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Chicago Hedge Fund Manager Knew He Had To Make Up Money To Make Money

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SEC enforcement orders against low-grade investment hucksters are among my favorite literary genres, full of oddball characters, devious drama, and silly names for hedge funds. Part of me wants the SEC to just issue fake enforcement orders when they don't have any real cases - no one would know the difference, and I would read them all1 - but I guess you can't, as they say, make this stuff up.

Today there is Umesh Tandon, "the CEO of Chicago-based investment advisory firm Simran Capital Management," who, remembering the old adage that it takes money to make money, told CalPERS that he was a big-shot hedge fund manager when he was in fact a small-shot hedge fund manager. In hindsight this should have been obvious because, I mean, just look at what he named his hedge funds:

Simran served as a subadviser to funds managed by other advisers and provided advisory services to its own private onshore fund (Simran Pre-Event Driven Activist Opportunity Fund LP) and a private offshore fund (Simran Pre-Event Driven Activist Opportunity Fund Ltd), both of which fed into a master fund.

"Pre-Event Driven Activist Opportunity Fund" is my new favorite fraudulent hedge fund name. Surely "pre-event driven" should mean "we trade on inside information," though realistically it means "we have no idea what we're talking about." Also amazingly the fund did, or supposedly did, something totally unrelated to events, activism, opportunity, whatever: "Tandon marketed Simran as an experienced fixed income manager that applied a unique risk-averse strategy bearing a low correlation to equity and debt markets." Perhaps the unique strategy was fraud.

Though, considering that name, Tandon's fraud was surprisingly mild:

In 2008, the California Public Employers’ Retirement System issued a request for proposal to select investment managers. Among other things, CalPERS required that applicants, as of December 31, 2007, manage at least $200 million for institutional clients. The request for proposal stated that failure to satisfy the minimum qualifications would result in rejection of the applicant.

In May 2008, Tandon, on behalf of Simran, falsely certified that Simran met CalPERS’s minimum qualifications, including that Simran managed at least $200 million for institutional clients as of December 31, 2007. Simran actually managed only approximately $80 million as of year-end 2007. Indeed, Simran’s Form ADV, filed with the Commission in February 2008, reported that Simran had $102 million of assets under management – itself a falsely inflated number.

CalPERS gave Simran $50 million, which ultimately grew to $122 million by 2010; the SEC order doesn't specify how much of that was investing returns and how much was additional inflows, though CalPERS demanded its money back in April 2010 so I guess the performance wasn't that great? I don't know. That seems like a key detail to leave out.

Anyway now he's in trouble for defrauding CalPERS,2 settling with the SEC for a $100,000 fine and a $20,000 reimbursement to CalPERS, which, again, key omitted detail is why twenty thousand dollars? The SEC order doesn't say how much CalPERS paid him in fees though I hope it was $20,000? On ~$100mm of assets for ~2 years? If CalPERS really paid him 1 basis point a year, he should sue them.

You might reasonably criticize CalPERS for failing to notice this fraud in the first place - remember that Tandon's application and his publicly filed Form ADV had very different AUM numbers, which CalPERS could easily have noticed. Also, um, the name. This made me curious enough about CalPERS's selection process to go look and it appears to be, like, a blind internet resume drop:

To Submit Hedge Fund Investment Proposals
Proposals for investments for the ARS [absolute return strategies] program should be submitted to the advisor or FoHF manager(s) relevant to the appropriate part of the program. Due to the large volume of proposals, neither CalPERS nor its advisors and partners can guarantee a reply to every proposal that is submitted.

So, yeah: CalPERS is so overwhelmed by the number of hedge funds pestering it that it can't even write back to all of them. You can hardly blame them if a few fake ones slip through the cracks.

SEC Charges Chicago-Based Investment Adviser with Defrauding CalPERS and Other Clients [SEC]

1.I would write them, SEC, if you want; be in touch.

2.Also for defrauding other customers:

Although procured by fraud, Tandon touted, and instructed others to tout, Simran’s selection as an adviser by CalPERS to the public, to other current clients, and to prospective clients, all of whom were unaware that the relationship with CalPERS was procured by fraud.

Well but he was selected by CalPERS! It was true! Seems very unsporting of the SEC to get mad at a guy for truthfully boasting about a client relationship just because that client relationship happened to be secured by fraud. What was he supposed to do? Though TBF he also overstated his assets to those other clients.

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Now Here Are Some Guys Who Knew How To Rip Off A Client

One aspect of good salesmanship is that you have to offer an attractive proposition not merely to the abstract entity that is your nominal client - El Paso, Italy, Greece - but also to the specific human being who is your contact at that client. Telling a corporate treasurer who is five years from retirement that a trade will have a significantly positive NPV due to huge cash flows in years 11-15 is not always as effective a sales technique as buying him a nice steak and an evening of unclothed entertainment. I suspect, though, that the latter strategy is more highly correlated with whatever you're selling ending up on the front page/op-ed page/sec.gov. Anyway, I definitely admire these guys for this particular con*: The SEC alleges that Argyll Investments LLC’s purported stock-collateralized loan business is merely a fraud perpetrated by James T. Miceli and Douglas A. McClain, Jr. to acquire publicly traded stock from corporate officers and directors at a discounted price from market value, separately sell the shares for full market value in order to fund the loan, and use the remaining proceeds from the sale of the collateral for their own personal benefit. Miceli, McClain, and Argyll typically lied to borrowers by explicitly telling them that their collateral would not be sold unless a default occurred. However, since Argyll had no independent source of funds other than the borrowers’ collateral, Argyll often sold the collateral prior to closing the loan and then used the proceeds to fund it. Got it? Argyll gave corporate executives margin loans at 50-70% loan-to-value based on the market price of their stock (based on the volume weighted average price over five days leading up to the closing of the loan). They took the stock as "collateral." They then trousered the stock and sold it for, y'know, 100% of the market value, with 50-70% of that funding the loan and the remaining 30-50% funding miscellaneous expenses that presumably included unclothed entertainment for themselves. The loans had three-year terms and were not prepayable for 12-18 months, so the expected life of the scam was at least 12 months (but see below).