Down and Out in Beverly Hills : Mr. Ruderman’s Ponzi Ways

Bradley Ruderman, a hedge fund manager from Beverly Hills, California has pled guilty to running a Ponzi scheme. Mr. Ruderman is facing up to 51 years in prison. He will learn his fate on December 7, 2009.

Appearing before U.S. District Judge John F. Walter heard Mr. Ruderman’s admission that he took approximately $44 million from approximately 22 investors while claiming returns of approximately 60% annually. Specifically, he pled guilty to two counts each of wire fraud and investment fraud. Here is the SEC press release announcing their formal complaint in which they froze Ruderman's assets.

Mr. Ruderman orchestrated his scheme via his firm, Ruderman Capital Partners. He surrendered to federal agents in May. In April Mr. Ruderman sent a letter to investors claiming that the firm’s funds were almost entirely gone. Mr. Ruderman had spent $8.7 million on a myriad of personal expenses. The list includes two Porches. He also had over $5 million in Poker losses.

Adding to the laundry list of problems, Bloomberg is reporting that Mr. Ruderman lied about the identity of his investors claiming that Lowell Milken (chairman of the Milken Family Foundation) and Larry Ellison (Chief Executive Officer of Oracle Corp.).

While a famous investor may not always take a call if a hedge fund manager is touting their relationship with a particularly dazzling or well respected investor it would behoove any investor to pick up the phone or send an email to at least attempt to confirm the relationship If the prestigious investor picks up the phone you may be able to garner more color on the details of their relationship with a particular manager. Should you not be able to confirm the relationship, at the very least as an investor you will sleep better at night knowing that you tried. Further, the hedge fund manager should be able to explain why their highly respected investors won’t return your call – and it should be a good indicator or a yellow flag at the least which would add another data point to your operational due diligence process.

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Insider trading and Bear's Collateral Condo Pledge: A long list of red flags

Ralph Cioffi, a former Bear Stearns hedge fund manager, has been indicted for an alleged fraud which contributed to firm's downfall. Mr. Cioffi and another former Bear Stearns hedge fund manager, Matthew Tannin, were indicted last year. The duo allegedly mislead investors about the status of the firm's two hedge funds whose failure costs investors approximately $1.6 billion in July 2007. Bloomberg is reporting that according to the government, Mr. Cioffi also "rarely" listened to the firm's compliance trading measures and had a combatitive relationship with Bear Stearns compliance and legal department.


Mr. Cioffi has also been charged with insider trading for redeeming $2 million from the Bear Stearns Enhanced Fund. This represented approximately 1/3 of his investment in the fund. Specifically, the government is claiming that Mr. Cioffi used material non-public information to time his withdrawal before the fund's collapse. Adding insult to injury news is also coming out that Mr. Cioffi attempted to pledge his investment in the fund as collateral for a building loan for a luxury condo complex his brother was building in Sarasota, Florida. Bear Stearns apparently didn't grant approval for this. Apparently, "Cioffi became extremely upset and accused the general counsel of BSAM of being behind the decision," the U.S. said in court papers.

Outside business activities fund relatives building developments, in-fighting among internal units, a hedge fund manager fighting with the firm's compliance department and a hedge fund manager reducing his stake in the firm. This long list of red flags seems to keep getting longer...

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Butler and Tzolov face the music - for now....

Eric Butler, a former Credit Suisse Group AG broker, was convicted today of three counts fraud. Specifically, Mr. Butler pled guilty to conspiracy to commit securities fraud, securities fraud and conspiracy to commit wire fraud.


Mr. Butler's conviction relates to fraudulently selling millions in subprime securities and reaping huge commissions in the process. Mr. Butler's co-defendant Julian Tzolov also plead guilty to conspiracy, wire fraud and securities fraud. He turned on his former colleague and became a prosecution witness against Mr. Butler. Mr. Tzolov, he was originally thought to have fled to Bulgaria but actually fled to Spain for three months to avoid persecution but returned to testify. Mr. Tzolov even went so far to hire a bodyguard and carry false documents while on the lamb. Mr. Butler faces a maximum sentence of up to 45 years.

