Matthew Marino... brother of former bayou exec, Daniel Marino (already plead guilty).

Labels: Bayou Group, Daniel Marino, Matthew Marino, Sam Israel

Hennessee Group, a New York-based investment adviser is facing a $800,000 fine from the SEC due to the firm's failure to perform promised due diligence of the Bayou Group hedge fund, once run by eventual death-faking, scooter-riding fugitive from justice, Sam Israel.

Bayou, of course, was one of the biggest hedge fund flame-outs of all time, with many of the fund's major players doing jail time. The SEC complaint details about 40 Hennessee clients who altogether has about $56 million invested inthe Bayou fund.

Hennssee head, Charles Gradante has neither confirmed or denied wrongdoing in the matter. While he hasn't commented on the specifics of his own case, Gradante has submitted a letter to the SEC with a variety of recommendations for how other migh avoid Hennessee's fate.

Amongst Gradante's recommendations - increased reguation of hedge fund borrowing and requiring that third parties, such has Kroll, be hired to conductforencic audits of hedge fund financial statements. More here, via Bloomberg.

-- MDT

Labels: Bayou Group, Fraud, hedge fund, Hennessee, Kroll, Sam Israel

I know I am a little late posting this, but the past week has been all election all the time, so I apologize for my tardiness. If you have yet to read about the latest turn in the twisted tale of fraudster (and former dead guy), Sam Israel you can do so right here.

-- MDT

Labels: Bayou Group, hedge fund, Sam Israel

Oh the humanity!

A new low for the former hedge fund fugitive.

-- MDT

Labels: Bayou Group, hedge fund, Sam Israel

Cool piece from Bloomberg on this - had no idea.

Look for cameos and colorful anecdotes involving some of your fave white collar crooks.

-- MDT

Labels: asset recovery, Bayou Group, Kroll, Sam Israel, U.S. Marshalls

As white collar fugitive bolt-holes go, this is so, soooo weak. Rolling into the police station on a Yamaha scooter because his mama told him to? Seriously? This is our $2 trillion arch criminal mastermind?

I am so deflated.

-- MDT

Labels: Bayou Group, fugitive, hedge fund, Sam Israel

And here I hoped that the fugitive hedge fiend show would run all summer long...

I guess I'm back to Matlock reruns. That and Season Three of The Wire!

-- MDT

Labels: Bayou Group, fugitive, Sam Israel

Here's a few thoughts on the Israel disappearance from former FBI Agent, Paul Hayes, now managing director of Corporate Resolutions, a NY-based corporate investigative firm.

-- MDT

Labels: Bayou Group, Corporate Resolutions, Paul Hayes, Sam Israel

If you've seen it, you've potentially laid eyes on the highly styling ride of the recently un-departed hedge fund fraudster and fugitive from justice, Sam Israel.

Meanwhile, at least some folks have found a way to make something good happen over Israel's shenanigans. Own a piece of history for yourself.

Something not good would be the prospects for Israel's girlfriend, Debra Ryan. She could be facing 10 years for her part in Israel's elaborate dodge of his own twenty year fraud sentence.

-- MDT

Labels: Bayou Group, Debra Ryan, Sam Israel

The Feds seem all but certain that the Bayou hedge fund founder's suicide was mere window dressing to a disappearing act.

I must confess... I love it when they run. As to why he'd run? If you need a reminder, try Bloomberg. Something to do with starting a 20 year prison sentence, I'd think.

-- MDT

Labels: Bayou Group, Fraud, fugitive, hedge fund, Sam Israel, suicide

Sam Israel presided over the spectacular $40 million flame-out of the now defunct hedge fund, Bayou Group. Bayou was the hedge fund fraud and failure that really put the subject on the front page - not just the business pages. This week Israel got his comeuppance - a sentence of 20 years and an order to forfeit $300 million to compensate his former investors for their losses.

Now if Israel had that kind of money at hand, doubtless Bayou would still be in business, so who knows whether those bilked by Bayou have any realistic chance of reclaiming their money. Still, the knowledge that Israel (and his previously convicted Bayou co-horts) will be spending a significant number of years behind bars might provide some small solace.

Or not...

-- MDT

Labels: Bayou Group, Fraud, hedge fund, James Marquez, Sam Israel

James Marquez, co-founder of Bayou Financial, plead guilty in December of 2006 to participation in the $400 million fraud arising from his former firm (Marquez left Bayou in 2001).

Sentenced just this week, Marquez, in addition to spending a little over four years in prison and another two years under supervised release, Marquez is expected to pay over $6 million in restitution.

Two other former Bayou executives, Sam Israel and Daniel Marino have also plead guilty in relation to the fraud.

For further details on the Marquez sentencing, check out CNNMoney.

