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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"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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Has Rigor Mortis Set In On Your Due Diligence?

Corgentum Consulting has released a new piece entitled, "Has Rigor Mortis Set In On Your Due Diligence? - The dangers of inflexible operational risk methodologies."
This paper outlines the benefits of adding an element of flexibility to operational due diligence approaches and cautions against overly rigid operational risk methodologies.
The piece can be found in the Research section of the www.corgentum.com website or via direct link here.
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A Service Provider Switch - Raise the Yellow Flag

Forbes reported that the NIR group, which has recently faced accusations of faulty returns, has just switched firms to provide valuation services. It is reported that NIR previously worked with a third-party firm for valuation services called WTAS. Interestingly, the WTAS home page describes it services as, "We specialize in full service individual and business entity tax compliance and consulting. Our goal is to provide you with opportunities and solutions to help you attain your vision." No mention of valuation services here.


The interesting part of this story is that just a few days ago NIR's Corey Ribotsky told Forbes in a statement: "It is also notable that Mr. Mizel's complaint insinuates a claim that AJW's assets have been improperly valued, yet AJW utilized a third-party valuation service (WTAS)." Even more interesting, NIR is not naming who this new mystery third party valuation agent is.

A service provider switch, regardless of which function the service provider is performing for a hedge fund should always raise a yellow flag at a minimum, if not a full blown red flag. Obviously, certain service provider functions (i.e. - auditor, administrator etc.) are more sensitive than others (i.e. - information technology provider). When evaluating a service provider switch there are three critical points to consider:

• Motivation for making a switch


• Timing of the switch


• How long the switch takes

Motivation for making a switch

Some hedge funds are proactive, others are reactive. Switching a service provider in response to litigation or a specific large investor concern may not be in the best interest of the entire organization. Other reasons a hedge fund may switch a service provider may include fees, perceptions of a particular service provider etc.

Timing of the switch

Investors should consider whether a hedge fund is selecting the appropriate time to make a service provider switch. Monitoring not only the reasons but the timing of a hedge fund's decision to terminate one service provider in place of another is also important. As an extreme example, a hedge fund switching auditors before an audit would not be the best timing.


How long the switch takes

Certain service providers take longer to complete a switch than others. Legacy hedge fund administrators for example often require a number of months at a minimum to properly complete a switch. Often times, it takes a few months of running in parallel with two administrators to complete a switch. A hedge fund may announce a switch, but it may not be completed in actuality for quite a long time. Hedge funds can take several steps to facilitate this process before a switch is complete and investors should inquire as to whether a hedge fund has taken such steps.

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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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Preparing for the operational due diligence visit: A hedge fund's guide

As a result of the current economic environment and frauds such as the Madoff scandal, hedge fund investors have placed an increased importance on performing detailed operational due diligence reviews.

Corgentum has recently released a paper which outlines a few key steps a hedge fund can take to ensure that they are adequately prepared for an operational due diligence review. The paper can found in the Research section of the www.corgentum.com website, or via direct link here.

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Thinking outside the box - Seven innovative due diligence techniques

The nature of due diligence is changing. In this new environment, investors need to be innovative in their approach to due diligence.


Corgentum has released a paper which outlines several innovate hedge fund due diligence techniques. The paper can found in the Research section of the http://www.corgentum.com/index.html website, or via direct link here.

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Family Offices and public pensions stress the need for operational due diligence

The recent sentiments from two investment conferences from two very different and influential groups of investors are clear: due diligence and in particular operational due diligence, will be a key factor in designing and maintaining any hedge fund (or fund of hedge funds) investment program.

At the recent the Public Fund East Summit (which was primarily attended by public pension funds) and the Family Office & Private Wealth Management Forum in Newport, Rhode Island both groups shared similar concerns and opinions about due diligence.

From early on in the conference one message was: a lack of comprehensive due diligence was previously not being performed and that in the post- Madoff environment both family offices and public pension funds are particularly focused on operational risk in alternatives in general and hedge funds in particular.



Some key points being stressed by both groups on the operational due diligence front include:

• Using a hedge fund managers time in a productive way

*Importance of on-site visits (walking the floor and kicking the tires)

*Reference checks & background checks

*Need for independent operational oversight

*One can get to a point of diminishing returns but there are a lot of boxes that need to be checked

*Stress on trade flow, counterparty management

*The importance of document collection and review

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Third party administration: a hedge fund necessity?

Corgentum, a provider of comprehensive operational risk consulting services to the alternative investment industry, was feature in a recent Opalesque article entitled, "Has third party administration become a necessity?"

Jason Scharfman, Managing Partner of Corgentum, comments on the often complicated relationship between hedge funds and administrators saying, "98% of all hedge funds view administrators as a waste of money and a necessary evil that they are forced to use because of their investors."

