Another day, another fraud - Mr. Pippin's search for Ponzi fulfillment

Stuart J. Pippin of Kerrville, Texas, USA today was to be sentenced today for defrauding 35 investors of over $2 million dollars. Mr. Pippin, who is 60 years old and in a twist of irony, is named after a famous Broadway musical in which, “The Leading Player invites the audience to join them in a story about a boy prince searching for fulfillment.” Perhaps that’s what Mr. Pippin’s investors were looking for when they wrote checks without apparently performing any due diligence whatsoever.


Mr. supposedly told investors he would be running a commodity trading pool. The problem was that no trading actually occurred. Even worse, Mr. Pippin never even had bothered to set up a trading account for his CTA, Pippin Investments. In classic Ponzi fashion, Mr. Pippin even went so far as to manufacture false account statements and pay false dividends to some investors with other people’s money.

As if it was any consolation, at least the good Mr. Pippin wasn’t discriminating in selecting his victims which including his brother Fred, his former dentist brother-in-law Randall Voigt and other friends and relatives.

The CFTC caught on and sued Mr. Pippin who in 2006 was forced to pay $1.68 million in restitution and $106,500 fine. More recently the FBI came in and pursued a criminal indictment for wire fraud which is the crime he was being sentenced for today.

While this amount of money lost in this case may seem paltry when compared to the large scale sums of hundreds of millions of dollars in play in fraud cases such as Madoff, these cases highlight an important point. Often times it is the ultra-high net worth individual rather than the large institution that needs to be overly cautious in the hedge fund due diligence process.

This is particularly true for operational due diligence when an investor may have little to no concept of the additional types of operational risk they are signing up for when investing in a hedge fund manager. Perhaps a new good rule of thumb for hedge fund investing harkens back to an old classic: if a manager cannot explain, either operationally or from an investment perspective, what they are doing and it seems too good to be true – don’t invest. There are plenty of other people who will provide transparency in an effort to secure your investment.

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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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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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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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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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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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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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