--MDT

Labels: Bayou Group, Daniel Marino, Fraud, hedge fund, James Marquez, Sam Israel

Bayou Hedge Fund co-founder, James Marquez saw his sentencing hearing was moved to today, November 20th due to "disputed issues of fact." As of this evening nothing notable has come across the wire. But we'll keep an eye out.

If you'd like to recap, here's Marquez's guilty plea from late last year. Bayou, of course, was one of the more notable hedge fund flameouts of the past few years and the one that started putting these stories on the front page, not just the front page of the business section.

-- MDT

Labels: Bayou Group, Fraud, hedge fund, James Marquez

A Bayou-related investor suit filed against Hennessee Group, a financial advisory firm has been dismissed. Hennessee was being sued for breach of fiduciary duty by South Cherry Street, LLC, which on Hennessee's say-so had invested $1.5 million with Bayou.

While proprietors of Hennessee, Lee and her husband Charles Gradante claim to have a thorough five-step due diligence process, the folks at South Cherry Street claimed that this was never conducted in the case of Bayou.

The judge found differently, deciding that Hennessee was just another sucker in a group that included the IRS and the SEC. Ouch...

Also, it appears that Bayou badguys Sam Israel and Daniel Marino will be sentenced for their roll in the hedge fund fraud as soon as September.

Further details on Bayou via Reuters.

-- MDT

Labels: Bayou Group, Fraud, hedge fund, Hennessee, South Cherry Street

Bayou would be the hedge fund whose collapse brought questions about hedge fund transparency from the business page to the front page. The reverberations from the Bayou collapse continue, most recently with the guilty plea on tax evasion from former Bayou financial advisor Burt Kozloff. You can get a look at the terms of Kozloff's plea deal right here, courtesy of the fine folks at the U.S. Attorneys Office, Souther District of New York.

-- MDT

Labels: Bayou Group, Fraud, hedge fund

Lets go back to last fall and recall the implosion of hedge fund, Bayou Group. The failure of this multi-million dollar fund sent shockwaves through the business media and was one of the key factors in raising the profile of hedge fund fraud in the press. Heck, it even prompted Risk Magazine to give a call to The Daily Caveat for a brief interview.

Law.com has a post-game analysis of the Bayou collapse from Jeff Marwill, a partner in the bankruptcy practice of Jenner and Block. Marwill charts the organization of the Bayou entities, what went wrong and how investors were made to eat the losses. Bayou Group subsequently declared bankruptcy and Marwill is uniquely qualified to comment on the aftermath as, in April '06 , he was appointed the federal equity receiver responsible for aiding investors in recouping some of the $450 million lost in the Bayou Fraud.

Interesting reading. And as always, when it comes to investing - do your homework.

-- MDT

Labels: Bayou Group, Fraud, hedge fund, Jeff Marwill, Jenner and Block

Whether on behalf of individual investors or fund of funds who bear responsibility for the actions of the funds they manage, corporate investigators can be a crucial component in risk management - operational, headline and otherwise. If nothing else, the IMA story illustrates that if you don't work investigators on the front end, you may end up hiring them anyway...when it comes time to figure out where your money went.

Recently The Daily Caveat had the opportunity to discuss the challenges of hedge fund due diligence with the fine folks at Risk Magazine, the world's leading fianancial risk management journal. Seems appropriate to revisit the story, in light of continuing concerns in this arena:

Fund investors turn to private investigators

Risk Magazine
November 2005
By Jayne Jung

The recent to turn to private investigators to dig deeper into fund managers and to conduct due diligence

A spate of hedge fund-related scandals in recent months has increased concern among investors about fraud, and is prompting many to turn to private investigators to dig deeper into fund managers and to conduct due diligence. "What's going on with Bayou, Refco and Man Financial makes people nervous. And nervous people call investigators," says Michael Thomas, a partner at Caveat, a Washington DC-based corporate investigation firm...

...Caveat's Thomas says investors' focus is broader than the financial markets when making investment decisions, and with good reason. Something as simple as a driving under the influence of alcohol or drugs charge might cause investors to withdraw cash from a fund manager, he says. Investors don't want there to be any kind of question mark hanging over the integrity, or principles, of a manager.

The full article appears here.

-- MDT

Labels: Bayou Group, Kroll, Refco

51 SEC investigations between 1999 and 2004 and 30 some odd cases brought mean one thing for the hedge fund industry industry....increased regulation. But already many have come forward saying the soon-to-take-effect SEC regs of hedge funds are a joke, with enforcement and oversight capacities sadly lacking...206 will tell the tale.

Via the FT.com:

Deadline looms as SEC turns screw on hedge funds

By Andrew Parker in New York,
Stephen Schurr in London and
Francesco Guerrera in Hong Kong
The Financial Times

The chief US financial regulator is flexing its muscles again, both at home and abroad. The Securities and Exchange Commission has set a deadline of Wednesday for many US and foreign hedge fund managers to register with it. They must provide the regulator with information about their businesses and brace themselves for the possibility of inspections.

