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Skirting Swindlers
Peter J. Turecek
01/01/2004
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Yagalla’s background also raised a few red flags. One item that would arch an investigator’s eyebrow was his incorporation of a nursing home company, for which he, at the age of 21, was the CEO. Another would be his purchase and sale, within a year, of a $200,000 Delaware condo, followed by his purchase of a $1.25 million luxury home in Las Vegas.
Creative Accounting
The second ilk uses creative accounting or similar strategies—and these are increasingly difficult to identify—to dupe investors. The SEC unearthed one in June 2002 when it accused Von C. Cummings and his fund, Paramount Financial Partners LP, of inducing investors to put $15 million into the hedge fund, which the SEC alleged was nothing more than a Ponzi scheme, paying out early investors with money raised from new investors. The SEC found another when, in November 2002, it sued Beacon Hill Asset Management, alleging the fund had materially overstated its value to investors and the fund’s prime broker.
Unfortunately, even comprehensive due diligence investigations have little hope of uncovering instances of internal fraud involving misallocations, improper valuations or strategies different than those presented to investors. In the secretive world of hedge funds, this information is typically closely guarded by fund managers and not shared with investors, business partners or industry colleagues. While a thorough review of a manager’s reputation may identify sources who are suspicious of a fund manager’s activities, it will rarely be able to offer documentary evidence.
For those contemplating investments in hedge funds, the key is trust, but verify. A few simple questions may help prevent the investor from becoming trapped in a fraud:
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How did the investor meet the hedge fund manager? Did the contact come through a trusted contact, investment advisor or through an acquaintance?
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