, brought by the Securities and Exchange Commission, were Yorkville, which has been one of the largest funds specializing in thinly traded micro-cap and small-cap companies, founder and President Mark Angelo and Chief Financial Officer Edward Schinik.
The firm misreported values as the financial crisis hit in 2008 and 2009 and market conditions deteriorated, and its returns during the period consisted mostly of unrealized gains from marked-up investments, the SEC said.
The SEC’s release and complaint are deeply pleasant; we make fun of the SEC a bit around here so it’s worth saying that this is impressive work and I Like It A Lot. Yorkville had a pretty good plan, as the SEC lays it out. Here’s what you do: Read more »
Tags: fraud, GEI Management, hedge fund advertising, Hedge Funds, Laurie Gatherum, Lion Capital Management, Norman Goldstein, SEC
I think if I were running a small hedge fund far from prying eyes, every quarter I’d take a look at my performance and decide if I felt good about it, and then (1) if I did I’d take a nice chunk of the profits for myself and (2) if I didn’t then I’d drink until I felt better and GOTO (1). Also I’m sure that when I started I’d plan to take a percentage of whatever I earned over some benchmark, and day one that benchmark would be, like, some relevant index matching the style of my fund, but over time it’d creep down to “well 0% is a benchmark” and then, I mean, negative 10% is a benchmark too is it not? What is special about zero? And if investors asked “can you explain your fees?” I’d just yell “can you explain YOUR fees?” and wander off muttering to myself. Scott Ferguson, hire us!1
Chicago-area hedge-fund-ish thing GEI, its CEO Norman Goldstein, and his pleasingly named wife and chief compliance officer Laurie Gatherum started out nobly enough:
According to the September 2001 Agreement, GEI Management was entitled to a quarterly annual management fee of three percent of the net asset value of the Fund. GEI Management also received a quarterly performance fee – called an “incentive allocation.” This fee was subject to a high water mark and a benchmark. The Fund paid a performance fee to GEI Management only if the Fund produced net profits over the prior quarter and on a cumulative basis from the Fund’s inception in 2001. If these conditions were met, GEI Management received an incentive fee equal to 25 percent of the amount by which net profits exceeded the performance of the S&P Healthcare Index.
But what if GEI underperformed the S&P Healthcare Index? A careful reading suggests that then they wouldn’t get performance fees, which hardly seems fair, because underperformance is after all a kind of performance. This is solvable by amending the agreement, which GEI did (deleting the cumulative high water mark and the benchmark, i.e. giving them all profits above zero). Further careful reading of the agreement suggests that they needed 75% of outside investors to agree to this amendment, but that was solvable by ignoring it: Read more »
Tags: fraud, Joseph Caramadre, life insurance, variable annuities
When the earnest scoldy public-interest journalists at ProPublica take it upon themselves to defend a financial scam artist who tricked terminally ill people into signing documents that they didn’t understand,* you have to figure there’s a pretty good story behind it. Oh God is there. I challenge you to find a better story about mispriced derivatives in the last week of August than ProPublica’s story this weekend about Joseph Caramadre.
The scam – and I say that with some affection – is this: life insurers offered products (call them variable annuities or death-put bonds, but you can abstract them to just one-period investments) that allowed you to invest your money in stuff and then, when a “reference life” or “annuitant” – a person, normally but not necessarily you – died, you got back the greater of (1) your original investment (plus interest sometimes!) and (2) the value of the stuff. So if the stuff went up, you profited; if it went down, you broke even (or did a little better). In exchange for this guarantee you paid a tiny fee every month, and I guess actuarially those fees were supposed to add up to the fair price of the put that the insurer was selling you.
But the trick comes when you decide, as amazingly you can, to make the annuitant not you but rather someone you found in an AIDS hospice and then bamboozled into signing up for the scheme by giving him a $2,000 payment that you told him was a charitable donation so he didn’t have to report it to the IRS. Then you end up paying almost nothing – well, $2,000 and change – for that put that the insurer is selling you, meaning that you get it for way under its fair value. And if you have a free put, you might as well combine it with the most volatile thing you can find. And our guy did. Actually he did a little better than that: Read more »
Tags: Barclays, CFTC, fraud, FSA, LIBOR, like dude you're killing us
Good lord are these Barclays settlements juicy. Basically every day for two years one Barclays trader or another would send an email to their Libor submitter saying “hey let’s commit crimes, tons of crimes, hahahaha” and then they did. In pathetically colorful language:
Trader C requested low one month and three month US dollar LIBOR submissions … “If it’s not too late low 1m and 3m would be nice, but please feel free to say “no” … Coffees will be coming your way either way, just to say thank you for your help in the past few weeks”. A Submitter responded “Done … for you big boy”.
on 5 February 2008, Trader B (a US dollar Derivatives Trader) stated in a telephone conversation with Manager B that Barclays’ Submitter was submitting “the highest LIBOR of anybody [...] He’s like, I think this is where it should be. I’m like, dude, you’re killing us”.
Or tons more, but I found this one particularly poignant:
Submitter: “Hi All, Just as an FYI, I will be in noon’ish on Monday [...]”.
Trader B: “Noonish? Whos going to put my low fixings in? hehehe”
Submitter: “[...] [X or Y] will be here if you have any requests for the fixings”.
Like … Trader B was kidding right? I mean, in this one single case? He was making a joke about how he was constantly asking for low fixings and the submitter took him seriously? When you joke around about committing fraud and people take you seriously, that’s maybe a sign you should stop committing so much fraud. Read more »
Tags: cdos, Citi, fraud, Jed Rakoff, Lawsuits, SEC
I’ve had some fun these last few days proposing counterintuitive theories for why Citi might not suck as much as you probably think it does and it’s nice to see others joining in the pastime, even if this sounds a little far-fetched:
The district court’s logic appears to overlook the possibilities (i) that Citigroup might well not consent to settle on a basis that requires it to admit liability, (ii) that the S.E.C. might fail to win a judgment at trial, and (iii) that Citigroup perhaps did not mislead investors.
That piece of rank conjecture is from the Second Circuit’s opinion on an appeal* of Judge Rakoff’s rejection of the settlement between the SEC and Citi over some mortgage-backed securities. Here’s DealBook: Read more »
Tags: bankruptcy, fraud, friends of Jim Cramer, hookers, legendary investors, Lenny Dykstra, take a left on maple and uh.., you lookin' for a good time sweet cheeks?, you wanna party or what?
Lenny Dykstra, described by his ex-best friend Jim Cramer as one of “the greats” in the investing industry, has reportedly been charged with with bankruptcy fraud for “selling items from his $18 million California mansion.” Read more »
Tags: fraud, Hedge Funds, Juno Mother Earth Asset Management, SEC
Again, just one of those things I thought you needed to know. Unlike Pappajohn Capital and the Misfit Barbarian Fund, however, this name is now up for grabs, as the firm and its partners have been sued by the SEC. In the likely event they must close up shop, this baby’s yours! Read more »