Category Archives: Press Releases

Press Release: Hedge Fund White Paper Indicates Growth in Family Office Investments

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The press release below discusses a report on investments in hedge funds by single family offices.  The report finds that single family offices are willing to invest in hedge funds and also lays out some of the major concerns about hedge fund investing.  The central issue for single family offices is transparency in the underlying hedge fund.  This indicates that hedge funds are likely to see a rise in the request for due diligence on the fund and management company.

SINGLE FAMILY OFFICES BOLSTER ALTERNATIVE INVESTMENT SECTOR

New Survey from CPA Firm Rothstein Kass Finds Nearly 75% of Single Family Offices Invest in Hedge Funds
Almost 60% Plan to Increase Allocations to Alternative Investments in the Next 12 Months

Roseland, NJ – October 14, 2008 – The alternative investment sector will continue to benefit from increasing asset allocations from Single Family Offices (SFOs), according to “On the Rise,” the latest research report sponsored by CPA firm Rothstein Kass. The white paper, co-sponsored by G Capital highlights the growing relationship between the alternative investment community and SFOs, entities established to serve the needs of individual high-net-worth families. “On the Rise” was co-authored by Russ Alan Prince, a leading authority and counselor on private wealth, and Hannah Shaw Grove, a widely recognized expert on behaviors and finances of high-net-worth individuals. Among notable findings:

  • Almost three-quarters of SFOs currently invest in hedge funds, with nearly 60% of this group planning additional allocations in the coming year
  • SFOs with hedge fund allocations hold an average of 3.2 hedge funds or fund-of funds in the portfolio
  • Nearly 70% of SFOs with hedge fund allocations report that these investments have met or exceeded performance expectations over the past 12 months
  • Over 80% of respondents reported 24 month performance was ‘as expected’ or better
  • More than 70% of SFOs with hedge fund allocations report “lack of transparency” as a key concern. Other concerns sited include lock-up periods (60%), style drift (55%) and fraud (37%)

“Single Family Offices are trusted and highly valued by high-net-worth families they serve because of the individualized attention and customized solutions they provide to holistic wealth management. However, our research suggests that persistent market volatility has placed added importance on the asset allocation function. As SFOs consider an ever-expanding range of investment options, they are increasingly turning to the alternative investment sector and its proven ability to deliver superior returns independent of underlying market conditions,” said Rick Flynn, a Principal in Rothstein Kass’ Family Office Group. “Moreover, our findings suggest that performance continues to drive alternative investment allocations. Nearly 70% of those polled said that performance over the last 12 months has been ‘as expected’ or ‘better than expected.’”

The “On the Rise” survey was based on telephone interviews with 146 SFOs and was concluded in August 2008. Investable assets ranged from $312.2 million to $1.3 billion, with a median of roughly $500 million. Just under 60% of the firms polled are based in the Americas, with the balance operating in Europe (21%) and Asia (20%). Additional results were generated from only those entities with reported allocations to the alternative investment sector. For the purposes of this research, SFOs are defined as “created exclusively for or by a single exceptionally wealthy family to provide control, negotiating leverage, and a defense for family members.”

“’On the Rise’ details the latest evidence of the growing interrelation between SFOs and the alternative investment community. While high-net-worth individuals generally recognize advantages of hedge fund investing, they are frequently confounded by the growing roster of products and services available. SFOs have had great success in bridging this knowledge gap,” said Peter Gerhard, Chief Executive Officer of G Capital Management LLC. “Still, lingering challenges face this blossoming relationship. Both transparency (73%) and style drift (55%) rated as key concerns among respondents. It seems that although high-net-worth families are comfortable involving SFOs in the asset allocation process, they themselves retain a level of involvement. Investors need to feel confident that the funds that have been selected are not only good choices in the moment, but reflect overarching and longer-term investment objectives.”

About Rothstein Kass:

Rothstein Kass is a premier financial services firm, recognized nationally as a top service provider to the alternative investment industry. The Firm provides audit, tax, accounting and consulting services to hedge funds, fund of funds, private equity funds, brokerdealers and registered investment advisors. Rothstein Kass is recognized nationally as a top service provider to the industry through its Financial Services Group. The Financial Services Group consults on a wide range of organization, operational and regulatory issues. The Firm also advises on fund structure, both inside and outside the US, compliance and financial reporting, as well as tax issues from a federal, state, local and international compliance perspective. Rothstein Kass has offices in New York, New Jersey, California, Colorado, Texas and the Cayman Islands. www.rkco.com

The Rothstein Kass Family Office Group offers a wide range of financial, wealth planning and lifestyle management services to family offices and high-net-worth individuals, including family members, business owners and members of the financial services, entertainment and sports industries. Composed of seasoned financial professionals and certified public accountants, the Rothstein Kass Family Office Group applies proven expertise with the utmost discretion and attention.

About G Capital Management LLC

By leveraging state-of-the-art capital markets expertise and select advanced planning concepts, G Capital has raised the bar for the next generation of family offices. In addition to the highly effective and sophisticated solutions its family members require, the organization’s structure and capabilities create an efficient, scalable and profitable operating environment that can be readily adapted to capture new businesses opportunities.