The extension of the SEC's supervisory work to hedge funds, where wealthy investors put their money, represents a big expansion of its powers and responsibilities. However, intense controversy and uncertainty surrounds the regulator's flagship project. A federal appeals court was asked in December to strike down the SEC's rule requiring hedge fund managers who advise more than 14 investors to register with the regulator.

Phillip Goldstein, a New York-based hedge fund manager, says he is "cautiously optimistic" that the court will support his argument that the SEC did not have the authority to draw up the rule in October 2004.

William Donaldson, the SEC's Republican chairman at the time, had to rely on the support of the regulator's two Democratic commissioners to get the rule approved. He insisted the rule was necessary for the SEC to gain a full understanding of the traditionally secretive hedge fund industry, which controls assets worth $1,200bn. More than 1,000 hedge fund managers had registered with the SEC before the rule was approved. Some did so voluntarily, while others had to if they were advisers to mutual funds, for example.

But the SEC estimated that a further 1,000 hedge fund managers would have to register following the rule. Mr Donaldson said the growth of hedge funds had been accompanied by increasing instances of fraud. He highlighted 51 SEC investigations into hedge fund managers accused of fraud between 1999 and 2004. Since then the SEC has brought a further 30 cases, including against Samuel Israel III, founder of the Bayou group of hedge funds, where investors had put $450m.

The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused.Today, concerns about the SEC's registration rule focus on compliance costs, and the risk they will be passed on to investors in the guise of reduced returns. Hedge fund managers, for example, must appoint chief compliance officers at their businesses. But Ernst & Young, the accountants, last month published a survey of 109 managers that found 85 per cent thought the annual costs to be $500,000 or less, which was "generally below market projections".

Some hedge fund managers appear to be taking steps to avoid having to register with the SEC by Wednesday. Managers do not have to register if after February 1 they do not take additional money from existing clients or accept contributions from new investors. They also do not have register if they bar clients from withdrawing their investments for more than two years.

SEC officials say the UK and Hong Kong are the most significant overseas jurisdictions for hedge fund managers. By the end of last Thursday, 113 hedge fund managers based outside the US were registered with the SEC. Of these, 68 are in the UK and seven are in Hong Kong.

In London, some hedge fund managers regard the SEC's oversight as unwarranted, given that the Financial Services Authority, the chief UK financial regulator, scrutinises their industry. "Outside the US, the feeling is that the FSA is completely on top of hedge funds, far more than anyone else in the world," says Philippe Bonnefoy, partner at Cedar Partners, a London-based fund that invests in hedge funds.

In Hong Kong, hedge fund managers say they expect the bigger players to register with the SEC, partly because it would help them improve their image. "They may not like it but they have little choice if they want to continue to attract US investors and not raise suspicions in the eyes of regulators," says the Hong Kong-based manager of a large hedge fund.

The original article appears here.

-- MDT

Labels: Bayou Group, Financial Services Authority

Via CNNMoney.com:

Top hedge fund stories of 2005 -- Fines, proxy fights, rocky returns -- 2005 has proved a tricky year for hedge funds

December 12, 200
By Amanda Cantrell
CNN/Money staff writer

From fines to frauds to proxy fights to rocky returns, the press-shy hedge fund industry grabbed more headlines in 2005 than it has since 1998, when the spectacular blowup of a fund called Long Term Capital made "hedge fund" a household word. Since then, strong performance and other factors have helped these funds rack up $1 trillion in assets worldwide. The industry has swelled to an estimated 8,000 funds, attracting new investors such as endowments and pension plans along the way. Here are the top hedge fund stories of the year:

Bayou blows up

Bayou Group founder Samuel Israel III, scion of a New Orleans commodity trading family, and Daniel Marino, the fund's chief financial officer, pleaded guilty to defrauding investors of $450 million over several years simply by lying to them about how much money the funds were producing and setting up a phony auditor to sign off on the cooked books.

The tale produced news reports containing sordid details such as a six-page suicide note and confession from Marino, who didn't kill himself, and allegations that Israel had a drug problem and threatened his partner with a gun. While Israel and Marino await sentencing in January, investors are trying to get their money back. Numerous class-action suits are hitting court dockets, filed by investors suing third-party firms who invested in Bayou on their behalf.

Tough October; lackluster year

October proved to bethe worst single month for hedge funds in many years, with even typically strong performing managers posting losses in the high-single digits. For some, the month wiped out the modest gains managers have made in what has proved to be a difficult year for getting strong returns. "Performance was terrible," said Daniel Strachman, managing partner of financial services firm Answers & Company Group and the author of "Getting Started in Hedge Funds."

Strachman believes the mediocre performance has also affected funds of funds, or managers who invest in a portfolio of hedge funds on behalf of clients for an additional layer of fees. But a snap-back in November, coupled with what many believe will be a strong December, could lift hedge fund returns out of their doldrums. If that happens, it would be a repeat of 2004, in which many hedge funds racked up their gains for the year during the final quarter.

