The Importance of Cash Controls: Chief Operating Officer Charged With Fraud

In what is an interesting twist on the continued stream of frauds and Ponzi schemes, it seems that rather than an alleged fraud being perpetrated by an investment professional an alleged fraud was undertaken by a hedge fund's chief operating officer.



It is being reported that Manhattan District Attorney Robert Morgenthau's office has charged the chief operating officer of 3V Capital Management LLC, a Mark A. Focht of Suffern, NY, with stealing $250,000. Allegedly, Mr. Focht utilized a forged authorization form in April 2007 to transfer money from a bank account belonging to Pierce Diversified Strategy Master Fund. It has also been reported that Mr. Focht then utilized the money for personal investment. The specific charges include, Grand Larceny in the Second Degree, Forgery in the Second Degree, Falsifying Business Records in the First Degree.

This case highlights the importance of cash control and transfer procedures within hedge funds, particularly in an operational risk context. Fraudulent cash movements can be extremely dangerous to the health and well being of hedge funds and their investors.

Here are some operational best practices which would likely have prevented such a scenario from occurring:

• Multiple signatories required to transfer cash - this takes the power away from one single person being able to potentially steal cash

• There should be limits on the amount of cash that can be transferred at any one time

• Cash should only be able to transferred to certain parties (i.e. - approved vendors etc.)

• Certain types of cash transfers should not be allowed to be originated by the fund (like personal payments to the COO)

But its not surprising that such an alleged event occurred if the Chief Operating Officer, the person who is generally responsible for enforcing such cash transfer policies, was the one allegedly orchestrating the fraud.

Click here to discuss this post.

Permalink.