By Susan Barreto
Eliot Ness, the federal investigator who led a group of men credited with bringing down Al Capone, nicknamed his men 'The Untouchables' as they couldn't be bought. One wonders if today the US government could come up with such an elite taskforce to regulate the post-Madoff Wall Street.
Recent fraud cases and Ponzi schemes are small in size, but highlight the fact that rackets may go on for decades, often despite widespread investor suspicion.
Madoff is the ultimate example. Frank Casey, president of Fortune USA, is now openly discussing failed attempts over a 10-year period to tip off the SEC of his Madoff scepticism. Ultimately, it was Madoff's confession that shut down the Ponzi scheme, which leaves many wondering if there are any other similar operations out there trading in markets that themselves are unregulated.
Take foreign exchange trading, for example. Daniel Spitzer was charged with fraud by the SEC in June after allegedly perpetrating a $105 million Ponzi scheme against investors. Using several entities and sales agents to misrepresent investment funds with a foreign currency focus, Spitzer is said to have told prospective investors that his funds had never lost money and historically produced annual returns that one year reached over 180%.
Spitzer's tactics raised the eyebrows of at least one long-time hedge fund investor who says he crossed paths with one of Spitzer's funds more than 15 years ago. This anonymous hedge fund investor said that he had heard about Spitzer's pitch anew at an industry conference in Florida in January this year. The only thing that had changed was that the fund manager now had a private jet and lived in St Croix, which could easily be among the red flags (or eccentricities) we will be discussing at the InvestHedge Forum this September (see page 26).
In another instance, San Diego County Employees (see page 14) has dealt with fraud after the fact in the case of WG Trading. The SEC's complaint alleges that, since 1996, the firm run by Paul Greenwood and Steven Walsh promised investors that their money would be invested in a stock index arbitrage strategy. Instead, the pair treated their clients' investments as their personal piggy bank to purchase multi-million dollar homes, a stud farm and horses, luxury cars, and rare collectibles such as Steiff teddy bears.
It seems that the SEC is unable to nab a fraudulent manager until decades after the damage has been done. How can the pension portfolios today allocating billions to hedge funds for the first time be safe? Here at InvestHedge, we have tracked more than $17 billion in recent search activity now increasingly targeting direct investments in hedge funds, suggesting a more robust policing regime needs to be in place. Relying on manager track record and SEC registration is not enough to weed out fraud.
According to one public pension executive, it may be wise for the SEC to provide a conduit and line of communication for investors wishing to tip off the SEC to potential hedge fund fraud. Investors currently speak to one another to glean information on managers, but not everyone participates in that dialogue.
If there were an investor tip-off line specifically for hedge fund investors which is used by a unit set up specifically to combat fraud in the markets hedge funds are actively involved in, there could be a better chance of catching a Ponzi before it gets out of control.
Perhaps the SEC is too cash-strapped to create its own "In-touchables" unit. On the other hand, ploughing even more billions into regulation may be less effective than using more intensive work by consultants (see page 18).