The importance of independent valuation for private investments

Forbes is reporting today that the NIR Group (whose website states Experience, Integrity, Performance) is being accused of running an investment scam. The details emerged in a lawsuit filed by investor Steven Mizel against NIR which is run by Corey Ribotsky out of Roslyn, NY. This is the second major alleged hedge fund fraud to come out of Long Island. The previous one was Nicholas Cosmo's Agape World from Hauppauge, NY.


A lawsuit filed against Mr. Ribotsky (a graduate of Brooklyn Law School) and NIR AJW Qualified Partners claims that they, "appear to have provided investors with valuations of the Fund's securities which are wholly fanciful." In March this year it was reported that NIR settled a lawsuit from Gerald and Michael Tucci and Plum Beach Partners related to a delayed payout of a redemption).

NIR’s primary investment strategy was to participate in PIPEs (private investments in public equity). Forbes also reported that in those deals Ribotsky invested cash in thinly traded public companies, in return for securities convertible into discounted common shares of the company. The result of a Ribotsky investment has often been that the company's stock plummets in value, but Ribotsky has continued to post excellent returns. In a note to investors last year, Ribotsky said one of his main funds was up 8.27% in the first nine months of 2008 and that NIR Group funds had experienced "little volatility and have had positive returns in 114 out of 117 months."

Here is a link to an interview Mr. Ribotsky conducted with Bloomberg (with an odd disclaimer):

Aside from the numerous redemption and gate issues surrounding this case, NIR’s situation highlights the importance of both on-going due diligence and independent valuation. Continuous positive performance in light of a market which would generally cause a decline in a particular hedge fund strategy is certainly a red flag. Risk management and analysis not only of performance data but portfolio holdings to monitor such things as style drift can often detect when a hedge fund manager is straying from their original investment profile or perhaps even inflating (or dampening) performance.



Such situations often revolve around valuation issues. When there is a lack of independent oversight in the valuation process the hedge fund manager often has too much control on striking portfolio marks. Exacerbating the situation, is that investors often do not have the level of transparency necessary to gauge whether such valuations are inflated. An independent administrator can help to mitigate such risks, but only if they are valuing the entire portfolio and not performing a NAV light rubber stamp review.

Ultimately, the investor has responsibility for gauging the independence and accuracy of valuations of private investments for which the hedge fund manager may determine the mark. Detailed initial and on-going operational due diligence can facilitate this process. Often red flags travel in packs and investors performing frequent operational due diligence reviews increase the odds of spotting yellow flags before they turn red. This allows investors to redeem before a gate is invoked or they end up in court trying to get their money back.

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