Another Hedge Fund Fraud - Mark Bloom Over Concentrates

Last week, hedge fund manager and certified public accountant, Mark Bloom pleaded guilty in U.S. federal court to charges he faced in the U.S. Here is the original SEC complaint and the original CFTC complaint.


Mr. Bloom was accused of, among other things, stealing in excess of $20 million from clients and selling illegal tax shelters while working at BDO Seidman LLP.

Mr. Bloom was the manager of the North Hills Fund and admitted to committing securities and mail fraud. Bloomberg reported that the North Hills fund investment strategy was purportedly to be diversified among several hedge fund strategies however, Mr. Bloom apparently concentrated over 50% of his fund into something called the Philadelphia Alternative Asset Fund (a former commodity trading pool which appears to be in receivership). More interestingly, it has also been reported that Mr. Bloom waited more than a year to tell investors of this concentration in the Philadelphia fund.

What seems interesting to me is that this notion of investors waiting to be told certain pieces of information by a hedge fund. Due diligence in hedge funds, both investment and operational, is a two-way street. Long gone are the days of investors being able to sign away large sums of money and wait to hear how the manager allocates them. Any basic investment due diligence review of any organization which allocates capital (i.e. - the North Hills fund in this case) should include specifics of how this capital is being allocated. While investors may be subject to fraud, if a manager claims to have allocated capital to a certain entity investors should not be afraid to confirm this. While a full detailed confirmation may be overbearing, a spot check, particularly for large relationship is certainly not unheard of.

This concept is extended throughout the field of hedge fund operational due diligence as well. Investors should not take on face value that a hedge fund may or may not have a certain relationship with a particular underlying organization to which capital has been allocated or a particular service provider. Confirming such relationships often takes little more than a quick phone call or email and investors who have done so will sleep much better at night. Of course, more detailed due diligence reviews can and should be performed to determine the way in which certain service providers work with hedge funds, but at least confirming the relationship is a good starting point.

In the case of Mr. Bloom and North Hills it seems that if investors, or their advisers, may have done a little due diligence, a possible fraud may have been detected before they lost their money.

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