Rise of "activist" managers

Whatever you call them – shareholder activists, corporate raiders, saber-rattlers – hedge fund managers who battle corporate managements in the hope of boosting target companies' stock prices generated headlines and also cash as the hedge fund style du jour. And they're taking on big targets. Famed agitator Carl Icahn, who launched his hedge fund late last year, rounded up a cartel of investors, including fellow activists Jana Partners, to take on behemoths like Time Warner. (Time Warner is the parent company of CNNMoney.com) Meanwhile, Bill Ackman's activist fund Pershing Square Partners has taken on a corporate behemoth of its own in agitating for change at McDonald's.

The race to registration

While hedge funds have known for more than a year that many of them will be required to register with the Securities and Exchange Commission, some un-registered managers are evaluating their options for not having to comply with the rule, which takes effect in February 2006. The SEC is not requiring managers who "lock up" their investors' capital for two years or more to register and is also giving a pass to firms who agree not to take in new money.

Said Jedd Wider, a partner in the private investment fund practice at law firm Orrick, Herrington & Sutcliffe, "Most of our clients who are required to register have gone through the process already; others are giving very serious thought to extending their lockup periods or looking to close their funds to new investors."

Meanwhile, hedge fund manager Phillip Goldstein, who is suing the SEC on the grounds that the SEC exceeded its regulatory authority, got a short-term boost to his case Friday when U.S. appeals court judge Harry Edwards, one of three judges hearing arguments in the suit, told an SEC attorney the agency stretched the definition of "hedge fund clients" to make the registration proposal work, according to news reports. The panel will issue a verdict in about three months – after the rule will have already gone into effect -- Goldstein's attorney told the Chicago Tribune.

Overstock, Rocker Partners, and the "Sith Lord"

What started out as a brief, straightforward civil complaint rapidly spun into a circus sideshow as Patrick Byrne, chief executive of online closeout retailer Overstock.com, accused famed short-seller David Rocker of conspiring with independent research firm Gradient Analytics to drive down Overstock.com's share price. Byrne filed suit against both firms and their principals, but his bizarre publicity junket soon overshadowed the contents of the suit.

In a conference call to investors and reporters, Byrne launched into a rambling diatribe in which he accused hedge fund managers, journalists, and a well-known Wall Street figure, whom he would not name but instead dubbed the "Sith Lord, " of conspiring to drive the company's stock price down. Rocker and Gradient filed a motion to dismiss the suit, and Rocker founder David Rocker told Fortune he is preparing to file a countersuit.

Automaker downgrades lead to losses

When two bond-rating agencies this summer cut General Motors' corporate bonds to junk, some hedge funds, as well as some investment banks, suffered heavy losses. Particularly hard hit were funds that were shorting the common stock of GM and holding long positions in the underlying bonds. When the bonds got downgraded, investors were forced to try to sell into a market with no buyers; meanwhile, investor Kirk Kerkorian announced he would acquire a large stake in GM, causing a price spike in the stock. While the debacle did not force any large funds to unwind, the events sent jitters throughout the markets.

A once-dependable strategy falters

Once considered a safe, conservative strategy, convertible bond arbitrage, in which managers buy convertible bonds and short the underlying stock, proved to be the worst performing hedge fund strategy this year, and the plunge caused some large convertible arbitrage hedge funds to close, including Marin Capital Partners, which had $2.2 billion in assets at its peak, and Alta Partners, run by Creedon Keller & Partners, which had about $1.2 billion at its peak. The rout began late last year, when investors in these funds, unimpressed with a streak of lackluster returns, began asking for their money back. The redemption requests forced managers to sell into a market with no buyers, which drove returns even lower. Convertible arbitrage funds are down 2.69 percent for the year to date through November, according to Chicago-based hedge fund tracker Hedge Fund Research.

The original article appears here.

-- MDT

Labels: Bayou Group, Gradient Analytics, Patrick Byrne

Last week The Daily Caveat wrote about the looming court challenges to the SEC's new hedge fund regulations (between 1999 and 2004 the SEC brought 51 fraud cases relating to hedge funds) set to take effect in February 2006.

A hearing was held on Friday last, allowing both sides to courteously express their views on the merits or pitfalls of the proposed SEC rules. The Washington Post has the rather contentious details.

And now, the undignified scrapping:

Appeals Judges Question SEC's Hedge Fund Rule

By Carrie Johnson
Washington Post Staff Writer
Saturday, December 10, 2005; D01

Appeals court judges sharply questioned yesterday whether the Securities and Exchange Commission had a reasonable basis for adopting a controversial rule that requires hedge funds to register with the agency.

A divided SEC passed the rule in a 3 to 2 vote last year, citing evidence that the loosely regulated investment pools had become a breeding ground for fraud and trading abuses. But New York fund adviser Phillip Goldstein sued to stop the rule, arguing that the SEC had overstepped its authority and did not provide adequate foundation for the move.

