We frequently discuss scams involving the investment management and hedge fund industry as a warning to potential hedge fund investors to take the hedge fund due diligence process seriously. In the CFTC release posted below, we have a classic scam where the sponsors of a commodity/futures fund acted in a fraudulent manner and used the assets of the fund for their own personal reasons. We have listed the items which the consent order found and how an experienced hedge fund due diligence team could have protected the investor from fraud.
1. Manager was not registered as a commodity pool operator with the CFTC – this is an easy one to spot. In general many hedge fund (or pooled investment vehicle) operators must be registered in some capacity. Here the operator needed to be registered as a commodity pool operator because the fund invested in commodities. A due diligence expert could have informed the investors that the entity needed to be registered.
2. Manager misrepresented profit potential to fund investors – as the saying goes, if it sounds too good to be true, it probably is. Here, the manager preyed on the ignorance of the investors. A due diligence team would have understood the investing style and whether the representations about the profit potential were accurate. A financial advisor would also be able to help the investor determine if the claims were accurate.
3. Manager neglected to advise pool participants of the risks inherent in trading futures and failed to provide required pool disclosure documents – before anyone invests in a hedge fund, an offering document should be thoroughly read and understood. If there is no offering document then an investor should not invest any money with the manager.
4. Manager provided a false account statement to at least two investors – another basic item that is easy to check. If you are an investor and have any questions about the account statement you should discuss your questions with the manager and/or the fund’s administrator
First and foremost if you are an investor in a hedge fund and do not understand the terms of the offering or the investment program, please contact an advisor or someone you trust to review the offering. A good hedge fund due diligence team or a hedge fund attorney will be able to help you out. The is posted below in its entirety. Related hedge fund law articles inclue:
- How to register as a CPO or a CTA
- Hedge Fund Due Diligence
- Hedge Fund Due Diligence 2.0
- Hedge Fund Offering Documents
- Hedge Fund Attorney
- Hedge Fund Auditor
- Hedge Fund Administrator
For Release: December 11, 2008,
Nevada Firm Alliance Development Co. and William Snyder Ordered to Pay $3.65 Million in Restitution and Penalties for Operating a Commodity Pool Scam in CFTC Anti-Fraud Action
Synder’s Daughter, Christi Wilson, Ordered to Disgorge $220,000 in Payments Misappropriated from the Fraudulent Pool Operation to Pay Personal Expenses
Washington, DC—The U.S. Commodity Futures Trading Commission (CFTC) today announced today that Alliance Development Company (Alliance) of Reno, Nevada, and William Snyder of Issaquah, Washington were ordered to pay restitution of $550,000 and civil monetary penalties of $1.65 million and $1.45 million, respectively, to settle a CFTC enforcement action charging them with commodity pool fraud.
In addition, Synder’s daughter and a former Alliance principal, Christi Wilson of Reno, Nevada, was ordered to disgorge $220,000 in payments that she received from Alliance’s and Snyder’s fraudulent commodity pool operation.
The consent order, entered on December 10, 2008 by the Honorable Larry R. Hicks of the U.S. District Court for the District of Nevada, also permanently bars Alliance, Snyder, and Wilson from engaging in any commodity-related activity. The order stems from a CFTC complaint filed on September 28, 2006 in CFTC v. Alliance Development Company, et al., Case No. 3:06-cv-00512-LHR-RAM (D. Nev.). (See CFTC Press Release 5257-06, November 16, 2006.)
According to the order, from at least October 2004 to at least February 2006, Alliance (an unregistered commodity pool operator) and Snyder (an unregistered commodity pool operator and an unregistered associated person of Alliance) used no less than ten sham companies and aliases to fraudulently solicit others to invest in commodity pools that purportedly traded, among other things, commodity futures contracts.
The order also found that Alliance and Snyder misrepresented profit potential to pool participants, neglected to advise pool participants of the risks inherent in trading futures, failed to provide required pool disclosure documents to pool participants, and provided a false futures account statement to at least two pool participants. Alliance and Snyder solicited $550,000 in pool participant funds, most of which they misappropriated to pay Snyder’s and Wilson’s personal expenses.
The following CFTC Division of Enforcement staff members are responsible for this case: Rachel Hayes, Jo Mettenburg, Lacey Dingman, Charles Marvine, and Richard Glaser.
Last Updated: December 11, 2008