It looks like the judge will go easy on them since he believed they operated in a so-called "culture of corruption." Adding insult to injury Bloomberg is reporting that the judge told lawyers for both the defense and the government to put Mr. Butler and Mr. Tzolov's deeds in the context of, "how pernicious and pervasive was the culture of corruption, lack of regulation” and “serious negligence in the financial services industry in supervising people like this.” I'm sure this will be a big condolence to Butler's and Tzolov's victims who include GlaxoSmithKline Plc, Roche Holding AG and Potash Corp. of Saskatchewan.

Butler and Tzolov's scheme involved selling securities which they told people were backed by federally-guaranteed student loans. They further told their clients that they were a safe alternative to bank deposits or money market funds. In fact, the subprime securities were linked to auction rate securities. It is expected that Mr. Butler will appeal.... stay tuned.

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Madoff feeder fund trouble continues - Tremont and Fairfield's Slow Death

It is being reported that William Galvin, the Massachusetts Secretary of State, has rejected a settlement offer by Fairfield Greenwich Group to repay $6 millon to Massachusetts investors who were victims of fraud in the Madoff scandal.



Galvin's civil complaint, in part, claims that Fairfield executives were coached by Madoff on how to answer federal investigators questions. The complain further alleges that Fairfield misrepresented how much they knew. With the settlement offer reject a hearing is scheduled for September 9.

Fairfield spokesman Thomas Mulligan was quoted as saying, "It would be irresponsible for Fairfield to devote any more time or resources to a case involving at most a dozen people with losses of $6 million, when Fairfield is facing litigation involving thousands of investors and hundreds of millions of dollars elsewhere."

In other Madoff feeder fund news, Tremont Group, has been forced to auction off its hedge fund assets.

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Madoff’s Film Studio and the risks of outside business activities

It has been reported by Bloomberg that Madoff’s son Andrew and Nehst Media Enterprises LLC are being sued for $5.3 million. Nehst is a Madoff-funded film studio. The suit is being brought by allegedly wronged filmmaker Dana Offenbach whose production/director credits includes such independent films as Hav Plenty, Love & Orgasms and The Mamsahib.



Ms. Offenbach is seeking at $5 million in punitive damages and $300,000 in regular old-fashioned damages. Also named in the suit are Nehst Chairman Larry Meistrich and CEO Ari Friedman. The complaint alleges that Madoff was the “principal investor” in Nehst film studio. Here is a video about Nehst which is described as one-stop shop for independent film making that interestingly doesn't mention anything about the Madoff connection:



This suit highlights another important, yet often overlooked, aspect of hedge fund operational due diligence – outside business interests. Often times during the operational due diligence process investors are so focused on reviewing the risks associated only with the hedge fund manager that they often fail to cast a wide enough net to look at exogenous risks, such as outside business activities.

Any such activities are often important for a number of reasons. By way of illustration, suppose the Chief Investment Officer or lead Portfolio Manager of a hedge fund invests in a music company run by one of his close relatives, let’s say in this case his son. Continuing our example, when asked this question the standard hedge fund reply is often, “Mr. So-and-so does not devote a material amount of time to any external endeavors.” Some hedge funds may even go further and state, “All such external outside business activities must be approved by the firm’s compliance department.”

While all that sounds great, such activities often involve more than simply writing a blank check to a relative. Often times, and with the best intentions, the check writers/Portfolio Manager will be involved if not for the sole reason that they want to offer guidance to their relative and perhaps, albeit less noble an objective, look after their investment.

There is nothing inherently wrong with such external activities or investments. That being said, during the operational due diligence process investors should take steps to learn about these outside activities and determine what risks or distractions they may pose to a hedge fund manager. Many investors will be surprised to learn what external activities a hedge fund manager may be invested in. Knowledge of such activities will allow investors to make more informed allocation decisions and provide another data point by which to manage operational risk.

