Funds sleuth sees investors digging deeper

Funds sleuth sees investors digging deeper
By: Joseph A. Giannone
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 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. 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 Madoff shows the value of asking questions and double-checking claims, 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 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,” he said.

Springer 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 Madoff.

“Hennessee had the same issues as Fairfield Greenwich: they were paid fees to conduct due diligence before they recommended funds,” he 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,” Springer said. “Funds have to play by the new rules.”