About the Authors:

Russ Alan Prince is the world’s leading authority on private wealth, the author of 40 books on the topic, and a highly-sought counselor to families with significant global resources, and their advisors. He is co-author of Fortune’s Fortress: A Primer on Wealth Preservation for Hedge Fund Professionals.
www.RussAlanPrince.com

Hannah Shaw Grove is a widely recognized author, columnist, speaker and an expert on the mindset, behaviors, concerns, preferences and finances of high-net-worth individuals. She is co-author of Inside the Family Office: Managing the Fortunes of the Exceptionally Wealthy.
www.HSGrove.com

SEC ends CSE program for investment banks

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Last week Goldman and Merril announced that they were going to convert to bank holding companies.  A good article on  the conversion, including questions and answers, can be found here. An interesting consequence of the change is that the SEC’s Consolidated Supervised Entities (CSE) program is no longer necessary.

The CSE was a unique program where the SEC would supervise the very large investment banking firms from the inside. While the program was voluntary, it was designed to identify potential issues in the devolpmental stage.  However, because the SEC really had no authority to recieve certain reports from the investment banks, the program could only do so much and as we’ve seen, the program failed to protect against the meltdown of both Bear and Lehman.

Chairman Cox will definately take some heat for what the CSE program did not accomplish (see this article), however, it is not presently clear whether he deserves the blame.  As his statement below indicates, the SEC had no explicit governmental oversignt of the major investment banks which would allow them to really act as a regulator for these entities.   What is scary about this is that, if congress listens to Cox, there may be a rush toward over-regulation – Cox is already calling for the regulation of the currently unregulated CDS market. If there is more regulation in the future it is unclear what governmental agency will be in charge of such regulation as the SEC is already overburdened and underfunded.

The statement by Cox below can be found here.


Chairman Cox Announces End of Consolidated Supervised Entities Program
FOR IMMEDIATE RELEASE
2008-230

Washington, D.C., Sept. 26, 2008 — Securities and Exchange Commission Chairman Christopher Cox today announced a decision by the Division of Trading and Markets to end the Consolidated Supervised Entities (CSE) program, created in 2004 as a way for global investment bank conglomerates that lack a supervisor under law to voluntarily submit to regulation. Chairman Cox also described the agency’s plans for enhancing SEC oversight of the broker-dealer subsidiaries of bank holding companies regulated by the Federal Reserve, based on the recent Memorandum of Understanding (MOU) between the SEC and the Fed.

Chairman Cox made the following statement:

The last six months have made it abundantly clear that voluntary regulation does not work. When Congress passed the Gramm-Leach-Bliley Act, it created a significant regulatory gap by failing to give to the SEC or any agency the authority to regulate large investment bank holding companies, like Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns.

Because of the lack of explicit statutory authority for the Commission to require these investment bank holding companies to report their capital, maintain liquidity, or submit to leverage requirements, the Commission in 2004 created a voluntary program, the Consolidated Supervised Entities program, in an effort to fill this regulatory gap.

As I have reported to the Congress multiple times in recent months, the CSE program was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate of the CSE program, and weakened its effectiveness.

The Inspector General of the SEC today released a report on the CSE program’s supervision of Bear Stearns, and that report validates and echoes the concerns I have expressed to Congress. The report’s major findings are ultimately derivative of the lack of specific legal authority for the SEC or any other agency to act as the regulator of these large investment bank holding companies.

With each of the major investment banks that had been part of the CSE program being reconstituted within a bank holding company, they will all be subject to statutory supervision by the Federal Reserve. Under the Bank Holding Company Act, the Federal Reserve has robust statutory authority to impose and enforce supervisory requirements on those entities. Thus, there is not currently a regulatory gap in this area.

The CSE program within the Division of Trading and Markets will now be ending.

Under the Memorandum of Understanding between the SEC and the Federal Reserve that was executed in July of this year, we will continue to work closely with the Fed, but focused even more clearly on our statutory obligation to regulate the broker-dealer subsidiaries of the banking conglomerates. The information from the bank holding company level that the SEC will continue to receive under the MOU will strengthen our ability to protect the customers of the broker-dealers and the integrity of the broker-dealer firms.

The Inspector General’s office also made 26 specific recommendations to improve the CSE program, which are comprehensive and worthy of support. Although the CSE program is ending, we will look closely at the applicability of those recommendations to other areas of the Commission’s work and move to aggressively implement them.

As we learned from the CSE experience, it is critical that Congress ensure there are no similar major gaps in our regulatory framework. Unfortunately, as I reported to Congress this week, a massive hole remains: the approximately $60 trillion credit default swap (CDS) market, which is regulated by no agency of government. Neither the SEC nor any regulator has authority even to require minimum disclosure. I urge Congress to take swift action to address this.

Finally, I would like to commend the extraordinary efforts of the SEC’s diligent staff, who for so many months have been working around the clock in the current market turmoil. Their dedication and commitment in behalf of investors and the American people are unequaled.

****

Please contact us if you have any questions or would like to start a hedge fund.  Other related hedge fund law articles include:

SEC releases statement on protection of customer assets

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One of the major questions right now from both hedge fund investors and hedge fund managers is how safe are their assets.  I will be writing an article detailing the answer to this question over the next couple of days.

In the interim, the SEC has released a statement and so has FINRA.  I have posted a brief portion of the FINRA statement which can be found here.  I have also posted the entire SEC statement which can be found here.