Goldstein's case appeared to get a boost yesterday based on questions from two of the three judges on the U.S. Court of Appeals for the D.C. Circuit panel.

"You don't have authority to act simply because you exist," Judge Harry T. Edwards told Jacob H. Stillman, the SEC's lawyer.

A few moments later, Edwards said: "We have to test your thesis, and your thesis doesn't hold up."

Judge A. Raymond Randolph also expressed skepticism about the agency's arguments.

Legal experts cautioned that it is difficult to draw conclusions about how a court will rule based on questions asked by judges during oral arguments. The appeals court, however, has criticized the SEC's approach in a few recent cases.

Earlier this year, the court sent back for more research a rule mandating that mutual fund board chairmen be independent of management. The SEC retooled the rule, prompting a second, pending legal challenge by the U.S. Chamber of Commerce. That case is to be argued Jan. 6.

Last month, the court rejected a separate bid by agency lawyers to impose financial penalties on board members at an investment fund called the Rockies Fund Inc., ruling that the agency had levied the fines "arbitrarily and capriciously."

Former SEC Chairman William H. Donaldson made the hedge fund effort one of his central initiatives before he resigned in June. In recent years, the market has boomed to include more than 8,000 funds with over $1 trillion in assets. Average investors and pension funds increasingly are investing in the funds.

From 1999 to 2004, the agency filed 51 fraud cases involving hedge funds. Last week, Millennium Partners LP, a highflying New York fund, agreed to pay $180 million to settle trading abuse allegations lodged by the SEC and New York state Attorney General Eliot L. Spitzer. In September, two top officers at the Bayou Management fund pleaded guilty to criminal charges for engaging in a fraud that cost investors $450 million.

Stillman, the SEC's lawyer, stressed to the appeals court yesterday that the agency moved to register funds with more than 14 investors and $25 million under management to further its mission of protecting investors.

"Aren't they really getting at trying to enhance the government's ability to identify and prosecute fraud when it occurs?" Judge Thomas B. Griffith asked a lawyer for Goldstein. "That's really what's at the core of this."

The rule is set to take effect in February. Critics fear the hedge fund rule could foreshadow inspections and other efforts to rein in the funds. Before it was adopted, the plan had been criticized by Treasury Secretary John W. Snow and Federal Reserve Board Chairman Alan Greenspan, among others.

A ruling is expected within the next several months, according Philip D. Bartz, a lawyer at McKenna Long & Aldridge LLP who represents Goldstein.

The original article appears here.

-- MDT

Labels: Bayou Group, Eliot Spitzer, New York AG

In his new colum Bloomberg regular John Wasik shares his doubts regarding the effectiveness of the SEC's upcoming regulation of hedge funds. Wasik's conclusion? To avoid putting your money in the hands of the next Bayou Management, seek outside assistance from your financial advisor and corporate private eyes:

Regulators May Never Police Hedge Fund Conflicts

By John Wasik
November 28, 2005
Bloomberg

The U.S. Securities and Exchange Commission is trying hard not to look like the bumbling film detective Inspector Clouseau in advance of its hedge-fund registration deadline in February. Already managers of the 8,000 funds that control $1 trillion in assets have found ways of avoiding registration. And it's unlikely the agency's inspection of the advisers will be too extensive, either.

As with many other investment products, you will have to be your own cop to ferret out conflicts at hedge funds and funds of funds, which package several hedge products. "Conflicts of interest -- they're everywhere,'' said Gene Gohlke, associate director of the SEC's Office of Compliance Inspection, who was speaking at a Fund of Funds Forum in New York on Nov. 14. "And they're particularly prevalent in the investment advisory business.''

The SEC is being honest about its inability to adequately supervise a huge, growing and sometimes unruly industry... The agency will only be able to conduct 1,200 to 1,500 inspections a year with 450 staff members. This team also tries to monitor 8,000 mutual funds from 1,000 fund groups... The odds are against the SEC collaring the next Bayou Capital, a $440 million hedge fund that collapsed in August and is under investigation for fraud...

You needn't be discouraged by the regulatory gap and can hire someone to be your watchdog... Hiring someone like an accountant, lawyer or financial planner to vet funds or funds of funds for you makes eminent sense... Some oversight of hedge funds is better than none, although the way the system is now, you will have much better protection if you do it yourself or hire someone akin to a private eye.

Indeed. Much more of interest in the full piece, regarding the February '06 hedge fund SEC filing deadline and the hurdles that still remain for the SEC before it can perform an adequate job in policing funds.