The full article can be read on Opalesque.com (subscription required).

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Hedge Fund Manhunt! - With Love from Bulgaria...

Lest we think we were entering the hedge fund fraud doldrums of the summer, when news was released ofthe manhunt for Bulgarian national Julian Tzolov.
[caption id="" align="alignleft" width="214" caption="Mr. Tzolov in cuffs"][/caption]
Mr. Tzolov, an ex-credut suisse trader who was charged with fraud along with another Eric Butler in September 2008, was declared a fugitive last Friday by the U.S. government. By complete coincidence, this was exactly three weeks before Mr. Tzolov's trial for fraud was to begin.
He was under house arrest while pending trial for fraud related to subprime mortgages. He left his houseon May 9 and never returned.
Guess Mr. Tzolov didn't hear about the new extradition treaty between the US and Bulgaria.
The hedge fund industry loves a good manhunt - the most memorable being Sam Israel's dramatic stint on the lamb.
[caption id="" align="alignright" width="166" caption="Bayou's Sam Israel Captured"][/caption]
Let the hunt begin!
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The Depth Of The Dive: Gauging The Scope And Scale Of Due Diligence

Corgentum Managing Partner, Jason Scharfman, has written an article as a guest contributor for FINalternatives. The article, The Depth Of The Dive: Gauging The Scope And Scale Of Due Diligence .
The piece states in part, "in the post-Madoff environment it is no longer acceptable for a fund of hedge funds or any institution, which allocates to hedge funds, to simply claim that they have comprehensive investment and operational due diligence practices. These firms must be able to consistently demonstrate the depth and breadth of their due diligence." The full article can be read on the FINalternatives website here.
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Are Hedge Funds Becoming Regulated Banks?

It seems like the Treasury’s Tim Geitner is getting behind the Federal Reserve to promote uniformity in derivatives. Specifically, in February several banking industry major players (Goldman Sachs Group Inc., JPMorgan Chase & Co., Credit Suisse Group AG and Barclays Plc) voiced their opinion to the Treasury arguing that the banking industry should require that traditional bank regulatory practices with regards to derivatives. It seems Geitner is trying to get his ducks in a row after some initial stumbling regarding the specifics of his plans to deal with toxis assets.

Banks want to level the playing field by requiring regular corporations, energy companies and hedge funds to face the same capital adequacy requirements and margin levels that bank do with regards to OTC derivatives.

Putting banks and hedge funds on the same playing field makes sense to promote transparency in derivatives. While there is some good in this, this type of move by the Fed is fraught with peril for hedge funds. This can represents a dangerous precedent and a slippery slope of hedge funds to be regulated alongside of banks in regards to other issues such as leverage requirements, position disclosures, overall risk budgeting and operational information disclosure.

These regulations focus on establishing the Fed as a systemic risk regulator. Systemic risk is extremely important but it is not the entire regulatory equation. This focus on systemic risk is important but once again it is of growing concern that the government is being steered by powerful lobby groups to ignore the continued threat of operational risk (aka: unsystemic risk) including fraud. Perhaps the hedge fund industry should take a page from the bank’s playbook and be more vocal in Washington with actionable recommendations, instead of the general pat on the back fodder that has been stated by most hedge fund lobby groups, to further craft future regulation before the hedge industry becomes regulated away.

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Madoff-Proofing Your Hedge Fund With Corgentum

APRIL 14, 2009

Corgentum Consulting and Managing Director Jason Scharfman were profiled in a recent piece on HedgeFund.Net. The artilce, which is entitled, "A New Service-Provider Pitch: Is Your Hedge Madoff-Proff?", highlights an increased trend of hedge fund investors seeking guidance from operational due diligence experts such as Corgentum to avoid fraud and Ponzi schemes such as the Madoff crisis.

The article reads in part, "While automation and outsourcing were mandated to eliminate mutual fund operational risk, the risk of outright fraud in the hedge fund industry is now fueling service provider growth. Scharfman theorized the average hedge fund [investor] might not be able to undertake due diligence on its own, turning businesses like Corgentum a necessity rather than a luxury."

The full article can be read on HedgeFund.Net here.

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If you can't beat 'em: Folsom Ponzi Victim's Join Bailout

APRIL 4, 2009

A Folsom, California based hedge fund manager named Anthony Vassallo is alleged to perpetrated a Ponzi scheme on approximately 150 investors.

Unfortunately, in the current environment of Ponzimonium news of another hedge fund fraud is nothing new.
After all, the 29-year old Vasallo (along with his 66 year old partner Kenneth Kenitzer) was only promising a modest 36% return with absolutely no risk. Certainly reasonable....