FINRA Statement

In virtually all cases, when a brokerage firm ceases to operate, customer assets are safe and typically are transferred in an orderly fashion to another registered brokerage firm. Multiple layers of protection safeguard investor assets. For example, registered brokerage firms must keep their customers’ securities and cash segregated from their own so that, even if a firm fails, its customers’ assets will be safe. Brokerage firms are also required to meet minimum net capital requirements to reduce the likelihood of insolvency, and to be members of the Securities Investor Protection Corp (SIPC), which insures customer securities accounts up to $500,000. SIPC is used in those rare cases of firm failure where customer assets are missing because of theft or fraud. In other words, SIPC is the last course of action in the unlikely event that the other customer protections have failed.

SEC Statement

Statement of SEC Division of Trading and Markets Regarding the Protection of Customer Assets
FOR IMMEDIATE RELEASE
2008-216

Washington, D.C., Sept. 20, 2008 — The Securities and Exchange Commission’s Division of Trading and Markets today issued the following statement:

In recent days, Securities and Exchange Commission staff have received a number of questions from investors regarding the protection of their assets held by broker-dealers.

Customers of U.S. registered broker-dealers benefit from the extensive protections provided by the Commission rules, including the Customer Protection Rule, as well as protection by the Securities Investor Protection Corporation (SIPC). The Commission’s Customer Protection Rule requires a broker-dealer to segregate customer cash and securities from a broker-dealer’s own proprietary assets. More specifically, the rule requires that a broker-dealer keep customer cash and fully paid securities free of lien and in a safe location.

Any person who has deposited funds or securities in a securities account at a broker-dealer is a “customer” under the Customer Protection Rule. Securities customers of U.S. broker-dealers are not permitted to opt out of the protections afforded by the Customer Protection Rule. There is a technical exception for affiliates of the broker-dealer, but this exception would not affect the protections generally extended to a customer’s funds and securities deposited at the broker-dealer.

In addition to the Commission’s rules that protect securities customers, SIPC also protects securities customers up to $500,000 per customer, including a maximum of $100,000 for cash claims. To determine if your broker-dealer is a member of SIPC, or to learn more about the SIPC protections, you can check the SIPC website at www.sipc.org.

Survey of hedge fund administrators

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As a hedge fund attorney I am often asked for referrals to hedge fund administrators. There are many very good administration firms that I have worked with in the past – for both small and large clients. The administration firms I would recommend for a larger client are not necessarily the same firms I would recommend for smaller clients. For either small or large hedge fund clients I will usually give the client two or three different administrators to talk with. Ultimately a start up hedge fund manager must be comfortable with the contact person at his administration firm and must also be comfortable with the fees that the administrators will charge – after the hedge fund launch most hedge fund managers will be communicating more with the administrator than the lawyer so it is important that the manager has a good relationship with the administrator.

Below is a press release which details a recent survey of hedge fund administrators. The survey comes from the Global Custodian website and can be found here.

Uncertain Markets Fail To Dent Appreciation of Hedge Fund Administrators

LONDON (2 September 2008) – Despite industry-wide anxiety about market conditions, more hedge fund administrators than ever took part in the annual Global Custodian survey of client perceptions of service quality and value. Nearly 1,200 responses were received from clients of 56 hedge fund administrators.

“Despite the consolidation which has taken place in the industry, and difficult investment and financing markets, we still attracted responses for well over 50 hedge fund administrators this year,” says Dominic Hobson, editor in chief of Global Custodian. “This is only one measure among many of the buoyant conditions in the alternative investment administration industry. Our survey also picked up signs of capacity constraints, limits on client size, high rates of staff turnover and expansion into new territories. These are all problems of success. The industry is clearly in a rude state of health.”

Despite the challenges they face, the average scores awarded by clients to their administrators are also up across the board, fuelled by a response rate that surged 25% this year.

“However, the headline scores are not the sole measure of success in the survey,” adds Dominic Hobson. “There are also large differences between providers in terms of the number, size and types of client they seek to service, which is why we divided the providers into separate peer groups this year.” The new peer group rating category facilitates comparisons between providers of similar size and structure.

In the first peer group, consisting of the largest and most international administrators, Citco Fund Services continues to top the annual survey. On the biggest turnout of any provider, Citco raised its scores in all but one question, further cementing the company’s long-held domination of the top spot in the survey.

“This survey is recognized as the most important, comprehensive annual survey of our industry,” says William Keunan, Citco’s director, fund services. “We are delighted with the top rated accolade, in particular as it comes directly from so many of our clients.”

In the same peer group, scores also rose significantly at Citi, Fortis Prime Fund Solutions and PNC Global Investment Servicing.

Peer Group 1 – Overall Scores

Provider (Total Scores)

  1. Citco Fund Services 6.36
  2. Goldman Sachs Administrative Services 6.23
  3. IFS, A State Street Company 6.11
  4. PNC Global Investment Servicing 6.03
  5. HSBC Securities Services 6.03
  6. CACEIS 5.96
  7. Citi 5.76
  8. UBS GAM -Fund Services 5.75
  9. GlobeOp Financial Services 5.65
  10. Fortis Prime Fund Solutions 5.51
  11. JPMorgan Hedge Fund Services 5.14

Peer Group Overall 5.93

Administrators were divided into peer groups based on similar size and structure to facilitate comparisons among administrators

In the second peer group, which consists of smaller and often new providers with a limited international presence, scores rose significantly for AIS Fund Administration, CIBC Bank and Trust Company, Equity Fund Services and Fulcrum Fund Services, which recently agreed a merger with Butterfield Fund Services.

