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Skirting Swindlers
Peter J. Turecek
01/01/2004
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Hedge fund fraud is making headlines as high-profile investigations by the Securities and Exchange Commission and state law enforcement authorities shine a spotlight on problems in the industry. What can investors do to avoid becoming ensnared in a hedge fund fraud? It helps to know with whom you are dealing—and hiring the best advisors and investigators can save you millions.
| The key is trust, but verify. |
Typically, managers who commit hedge fund fraud are one of two types. The first absconds with the fund’s assets for personal use. The second uses creative accounting or invests in ways that are not approved by investors.
Of the first ilk are John Turant Jr. and Russ Luciano—and their JTI Group Fund—who were sued by the SEC in September 2003 for allegedly defrauding some 100 investors of $4.5 million. The pair allegedly promised they would be day-trading securities and claimed annual returns of 20 percent to 120 percent. Another is Mark Yagalla, a young college dropout who set up his own hedge fund with the money of family and friends. As the fund grew, he started living a lavish lifestyle, indulging in pricey trips, yachts, chauffeured limos, chartered jets and a $1.2 million home in Las Vegas for his Playmate girlfriend.
These types of fund managers often have red flags in their past; conducting a simple investigation can turn up issues that steer investors away, saving them both time and money. For example, investigators might have discovered that Turant claimed security licenses that were either expired or nonexistent. He also was subject to a legal action by the Pennsylvania Securities Commission, which he did not disclose to his investors.
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