Fraudulent hedge fund management is a serious problem. While there are entities in place to help prevent and prosecute fraudulent brokers and firms, there is often little recourse for victims who have suffered financial losses from hedge funds because they are not required to register with the SEC.
A scam across borders
The fraudulent hedge fund manager of a Toronto based commodities trading fund was released from prison after only serving a partial sentence. He was charged with hedge fund fraud in February 2009 after investigators found discrepancies with the fund history and performance. The Commodity Futures Trading Commission suspected fraudulent activity when the company began soliciting American investors. After his arrest, the F.B.I. investigators tallied losses at roughly $300 million and remaining firm assets weren’t nearly enough to pay back investors.
He served several years in U.S. prisons but requested a transfer to Canada after reviewing the E102461 treaty. The treatise allows Canadians convicted of crimes abroad to serve their sentences in Canadian institutions, if all government parties consent. Less than six months after being transferred to a Canadian minimum security prison he was released. He served less than six years out of a 20 year sentence. The US government charged him with $155 million in restitution, which he is still required to pay even though he is living in Canada. Unfortunately, it is unlikely investors will see repayment.
An all too common problem
Hedge fund fraud is one of the most common forms of stockbroker fraud, but hedge funds continue to remain popular among investors because they are promoted as a high return investment. While no investments are without risk, hedge funds are particularly risky because they are not required to provide mandatory reports to a regulatory agency, unlike other investment funds. Also hedge funds require significant first investments and unsavory hedge fund managers often use the funds for personal gain at the expense of the fund and the investors.
Breach of fiduciary duty
Even though they are not mandated by the SEC, hedge fund managers are still bound to their investors by their fiduciary responsibilities and can be held liable for investment fraud. Investments are not guaranteed, but when a fund manager violated securities laws or committed another type of infraction they can be held responsible.
Before investing, research the broker and firm thoroughly. Exercise caution and do not be tempted by something that seems too good to be true.