But it was Kaufman Rossin Fund Services that dominated the second peer group, with an impressive debut in the 13th consecutive annual survey. The company grew out of a Florida accounting firm, allowing it to grow without taking in third party investors or taking on acquisitions, and it is now larger than the average small provider, with more than $18 billion in AuA.

“These survey results clearly reflect that our strategy of controlled growth, hiring ahead of the curve and leveraging technology enables us to exceed the expectations of our clients and the industry,” says Jorge DeCardenas, a co-founding director at Kaufman Rossin.

“Our outstanding service professionals and increasing institutional client base means that KRFS is very well positioned to continue this growth while maintaining our reputation for service,” adds Keith Sharkey, a co-founding director at Kaufman Rossin.

In addition to Kaufman Rossin, several other firms made their debut in the survey as rated providers for the first time this year, including the publicly listed GlobeOp Financial Services and Quintillion (Ireland).

Peer Group 2 – Overall Scores

Provider (Total Scores)

  1. Kaufman Rossin Fund Services 6.59
  2. ATC Fund Services 6.59
  3. AIS Fund Administration 6.49
  4. Pinnacle Fund Administration LLC 6.44
  5. Fulcrum Fund Services 6.42
  6. Quintillion [Ireland] 6.31
  7. Equity Fund Services 6.28
  8. Kingsway Taitz 6.25
  9. Trinity Fund Administration Ltd 6.23
  10. CIBC Bank and Trust Company Ltd 6.08
  11. LaCrosse Global Fund Services 5.98
  12. Circle Partners 5.95
  13. OpHedge Investment Services 5.82
  14. Daiwa Securities Global Asset Services 5.64
  15. Spectrum Global Fund Administration 5.43

Peer Group Overall 6.15

Administrators were divided into peer groups based on similar size and structure to facilitate comparisons among administrators

Even as several firms featured in the survey in the past have consolidated, the number of rated providers rose from 20 to 26. Of the 56 providers for which responses were received, 39 received enough responses to be either rated or mentioned in the survey.

Responses increased 25% over last year to a total of 1,160 that could be fully authenticated.

In recent years, the custodian banks that have acquired hedge fund administrators have sought to adjust client lists in favor of larger and more profitable hedge fund and fund of funds groups interested in a broader array of services. At the same time, prime brokers have recognized that providing administration services can help attract and retain clients and counter the shift among hedge fund managers towards multiple prime brokerage.

“It would be surprising if the hedge fund administration industry continues to support such a large number of providers, and there is now evidence that a renewed round of consolidation is in the offing,” says Dominic Hobson. “However, the appetite to sell may be offset as well as encouraged by the depressed prices available. In any event, the buyers are likely to be different from the banks which dominated the acquisition process in the early years of this century.”

Despite the slowdown in merger and acquisition activity, the hedge fund administration industry also continues to spawn new and smaller providers through a mixture of back office spin-offs by fund management and trading houses and start-ups that aim to service the smaller funds that are being jettisoned by the major providers, or which reckon they can use expertise acquired elsewhere to support particular investment strategies.

“It is worth reiterating that, in spite of the testing conditions in the marketplace, more hedge fund managers than ever responded to the survey this year, and we were able to rate more service providers than ever before,” says Dominic Hobson. “This reflects not only the growing maturity of the survey, but also the larger role and increased importance of administrators as the hedge fund industry has attracted institutional investors.”

Although many administrators are controlled by banks, and there is demonstrable appetite among hedge funds for financing services, the number of hedge fund administrators interested in providing credit, leverage and securities lending services to clients remains small. Only six administrators were rated for credit and leverage in the survey.

However, the inclusion in the survey for the first time this year of questions on middle office services is a measure of the expanding role of hedge fund administrators. The middle office is a term open to various definitions, but the survey measures the performance of providers in terms of the usefulness of P&L reporting, efficiency of cash market trade confirmations, efficiency of OTC derivative trade confirmations, resolution of breaks unrelated to NAV calculations, ability to support multiple prime brokers, efficiency of OTC derivative processing (e.g. documentation management, expirations, re-sets etc.) and the sophistication of collateral management.

IFS, A State Street Company topped the first peer group in middle office services while Kaufman Rossin came out first among the second peer group.

“Five years ago the idea that hedge fund administrators would get involved in functions such as leverage, OTC derivative processing and collateral management was unthinkable at most firms, and controversial where it was not,” says Dominic Hobson. “But consolidation, more imaginative business strategies, a growing willingness on the part of commercial banks to challenge investment banks, and market circumstances are gradually eroding the barriers that once separated prime brokers, fund administrators and custodian banks. Chief among the factors at work is the anxiety of institutional investors in hedge fund strategies about exposure to the credit risk of the investment banks.”

The full results of the 2008 Global Custodian Hedge Fund Administration Survey appear in the Summer Plus issue of Global Custodian magazine. They are also available online (to paying subscribers only) at www.globalcustodian.com.

Contact:

Dominic Hobson, Editor-in-Chief, at [email protected] or +44 (0) 207 148 4280

Allison Cayse, Surveys Editor, at [email protected] or +1 513 574 0220

Muzaffar Karabaev, Survey Reprints/Research Enquiries, at [email protected] or +44 (0) 207 148 4289

Notes:

1. The Global Custodian Hedge Fund Administration Survey has been published annually since 1996.

2. A full list of revisions to the 2007 questionnaire can be found online in the surveys section at www.globalcustodian.com.