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"It was all fake" - Madoff's Frank DiPascali Jr.'s Begins Talking...

Frank DiPascali Jr., Bernard Madoff’s former “chief lieutenant” and chief financial officer formally entered his guilty plea yesterday. Mr. DiPascali pled guilty to 10 felony counts of conspiracy, fraud, money laundering and perjury. DiPascali was hired by Madoff straight from Archbishop Molloy High School. He went onto work for Madoff for 33 years. Some notable quotes from Mr. DiPascali’s appearance include:


-"I ended up being loyal to a terrible, terrible fault."

-"I apologize to every victim of this catastrophe, and to my family and to the government. I'm very, very sorry."

-“It was all fake”

-“It was all fictitious. I knew no trades were happening.”

-“I knew I was participating in a fraudulent scheme, I knew everything I did was wrong, and it was criminal, and I did it knowingly and willfully. I accept complete responsibility."

Despite these statements and both the prosecution and defense arguing for bail, U.S. District Judge Richard Sullivan denied his $2.5 million bail.

In making this decision the Judge Sullivan cited a presumption that a convict should be denied bail in the absence of "clear and convincing" evidence that he isn't a flight risk.

Here is a video discussing Mr. DiPascali's appearance:


With Mr. DiPascali remaining behind bars perhaps it will continue his continued cooperation and the additional parties who participated in the Madoff fraud he is expected to name.

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Frank DiPascali Jr.'s Secret Fee Arrangments - Don't Ask Don't Tell

Frank DiPascali Jr. is scheduled to plead guilty today. Mr. DiPascali was reportedly Madoff’s top aide who sometimes referred to himself as the Chief Financial Officer of Madoff’s firm. While the specific charges to which he will be pleading guilty to are unclear (although it is likely to include multiple counts of fraud) it is suspected that his sentence will be lessened by the fact that he is reportedly cooperating with investigators. This cooperation is also supposed to assist investigators in strengthening their case against certain feeder firms. These supposed deals guaranteed certain feeder funds (and perhaps even funds of hedge funds) with higher rates of return, albeit fraudulent ones, than other Madoff clients were receiving.


I find these supposed deals quite interesting. While pre-Madoff it may have been unheard of to think that investors with the same terms might all be generally receiving the same performance returns for investment in the same hedge funds it is now becoming more apparent that all investors are not competing on a level playing field. Please note I said above, investors with the same terms. That’s just the problem, not everyone has the same terms for each hedge fund investment. While, today many hedge funds seem to be resisting the temptations they may have succumbed to a few years ago to enter into side letters with investors spelling out a myriad of different nuances such as capacity agreements, most favored nations clauses and the like, such agreements are still prevalent, if not only for legacy reasons.

Here is a video from Fox Business News about the planned guilty plea:


During the course of the operational due diligence process, it is often useful to inquire about not only the so-called standard fund terms listed in the fund’s offering documents and marketing materials but about what “special deals” other investors may have bartered. Sometimes a hedge fund may clam up and simply state they don’t disclose the details of other investors. This curt response should be viewed as a stumbling block, not a brick wall. When faced with such a dilemma, the role of the operational due diligence analyst should be to try to utilize their red flag social network, to locate other investors and gather some general market intelligence. This may not yield any results, but at least it’s worth asking. Additionally, if the same request is sent to the hedge fund for this information several times they may eventually crack. Uncovering such information is no guarantee that a hedge fund manager may give you the same preferential terms as it may have given to a day one or extremely large investor, but it will give you the peace of mind to know that you are making an informed decision.

In Mr. DiPascali’s case, any unwillingness to talk, even generally, about such deals should have certainly been a red flag. Bloomberg even reported that Madoff didn’t want any notes taken during meetings, no less discussing such sensitive issues about fee arrangements. Now it looks like those investors which were swindled by Madoff will have to learn about them via court documents rather than during the due diligence process.

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