-- MDT

Labels: Bayou Group

Recently we had the opportunity to discuss the challenges of hedge fund due diligence with the fine folks at Risk Magazine, the world's leading fianancial risk management journal. The story has just appeared on the web and is also featured in the magazine's November 2005 issue. Following is a clip:

Fund investors turn to private investigators

Risk Magazine
November 2005
By Jayne Jung

The recent to turn to private investigators to dig deeper into fund managers and to conduct due diligence

A spate of hedge fund-related scandals in recent months has increased concern among investors about fraud, and is prompting many to turn to private investigators to dig deeper into fund managers and to conduct due diligence. "What's going on with Bayou, Refco and Man Financial makes people nervous. And nervous people call investigators," says Michael Thomas, a partner at Caveat, a Washington DC-based corporate investigation firm...

...Caveat's Thomas says investors' focus is broader than the financial markets when making investment decisions, and with good reason. Something as simple as a driving under the influence of alcohol or drugs charge might cause investors to withdraw cash from a fund manager, he says. Investors don't want there to be any kind of question mark hanging over the integrity, or principles, of a manager.

The full article appears here.

-- MDT

Labels: Bayou Group, Refco

In their November 21, 2005 issue Business Week has a long-form article on hedge fund due dilligence, recounting many of the familiar horror stories of the last few weeks. While there is nothing earth shattering to learn in the piece, it is worth a read for some insights into the process of investigation as well as for some first pre-investigative steps that clients can undetake before bringing in an investigator for a more thorough check. The message is simple, doing your homework pays off. Spend a little to save a lot. Here's the lead:

Hedge Fund Sleuths

November 21, 2005
Business Week

"For sizable fees, they put secretive investment partnerships under a microscope"

The recent high-profile blowups of two hedge funds, Bayou Management and Wood River Capital Management, have raised an important question: What can hedge fund investors do to avoid getting burned by unscrupulous managers? The answer: Quite a bit, as long as you're willing to spend time or money vetting these investments...

Read on, here....or save time and just give Caveat a call.

-- MDT

Labels: Bayou Group, John Whittier, Wood River Capital

If there's ever a move you want to take back, recommending a fraud-laden hedge fund to your clients is probably on the list. In this CNN article Hennessee Group, a prominent billion dollar investment advisory firm explains how, given all that we know now, they could have recommended Bayou Management to their circle of clients.

Some investors remain unimpressed with Hennessee's explanations and have their lawsits prepped and pending. Here's the lead. Click through to the full article for the complete story, including details on regulatory rumbles regarding the role of thrid party hedge fund marketers as well as advisory firms such as Hennessee.

Firm that pitched Bayou facing questions - After hedge fund blowup, advisory firm says it might have acted differently; others also under fire.

November 7, 2005
By Amanda Cantrell
CNN/Money, staff writer

NEW YORK (CNN/Money) - Hedge fund advisor Hennessee Group recommended Bayou to its clients. Now it's being sued. The firm says it regrets steering clients to Bayou but had reason to think at the time the hedge fund was legitimate.

Bayou's founder and CFO pleaded guilty nearly six weeks ago to charges that they raised more than $450 million from investors, lied about the fund's returns and formed a phony accounting firm to audit the firm's results.

Hennessee Group admits it should have done a better job of spotting red flags at Bayou, including the fact that Bayou wasn't using a well-known auditor. Hennessee recently spoke out about Bayou, acknowledging that the firm didn't catch the fraud, but defended its review process nonetheless.

"I can see why, in hindsight, it might seem like this was all very obvious, but it's important to realize how it appears when you are going through it real time," Leeana Piscopo, senior vice president and chief compliance officer at Hennessee, said in an interview...

Extensive additional details in the full article.

-- MDT

Labels: Bayou Group

Via Reuters:

Hedge fund fraud less likely in Europe than U.S

Reuters
November 4, 2005
By Pratima Desai

LONDON - The risk that hedge funds will defraud investors is lower in Europe than in the United States, because most European hedge funds turn to independent administrators to value their books, hedge fund analysts said.

A lack of independent valuations contributed to the high-profile failure earlier this year of the U.S.-based Bayou Group hedge fund. Its founder and chief executive pleaded guilty to fraud by misrepresenting the value of assets, in a scheme prosecutors said cost investors $450 million.

"You should be wary of self-administered funds ... That's where the danger is," said Derek Stewart, a director of Mellon Global Alternative Investments.

In Europe there have been no major failures in recent years, because hedge funds normally use independent administrators, even though it is not a legal requirement. Over the years it has become a standard industry practice, which investors have come to expect.

"Hedge funds outside the United States without independent fund administrators are unlikely to have any serious investors," said Joe Seet, senior partner at Sigma Partnership, a specialist hedge fund advisory firm.

"Most hedge funds that collapse do not have fund administrators that are truly independent," he added.

The reputation of an independent administrator is also important, and that means being registered with a local regulator. In Dublin, for example, analysts estimate there are close to 40 fund administrators and that all are registered with Ireland's central bank. Hedge funds based in Asia have in the main taken their cue from Europe and use independent administrators to value their books, analysts say.