3. Providers were rated on a total of 71 questions divided into 12 service areas: client service and relationship management, value, fund accounting and valuation, investor services, reporting to investors, reporting to fund managers, compliance and taxation, corporate administration, fund structures, credit/leverage, middle office services and technology. Respondents graded their administrators on quality of service using a scale of 1 to 7, where 7 is excellent; 6, very good; 5, good; 4, satisfactory; 3, weak; 2, very weak; and 1, unacceptable. Scores were then weighted for the size and sophistication of the respondent and for performance on questions named as important in each service area by all respondents.

4. Global Custodian is the leading specialist magazine covering operational, administrative and distribution aspects of the securities, derivatives, fund management and institutional investment industries. The magazine is supported in each of its chosen areas of expertise by industry-leading surveys of the global custody, sub-custody, hedge fund administration, mutual fund administration, prime brokerage and securities financing businesses.

SEC files complaint against forex fraud

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Summary:

Last Wednesday the SEC filed a complaint against a forex hedge fund manager who was supposedly using a “trading robot” to generate huge returns. It turns out the forex hedge fund manager and the trading robot did not generate the outsized returns, but instead lost investor money. There are two very important items to note here:

1. It is scams like this that has the SEC and CFTC on the offensive to regulate the spot forex market.

2. Again, it is so important for all investors to do proper due diligence on managers and to make sure they know what they are investing in. These fraudsters give a bad name to all hedge fund managers and, sometimes, they can be stopped if the right questions are asked in the beginning.

SEC Release:

U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20688 / August 22, 2008

Securities and Exchange Commission v. Royal Forex Management, LLC and Patrick H. Haxton, (U.S.D.C., Northern District of Texas, Dallas Division, Civil Action No. 3:08-CV-1467-L)

SEC Accuses Carrolton, Texas, Man of Selling Fraudulent Securities Involving Foreign Currency Trading

On August 20, 2008, the Securities and Exchange Commission filed an action in Dallas federal court to halt an alleged unregistered and fraudulent offering of securities by Patrick H. Haxton of Carrollton, Texas, and his company Royal Forex Management, LLC (“Royal”). The securities were investment contracts involving the trading of foreign currencies on the Forex market. On August 21, 2008, United States District Judge Sam A. Lindsay entered a temporary restraining order suspending the offering and orders freezing the defendants’ assets, requiring sworn accountings, prohibiting any alteration or destruction of documents and expediting discovery. The court set a hearing for September 4, 2008 to consider the Commission’s application for preliminary injunctive relief.

The defendants named in the Commission’s Complaint are: Patrick H. Haxton, age 51, of Carrollton, Texas, the owner and sole manager of Royal; and Royal Forex Management, LLC, a Texas limited liability corporation operated out of Haxton’s Carrollton home.

The Commission’s Complaint alleges that from at least June 2007 to the present Haxton, personally and through Royal, raised at least $305,000 from 8 investors in three states. Haxton offers the Forex investments through the Royal web site (www.royalforexmanagement.com), advertising on his work truck and personal contacts. Royal’s promotional materials and Haxton’s oral statements are replete with representations of phenomenal past trading returns, including claims of 400% to 500% annual returns, generated by a complex software program named “The Currency Trading Robot” (“Trading Robot”), purportedly created by Haxton. On the web site, Haxton claims to have a great history and to have been a very successful trader since 2000. Haxton and the web site also represent that there is very little risk of loss.

The Commission alleges, however, that these representations are materially false and misleading. For instance, the Commission contends that Haxton and Royal never generated the claimed phenomenal returns by trading currency. Indeed, according to the Complaint, Haxton lost a significant portion of investor funds trading foreign currencies and misappropriated the remaining funds for his own personal use. In some instances, investor funds were never traded, but were used to pay business and personal expenses.

The defendants are charged with securities fraud under Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and with conducting an unregistered offering under Section 5 of the Securities Act. The Complaint also seeks permanent injunctions, civil penalties and disgorgement of ill-gotten gains, among other relief, against each defendant.

The Commission would like to thank and acknowledge the assistance of the Texas State Securities Board in this matter.

Hedge fund author fined $100k by the SEC for fraudulent hedge fund

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Summary:

Mark J.P. Boucher, the author of the book The Hedge Fund Edge, was involved in a hedge fund scam where he lured investors into a real-estate hedge fund which was was supposed to be secured by real property. The fund was not and investors lost millions of dollars. This underscores the necessity for hedge fund investors to protect themselves from these fraudsters by completing proper hedge fund due diligence. Please contact us if you have questions on hedge fund due diligence.

SEC Release:

Litigation Release No. 20689 / August 27, 2008
Securities and Exchange Commission v. Mark Joseph Peterson Boucher and Gary Paul Johnson,, Case No. CV 08-4088 (N.D. Cal. filed August 27, 2008); Securities and Exchange Commission v. John E. Brake,, Case No. CV 08-4089 (N.D. Cal. filed August 27, 2008)

SEC Charges Bay Area Investment Adviser, Others in Real Estate Investment Scam

The Securities and Exchange Commission today charged a Portola Valley investment adviser and newsletter publisher, Mark J.P. Boucher, with misleading clients into investing in two failed real estate development companies.

