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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Cartoon Gallery: Madoff, Hedge Funds and Ponzi Schemes

There have been a number of cartoons put out involving Bernard Madoff, Ponzi schemes and hedge funds lately. We have put them all together in a new cartoon archive. Here are some of the notable ones:

For a more complete list of Madoff and Ponzi cartoons please visit our cartoon gallery.

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Ten Questions Every Investor Should Ask Their Hedge Fund Manager: Operational Risk

In the post-Madoff environment many hedge fund investors, both institutional and ultra-high net worth, are taking an increased responsibility for overseeing their own due diligence. Hedge funds should be addressing operational risk across a multitude of different operational risk factors.
Corgentum Consulting has released a paper which outlines ten questions every hedge fund should be able to not only answer, but explain why they made certain operational choices which led to these answers. The full paper entitled, Ten Questions Every Investor Should Ask Their Hedge Fund Manager: Operational Risk, can be read on the Research section of www.corgentum.com or via direct link here.

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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.

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Investing in hedge funds just got harder: Corgentum

Corgentum Managing Partner, Jason Scharfman recently authoried a guest article for Pensions and Investments where he discusses the many challenges facing pensions seeking to perform operational due diligence on hedge funds.

The article, which is featured in the publication's Regulation & Legislation section, is entitled, "Investing in hedge funds just got harder" . In the piece, Mr. Scharfman writes, "In the post-Madoff environment, sponsors of pension and other funds face a number of complex challenges with respect to performing due diligence on hedge funds..with all of these potential pitfalls, what are pension funds to do? There are a number of basic steps that can be taken to ensure a pension fund is adequately insulated from bearing unnecessary operational risks when investing in hedge funds through separately managed accounts structures."

Mr. Scharfman goes onto highlight the benefits and pitfalls of separately managed accounts including, the fact that such structures do not completely remove operational risk. The full article can be read on the Pension & Investments website .

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