STARTING TO CHANGE

In the United States, new SEC rules requiring most hedge funds to be registered by February 2006 mean that funds are starting to change the way their books are valued and that more are turning to independent administrators. But many U.S. independent administrators do not yet have the specialist resources to properly value complex derivatives in hedge fund portfolios.

"Most of the really big hedge funds are still U.S.-based, and they are becoming more sensitive to issues about independent (valuations) ... independent fund directors and corporate governance," Seet said. Investors in hedge funds that trade liquid markets such as listed securities, government bonds or foreign exchange have less cause for worry.

Examples include managed futures funds that trade exchange-traded futures and equity funds that buy and sell stocks on major stock markets in London, New York or Tokyo, where prices are transparent and easily available.

Problems normally arise in less liquid instruments for which prices can be more easily manipulated, which include over-the-counter derivatives such as options, convertible bonds, private equity investments or loans.

"Valuation becomes more important with funds who have illiquid assets," said Doug Fulton, a principal at Westhall Capital. "If there is any reliance upon the fund manager for valuations or on (one) mainstream market source (bank or broker), then it's opaque."

Original article appears here.

-- MDT

Labels: Bayou Group

KL Group...Bayou Management...Liberty Corner Advisors...Wood River...If you follow hedge funds - and really in investment today, what could be hotter than hedge funds - these are the names that keep you up at night. In order to avoid biting into the next bad apple many individual and institutional investors are turning to corporate investigators such as ourselves to vet investment opportunities.

Via Reuters:

Scandals make hedge fund sleuthing pay off -experts

October 12, 2005
By Svea Herbst-Bayliss

BOSTON - Back-to-back hedge fund scandals are sending investors a frightening message: Spend a few thousand dollars now to sidestep a multimillion-dollar fraud later. Lawyers and investigators said this week that the collapse of hedge fund Bayou Group and suspected fraud at hedge fund Wood River Partners likely will prompt investors to take more precautions before stepping into the fast-growing $1 trillion industry.

"The circle of who has gotten burned is getting bigger and the trend is that people will ask for more due diligence because they realize it pays to conduct these inquiries," said Peter Turecek, who manages the hedge fund business at Kroll, a New York-based security consulting firm. Financial regulators are sorting out what went wrong at Bayou, where investors are said to have lost $300 million, and Wood River, which once said it was managing $500 million.

Investors and lawyers have not been able to reach Wood River in the last few days, and in a lawsuit filed by Lehman Brothers against Wood River, the Wall Street investment bank said that it suspected the hedge fund ceased operating. Wood River is under investigation by the U.S. Securities and Exchange Commission.

These are the latest blowups in an industry that has attracted billions of dollars from pension funds, endowments and charities since becoming a hot asset class by delivering outsized returns in the late 1990s and positive returns during the stock market's almost three-year sojourn in bear territory.

Many investors, particularly funds of funds like Glenwood Capital Investments and Mesirow Financial that select hedge fund portfolios, already rely on investigators to snoop around and verify a manager really is who he says he is. For fees ranging between $2,000 and $50,000, firms will compile dossiers that can turn up anything from unpaid parking tickets to lawsuits to lies on resumes.

"Getting reports on managers shows that for $2,000 up front, you can avoid people like this instead of having to spend hundreds of times that amount to recoup millions of dollars in losses later," said Randy Shain, executive vice president of First Advantage CoreFacts LLC, which investigates hedge funds. "It is cheap insurance," he added.

Still, there are plenty of investors who pick managers based on a gut feeling and who consider due diligence a cost -- heaped on top of hedge funds' already hefty fees -- that is not part of their investment, lawyers and investigators said. But these are the people who might come around now, they added. "Every time there is a fraud, investors profess to do more due diligence and this is no different," said Scott Berman, a partner at law firm Friedman Kaplan Seiler & Adelman.

Those who still trust their gut may change their minds after hearing what firms like First Advantage CoreFacts turned up. This summer, a report on Wood River founder John Whittier showed the former technology analyst faced four tax liens, was sued for not paying rent and was sued for $1.6 million in securities losses, Shain said. His clients passed on Whittier. "Taken together, these three things added up to a red flag," Shain said, explaining that "the report shows Whittier ran out of money or that he's sloppy. Neither inspires confidence."

Fact checking also turned up discrepancies on Bayou founder Samuel Israel's resume when Shain's analysts tracked down the hedge fund manager's former employer, Leon Cooperman, who said he hadn't been head trader and wasn't there for four years.

As investors burned by these blowups wait to recoup money, the trend will be for people to spend a premium on "reputational reviews" that highlight behavior patterns which could become a liability later, investigators said. "People will want to know that the person is a good trader, but they'll also want to hear if the guy heads off to the bar and drinks all night every night," Kroll's Turecek said.