According to the Commission, Boucher helped raise around $20 million for the companies by falsely representing that the investments were secured by real estate, when in reality one of the companies owned no property, and the other owned a single property that was wholly underwater in debt. The Commission also sued the owners of each company, John E. Brake and Gary P. Johnson (both of Southern California) for misappropriating millions of dollars of investor funds to finance everything from beachfront homes to undisclosed side businesses. Boucher and Johnson have settled with the Commission without admitting or denying the allegations.

According to complaints filed today in federal district court in San Francisco, from 1999 through 2005, the defendants collectively raised about $20 million from investors based upon misrepresentations that the money would be used to fund large-scale real estate development projects and that the investments were secured by real property. In reality, the investments were not secured: one development company never owned property, and by the summer of 2002, the other company’s lone property was so heavily debt laden that its debts exceeded potential profits. In the end, neither company successfully developed a real estate project, and investors lost millions of dollars.

The Commission alleges that many investors became interested because Boucher — a hedge fund manager and the author of the book The Hedge Fund Edge — recommended the investments in a monthly newsletter he circulated to his advisory clients.

The Commission’s complaints allege that the defendants misused investor funds to pay for a wide variety of personal expenses. Among other things, Brake allegedly used investor funds to pay for a beachfront home rental in Carmel, California, luxury automobiles, a personal chauffeur, private jet travel, jewelry and designer clothing, while Johnson used investor funds to launch a failed furniture business. The Commission also alleges that Boucher used investor money to pay a portion of the mortgage on his personal residence.

Boucher, without admitting or denying the allegations in the Commission’s complaint, has agreed to a permanent injunction from further violations of Sections 17(a) and 17(b) of the Securities Act of 1933 (“Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder (“Exchange Act”), and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Boucher will also pay a $100,000 civil penalty. In addition, Boucher has consented to the institution of public administrative proceedings against him in which he will be barred from serving as an investment adviser with a right to reapply after five years.

Johnson, without admitting or denying the allegations, has likewise agreed to a permanent injunction from further violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Johnson has also consented to an order requiring him to disgorge more than $1.8 million in ill-gotten gains and approximately $700,000 in prejudgment interest, and to pay a civil penalty of $120,000.

Brake is charged with violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The Commission is seeking injunctive relief, disgorgement, and civil money penalties against Brake.

India Embraces Private Equity Funds

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The following is a press release from the international law firm Walkers discussing private equity funds in India.  The release can be found here.

India Embraces Private Equity
21-Aug-2008

Walkers, the global offshore law firm of choice for companies, financial organizations, and international law firms reports that private equity has emerged as a popular financing option in India for capital investment and expansion programs.

“The global credit crunch has tightened the availability of banking finance, forcing investors in India and worldwide to reach out to private equity funds as an alternative source of funding their capital investment/expansion programs. Despite India’s recent weakened economic outlook and inflation at a 13-year high, the infrastructure sector continues to attract global equity funds,” Caroline Williams, Private Equity partner in Walkers’ Cayman office, said. “Additionally, India is realizing increased interest from offshore money, which will be invested into the national infrastructure program over the next five to seven years.”

In 2007, India attracted more private equity funds than China, and also has more private enterprises. The high priority for development of infrastructure, anticipated to need US$500bn in the next five years, makes construction one of the most popular segments for investments. As an example, last month, Red Fort announced an infrastructure fund focused on ports and power station development that is estimated to raise in excess of US$600m by the end of 2008. The company has already closed seven deals in the real estate market worth US$200m in the first half of 2008 and anticipates investing another US$300m by the end 2008 to make a total of around 10-12 deals in 2008.

“The driving motivation for foreign direct investment inflows into India continues to be double tax treaties associated with offshore jurisdictions. Private equity funds establish wholly-owned subsidiaries in offshore jurisdictions to invest into the Indian target company,” said Philip Millward, a Private Equity partner in Walkers’ Hong Kong office. “Clients of Walkers’ Hong Kong office have established Special Purpose Vehicles (SPVs) in the Cayman Islands and British Virgin Islands to operate as holding companies for investments into India. These SPVs typically invest into underlying Indian investee companies via a wholly-owned subsidiary established in a country that has a double tax treaty with India, namely Mauritius, Singapore, or Cyprus. By creating an offshore holding structure, the private equity fund may avoid transferability restrictions on an eventual exit from the underlying investment.”

Despite some concern over valuations of Indian companies, the high growth of the Indian economy has kept it attractive to private equity.  Private equity investment has risen consistently from US$2.03bn in 2005 to US$17.14bn in 2007. And the deals are getting bigger. In 2007, 48 deals of over US$100m were closed compared to 11 deals of over US$100m in 2006.

“Private equity funds are extremely keen to identify and invest in growth opportunities in the Indian pre-IPO market. This enthusiasm, coupled with a lack of viable investment opportunities in other markets, has made private equity financing an easier source of capital than financial institutions that are scaling back their lending activities in emerging markets,” said Richard Addlestone, a Private Equity partner in Walkers’ Cayman office. “However, private equity’s insistence on taking quasi-management positions within the investee companies can be perceived as an encroachment on the funded company’s ability to independently control the growth and direction of the business. This can often lead to a focus on short- to medium-term growth to facilitate an exit for the private equity fund, not longer term strategies.”