Last month, Mr. Vassallo was charged with $40 million in fraud, money laundering and securities law violations according to FINalternatives. Vassallo met the majority of the investors in his Folsom, California based Vassallo Equity Investment Management and Trading via his affiliation with the Mormon church. Vasallo allegedly put money into high-risk ventures and luxuries including $103,000 Lexus for his wife. The SEC has since frozen $1.2 million of Vasallo's assets. The original complaint can be seen here.

Vassallo's story has two interesting twists:

1) Mr. Vasallo's former bodyguard was also arrested and accused of trying to shake down investors for money -

Question: Why does a hedge fund manager need a bodyguard and who paid for it - the same investors he ripped off?

2) Three former Vasallo investors bailed him out -
The three former investors were:
a) Sheila Watford of El Dorado Hills, California: the mother-in-law of Vasallo's sister (Alicia Watford)
b) Dr. Roy Harris
c) Cynthia Harris

Ms. Watford, the Harris' and Mr. Vassallo's father (whose is also named Anthony) pledged the equity in their homes to assist with the younger Vasallo's release.

From a purely due diligence perspective, I will go out on a limb and say that if a hedge fund manager has a bodyguard - do not invest. I would also hazard an educated guess that pledging all this property is not a sound investment, that is of course Mr. Vassallo can offer the same risk-free guarantee he was for his hedge fund....

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Ex-Morgan Exec Focused on Due Diligence: Corgentum Consulting

April 3, 2009

From HedgeFund.Net:

A onetime Morgan Stanley higher-up opened a hedge fund consulting firm on Thursday.

Jason Scharfman characterized his Corgentum Consulting as a provider of operational due diligence, noting the need for due diligence has been brought to the fore via the Bernard Madoff scandal.

Scharfman went to state that due diligence is turning into a third-party service, and less of an in-house function. The firm has contracted a network of people to vet a hedge fund, Scharfman said.

Scharfman authored a book on hedge fund operational due diligence in 2008. At Morgan Stanley, he oversaw due diligence for a $13 billion hedge fund platform.

Corgentum is based in Jersey City, N.J.

The full article can be read here.

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Corgentum Launches Consultancy to Provide Comprehensive Operational Due Diligence for Investors and Hedge Funds

APRIL 2, 2009

Jason Scharfman, author of Hedge Fund Operational Due Diligence:Understanding the Risks, John Wiley & Sons, Inc. 2008, today announced the launch of Corgentum Consulting, LLC, a full service hedge fund operational due diligence consulting firm. Corgentum's focus is on working with investors -- including fund of hedge funds, pensions, family offices and high-net worth individuals -- to perform comprehensive operational due diligence on hedge funds. In addition, Corgentum will work directly with hedge funds to strengthen their operational risk management processes.

Prior to launching Corgentum, Mr. Scharfman was a senior member of a team that oversaw all of Morgan Stanley's hedge fund operational due diligence efforts and which allocated in excess of $13 billion to a firm-wide platform of over 300 hedge fund managers, across multiple investment strategies. He also oversaw the operational due diligence function for a $6 billion alternative investment allocation group called Graystone Research at Morgan Stanley.

"Investors today are focused on operational risk because of a series of high profile hedge fund failures, the majority of which have poor operational planning at their core," said Jason Scharfman, Managing Partner. "Recent market events have demonstrated the need for more comprehensive and frequent investor due diligence on a hedge fund's operational risks. Corgentum will help investors to meet the challenges of this new demand." Corgentum's mission is to ensure that investors have the knowledge and best possible tools to assess operational risk management. To this end, the firm utilizes proven proprietary methodologies and original operational risk research to diagnose and mitigate investors' operational risk exposures and improve upon the overall efficiency and effectiveness of their operational due diligence process.

The firm's unique approach leverages off of Corgentum's Resource Network, a team of senior industry practitioners with expertise in law, compliance, hedge fund auditing, fraud investigation and information technology. Corgentum will also work with hedge funds to prepare for operational due diligence reviews, perform operational efficiency analyses to reduce Operational Drag(SM), and to recommend long-term sustainable operational risk solutions.

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Corgentum Managing Partner, Jason Scharfman, Authors Timely Book 'Hedge Fund Operational Due Diligence: Understanding The Risks'

--Comprehensive Treatise is the 'Bible' for Assessing Essential Non-Investment Risks and Mandatory Reading for Investors and Hedge Funds

APRIL 2, 2009

Jason Scharfman, Managing Partner of operational due diligence consultancy Corgentum and former senior team member at Morgan Stanley's Graystone Research, has recently authored Hedge Fund Operational Due Diligence: Understanding the Risks, John Wiley & Sons, Inc. 300pp.

Corgentum has been thrust into the spotlight because of recent market turmoil caused by the financial crisis and the resulting impact on hedge funds and those who invest in them. "Operational risk--the loss resulting from inadequate or failed internal processes--is clearly in the forefront, most notably in the Madoff scandal," said Mr. Scharfman. "I wanted to write the book to help investors and hedge funds lessen the chance that anything like that should ever happen to them."