Sovereign wealth funds (“SWF”), such as Temesek, Dubai Investment Corporation and others are also investing heavily in India.  SWFs tend to be known more for providing cash rather than management expertise. However, SWFs are evolving, hiring staff with similar skills to those in private equity houses and morphing into a type of private equity firm, themselves and so leveling the playing field.

“While India does present some challenges due to the strict restrictions of the Indian Companies Act, 1956 and the material regulatory barriers if a fund investing in India is not a member of IOSCO, we anticipate continued interest in India, and more activity from India investors,” continued Mr. Millward. “By working with a sophisticated law firm that has vast experience both in private equity funds and in the Asian markets, institutional investors and global financial organizations can leverage the power of this emerging market.”

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CFTC order levies major fine on hedge fund trader

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Summary:

The CFTC ordered a hedge fund manager who operated four commodity pools to pay more than $279 mm in restitution to prior hedge fund investors as well a $20 mm civil penalty for his fraud. The manager concealed huge losses from investors by issuing false account statements which reflected consistently profitable trades. The hedge fund manager also misappropriated some of the investor’s assets.

Press Release:

Release: 5531-08
For Release: August 19, 2008

Hedge Fund Trader Paul Eustace and Philadelphia Alternative Asset Management Co. Ordered to Pay More Than $279 Million to Defrauded Customers and More than $20 Million in Civil Monetary Penalties in CFTC Action

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Paul Eustace of Ontario, Canada, was ordered to pay more than $279 million in restitution and a $12 million civil penalty, based on an order that resolves a CFTC enforcement action against him for defrauding commodity pool participants in four pools that he managed.

The court also entered an order of default judgment against the commodity pool operator that Eustace controlled, the Philadelphia Alternative Asset Management Co. (PAAM), imposing permanent trading and registration bans, requiring payment of restitution of approximately $276 million, subject to offset by prior disbursements and payments by Eustace, and imposing an $8.8 million civil monetary penalty.

The supplemental consent order, entered by the Hon. Michael M. Baylson of the U.S. District Court for the Eastern District of Pennsylvania on August 13, 2008, follows a July 13, 2007 consent order of permanent injunction against Eustace that enjoins Eustace from further violations, and imposes permanent trading and registration bans.

“This concludes a successful effort by our Division of Enforcement to stop fraud in its tracks, return as much money as possible to defrauded investors, and to bring wrongdoers to justice,” said CFTC Acting Chairman Walter Lukken.

The orders arise out of a CFTC complaint filed on June 21, 2005, and later amended, against Eustace and PAAM. (See CFTC Press Release 5091-05, June 29, 2005.)

At the outset of the litigation, the CFTC’s action froze all the assets under the control of PAAM and Eustace and preserved more than $70 million for return to pool participants. The CFTC also obtained the appointment of a receiver to recover and distribute funds to defrauded participants. Through related receivership litigation, an additional $96 million has been obtained to date for the benefit of defrauded pool participants. Defendants’ restitution obligation shall be offset by any funds distributed through the receivership.

As alleged in the amended complaint, and as the 2007 consent order found, from at least the spring of 2001 through June 2005, Eustace fraudulently operated four commodity pools: the Option Capital Fund LP (Option Capital Fund); and, through PAAM, the Philadelphia Alternative Asset Fund, L.P. (LP Fund); the Philadelphia Alternative Feeder Fund LLC; and the Philadelphia Alternative Asset Fund, Ltd., an offshore fund with over $250 million in assets. During this time, Eustace incurred losses of approximately $200 million trading commodity futures and options either in accounts held in the name of the funds or in his name. Eustace concealed those losses by issuing or causing to be issued, false account statements reflecting highly and consistently profitable trading results. Eustace also misappropriated assets of the Option Capital and LP Funds and received incentive and management fees through his fraudulent operation of the pools. Eustace was also charged with fraudulent solicitation and registration violations.

The CFTC Division of Enforcement appreciates the assistance of the Ontario Securities Commission and the National Futures Association in this matter.

In December 2007, the CFTC issued a related order filing and settling failure to supervise and recordkeeping charges against MF Global, Inc. (MFG), a registered futures commission merchant, and Thomas Gilmartin, a former associated person of MFG relating to their mishandling of certain trading accounts managed by Eustace and PAAM that sustained losses of approximately $133 million. MFG and Gilmartin paid collectively $2.25 million in civil monetary penalties and Gilmartin agreed never to seek registration with the Commission. (See CFTC Press Release 5427-07, December 26, 2007.)

The following CFTC Division of Enforcement staff members are responsible for this case: Gretchen L. Lowe, Michael J. Otten, Kara Mucha, Glenn I. Chernigoff, Richard B. Wagner, and Vincent McGonagle.

SEC to replace ancient EDGAR database

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Summary:

On Tuesday the SEC announced that a new company filing database which will be faster and easier to use than the current EDGAR system. The new system is called IDEA, short for Interactive Data Electronic Applications. With IDEA, investors will be able to instantly collate information from thousands of companies and forms, and create reports and analysis on the fly, in any way they choose.

Press Release:

SEC Announces Successor to EDGAR Database
“IDEA” Will Make Company and Fund Information Interactive
FOR IMMEDIATE RELEASE
2008-179

Washington, D.C., Aug. 19, 2008 — Securities and Exchange Commission Chairman Christopher Cox today unveiled the successor to the agency’s 1980s-era EDGAR database, which will give investors far faster and easier access to key financial information about public companies and mutual funds.