In the book's ten chapters, Scharfman identifies the operational risks inherent in running a hedge fund and provides a detailed guide to an operational due diligence program to diagnose, analyze and mitigate potential risks. He also examines modeling techniques for operational risk and discusses how to consider asset allocation based upon this important factor.

Scharfman defines a four-pronged approach necessary to conduct an effective hedge fund operational risk analysis which takes into account both internal and external risk factors. He also expounds upon five core themes in an operational risk analysis by which investors can significantly reduce any exposure they may have to fraud such as Ponzi schemes, and provides in-depth examples of situations in which operational risk should have been uncovered.

In later chapters Scharfman reviews the skills investors need to evaluate the background and reputation of a hedge fund, effective analysis techniques, and the necessity of conducting ongoing reviews. He also portrays possible scenarios presented to investors who conduct operational due diligence reviews.

The book's last chapter discusses the various quantitative approaches to modeling operational risk and provides a detailed review of the advantages and disadvantages of utilizing these models. Scharfman concludes by writing on the various trends facing the hedge fund industry including the impact of FAS157 and further regulation.

About Corgentum, LLC

Corgentum Consulting, LLC is a full service hedge fund operational due diligence consulting firm whose focus is on working with investors, including fund of hedge funds, pensions, family offices and high-net worth individuals, to perform comprehensive operational due diligence on hedge funds. Corgentum utilizes proven proprietary methodologies and original operational risk research to diagnose and mitigate operational risk exposures at hedge funds as well as improve upon the overall efficiency and effectiveness of the operational due diligence process. The firm's unique approach leverages off of Corgentum's Resource Network, a team of senior industry practitioners with expertise in law, compliance, hedge fund auditing, and fraud investigation and information technology. Corgentum will also work with hedge funds to prepare for operational due diligence reviews, perform operational efficiency analyses to reduce Operational Drag(SM), to recommend long-term sustainable operational risk solutions. Corgentum is headquartered at 20 Fleet St. in Jersey City, New Jersey, 07306. Phone 201-360-2430. The Web site is www.corgentum.com.

About Jason Scharfman

Jason A. Scharfman holds the position of Managing Partner of Corgentum. He is recognized as one of the world's leading experts in the field of hedge fund operational due diligence. Before he founded Corgentum, Scharfman oversaw the operational due diligence function for a $6 billion alternative investment allocation group called Graystone Research at Morgan Stanley. While at Morgan Stanley, Scharfman was also a senior member of a team that oversaw all of Morgan Stanley's hedge fund operational due diligence efforts allocating in excess of $13 billion to a firm-wide platform of over 300 hedge fund managers across multiple investment strategies. Prior to joining Morgan Stanley, he held positions that focused primarily on due diligence and risk management within the alternative investment sector at Lazard Asset Management, SPARX Investments and Research and Thomson Financial.

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Another day, another Ponzi - Kramer's $40 Million Forex Fraud

MARCH 26, 2009

The U.S. Commodity Futures and Trading Commission ("CFTC") has charged a foreign exchange trading firm (Barki, LLC) and its principle Bruce Kramer with running a Ponzi scheme. The charges include:

*Solicitation of at least $40 million to trade leveraged foreign currency contracts

*Misappropriating of at least $30 million to pay false profits and for personal expenses

The court filing can be read here.

The CFTC said the beginning in June 2004 and up until last month, Mr. Kramer solicited approximately $40 million from 79 investors (mostly from the Charlotte, NC area) to trade leveraged foreign currency contracts with the promise of returning at least 3% to 4% per month. The charges further allege that Mr. Kramer sustained trading losses of at least $10 million and used $20 million to fuel his Ponzi scheme payouts.

Some of the personal expenses used by Kramer included the purchase of a million dollar 48-acre horse farm in Midland, North Carolina, a race horse, a Maserati, a 6,000 square foot home, other luxury cars, artwork and on throwing extravagant parties. Only $575,000 remains.

Mr. Kramer committed suicide on February 25, 2009 and his fraud only came to light after his death. This seems quite similar to the way the Madoff scandal played out - only instead of killing himself Madoff turned himself in. The Kramer situation is also similar to the Madoff scandal in that recovery of assets are being sought from Mr. Kramer's wife (Rhonda).

Rhonda Kramer's attorney, James Wyatt, said Ms. Kramer has cooperated fully with authorities and had nothing to do with the alleged fraud.

In the same way that questions were raised as to how the SEC failed to detect Madoff's fraud during prior audits, similar questions can be raised over the CFTC's oversight of situations such as Kramer. In light of these regulatory shortcomings across multiple agencies, the new hedge fund regulatory structure should include liability and responsibility requirements not just for hedge funds and investors but for regulatory agencies as well.

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