The new system is called IDEA, short for Interactive Data Electronic Applications. Based on a completely new architecture being built from the ground up, it will at first supplement and then eventually replace the EDGAR system. The decision to replace EDGAR marks the SEC’s transition from collecting forms and documents to making the information itself freely available to investors to give them better and more up-to-date financial disclosure in a form they can readily use.

Currently, most SEC filings are available only in government-prescribed forms through EDGAR. Investors looking for information must sift through one form at a time, and then re-keyboard the information — a painstaking task. With IDEA, investors will be able to instantly collate information from thousands of companies and forms, and create reports and analysis on the fly, in any way they choose.

IDEA will ensure that both the SEC and the investors who rely upon the financial reporting the agency demands are ready for the new world of financial disclosure that will soon arrive when financial information is presented in interactive data format. The SEC has formally proposed requiring U.S. companies to provide financial information using interactive data beginning as early as next year, and separately has proposed requiring mutual funds to submit their public filings using interactive data.

“IDEA will ensure that the SEC continues to stay ahead of the needs of investors,” said Chairman Cox. “This new SEC resource powered by interactive data will give investors far faster, more accurate, and more meaningful information about the companies and mutual funds they own. IDEA’s launch represents a fundamental change in the way the SEC collects and publishes company and fund information – and in the way that investors will be able to use it.”

Interactive data relies on computer “tags,” similar in function to bar codes, which identify individual items in a company’s financial disclosures. With every number on an income statement or balance sheet individually labeled, information about thousands of companies contained on thousands of forms could be easily searched on the Internet, downloaded into spreadsheets, reorganized in databases, and put to any number of other comparative and analytical uses by investors, analysts, journalists, and financial intermediaries.

The ease with which interactive data will make financial information available also is expected to generate many new Web-based services and products for investors.

As he unveiled the new IDEA platform at a Washington news conference today, Chairman Cox announced that the IDEA logo will begin to appear immediately on the SEC’s Web site as the agency transitions to making IDEA the new primary source for all SEC filings. Companies’ interactive data filings are expected to be available through IDEA beginning late this year.

Investors and others who currently use EDGAR will be able to continue doing so for the indefinite future. During the transition to IDEA, investors will be able to take advantage of new interactive, IDEA-like features that will be grafted onto EDGAR in the short run. This will make it possible for investors to tap IDEA’s advanced search capabilities, and to use the information from EDGAR within spreadsheets and analytical software – something that was never possible with EDGAR. The EDGAR database also will continue to be available as an archive of company filings for past years.

“When Congress created the SEC, and even when EDGAR was launched, the markets worked on paper and by mail. Today, the marketplace works online and by e-mail,” explained disclosure and transparency expert Dr. William D. Lutz, who is leading the SEC’s 21st Century Disclosure Initiative. “Companies and investors alike compile, analyze, and produce information and reports electronically. With the move to an electronic data-based filing system, the SEC will not only keep pace with the markets, but will provide investors with a dynamic system they can use to get the information they need, rather than having to wade through an avalanche of paper forms, legalese, and doublespeak.”

David Blaszkowsky, Director of the SEC’s Office of Interactive Disclosure, added, “After 75 years of document-based static financial reporting, whether in paper documents or in electronic equivalents, it is exciting to see the SEC poised to cross the ‘data threshold’ and help investors receive financial information that is dynamic, usable and ready to go as they make their investment decisions. And when the investor wins, so does the public company, fund, or other filer who simultaneously benefits from greater transparency and trust in our markets. By tapping the power of interactive data to tear down barriers to quick and meaningful investment information, markets can become fairer and more efficient while investors can possess far better quality data than was ever possible before.”

CFTC Announces Formation of Retail Foreign Currency Fraud Enforcement Task Force

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Washington, DC— The Commodity Futures Trading Commission (CFTC) has formed a special task force charged with investigating and litigating fraud in the off-exchange retail foreign currency (forex) market.

The creation of the task force within the Division of Enforcement comes in the wake of Congress’ passage in June 2008 of “The Food, Conservation, and Energy Act of 2008” that clarified and strengthened the CFTC’s jurisdiction over this market. The task force will focus on fraud in the retail forex market and will work cooperatively with other federal and state regulatory and criminal authorities.

“The formation of the CFTC’s new Forex Enforcement Task Force reaffirms our agency’s commitment to stopping unscrupulous individuals working in this space. Not only do forex fraudsters prey upon unsuspecting citizens, but their illegal activities taint the reputations of those working honestly in the futures industry,” said CFTC Commissioner Michael Dunn, head of the agency’s Forex Education and Outreach Task Force. “This announcement sends a clear signal that the CFTC is on the beat, and that our continued and increased cooperation with law enforcement authorities will help put these forex dealers where they belong – in jail.”

“Forex fraud impacts investors of all stripes,” CFTC Acting Director of Enforcement Stephen J. Obie said. “With the creation of the retail forex task force, the CFTC has committed the resources necessary to expand its efforts to identify and prosecute those who commit fraud in the retail forex market.”

Since enactment of the Commodity Futures Modernization Act in 2000, the CFTC has filed nearly 100 enforcement actions against firms and individuals selling illegal forex futures and option contracts. To date, the CFTC has obtained judgments in these enforcement actions for civil monetary penalties of approximately $560 million and restitution of investor losses totaling $450 million.