Looking ahead, investors also are likely to press for more clarity on operational matters like who checked the books after Bayou fabricated a firm to certify its returns. "We were able to discover that Bayou's auditor was bullshit," Shain said. This week, Reuters reported that Wood River told potential investors it had retained two firms as independent auditors. But those auditors on Tuesday denied any relationship with the controversial hedge fund.

The original article appears here.

-- MDT

Labels: Bayou Group, John Whittier, Kroll, Milberg, Wood River Capital

So says Business Week, recounting the sad, sorry, now-familiar tale - a promise of returns combined too-good-to-be-true with too little due diligence. And it all ends in tears:

Another Fishy Hedge Fund

October 13, 2005
By Justin Hibbard and Adrienne Carter
Business Week

A mysterious money manager, nonstop hype, plunging returns, empty offices, and now an SEC probe -- the intrigue at Wood River deepens.

Ketchum, Idaho, is the kind of place where people tend to know each other. Close to the Sun Valley ski resort, the tony town of 3,873 boasts several Wall Street refugees who manage money for wealthy neighbors and clients elsewhere. Yet few residents say they know John Whittier, a 39-year-old money manager who moved to the area about five years ago and opened an office for his fledgling hedge-fund firm, Wood River Capital Management, named for the picturesque river that runs through Ketchum.

Locals describe Whittier as an absent-minded-professor type who drives a Lincoln Navigator and sometimes fetches his morning coffee from a Tully's café in his pajamas. Beyond that he keeps to himself, they say. Investors in Wood River's funds apparently didn't know much about Whittier, either. The ex-stock analyst at investment bank Donaldson, Lufkin & Jenrette presented himself as a savvy stock trader overseeing hundreds of millions of dollars for investors. Marketing materials for his flagship fund trumpet 25% returns in the first eight months of this year, a period when the stock market was basically flat.

But some investors got nervous and tried -- unsuccessfully -- to get their money back late last month when Whittier's big bet on an obscure Silicon Valley stock slumped badly, say investors' lawyers. The firm stopped answering its phone. Last week, Wood River's offices in downtown Ketchum were locked and apparently unoccupied. FedEx packages piled up outside next to strollers and a red wagon left by Whittier's two young children.

Wood River is now the subject of a preliminary investigation by the Securities & Exchange Commission -- the latest hedge-fund scandal that is sure to intensify calls for greater government oversight of these lightly regulated investment pools. Only two weeks ago the founders of collapsed Bayou Management, a hedge fund in Stamford, Conn., pled guilty to criminal fraud.

As in the Bayou affair, Wood River presented red flags that careful investors should have noticed. The firms Wood River's promoters named as its outside auditor and bookkeeper, for example, say flatly that they didn't provide those services to the hedge fund. Morgan Stanley (MWD ), listed in April as one of the hedge fund's two prime brokers, in fact was not, according to a person familiar with the matter...

This is just the start of quite the lengthy article and one well-worth reading. The full version can be found here, courtesy of BusinessWeek.com.

-- MDT

Labels: Bayou Group, John Whittier, Morgan Stanley, Wood River Capital

Via Reuters:

U.S. hedge funds may slip past SEC, research shows

October 3, 2005
By Svea Herbst-Bayliss
Reuters

Hundreds of U.S. hedge funds may slip through the crack when they register with regulators, new research shows, causing a humiliating if not harmful situation as authorities begin to scrutinize the industry more closely. Life will change for thousands of loosely regulated hedge funds in February, when they must follow a new rule designed to reduce fraud in the hugely popular and often secretive $1 trillion industry. Funds that manage $30 million or more for 15 or more clients must register with the Securities and Exchange Commission and let the agency's inspectors review the hedge fund's books at any time.

With less than four months to go before the new rule takes effect, however, independent researchers, lawyers and even SEC officials said the agency's limited resources will be stretched dramatically, and some funds will not face the extra scrutiny -- at least not immediately. "We expect that some 1,900 hedge funds will plan to register with the SEC before February and that the agency will get bottlenecked, which means that a lot of hedge funds will be registered by default," Brian Shapiro, president of Carbon360, the research arm of CarbonBased Consulting, told Reuters.

Traditionally, the SEC has 45 days to accept or reject an advisor's package. But because so many hedge funds are waiting until the last minute to apply, the agency may not eye all the documents in time, lawyers said, agreeing with the research. "I think this is going to cause a traffic jam," said Paul Roth, partner at law firm Schulte Roth & Zabel, explaining some funds' applications may become effective without review. More problematic, however, could be what happens after the fund is registered, the researchers said.

Usually, the SEC conducts an audit within the first year of registration, which Carbon360 has calculated means the agency will have to review an additional 158 funds per month, tying up two examiners for four weeks on each one. SEC Commissioner Paul Atkins said last week that the agency may not be able to keep up. "We have neither the resources nor the expertise to oversee all of the potential new registrants," he told the hedge fund industry's lobby group MFA in a speech. Carbon360 based its research on public SEC documents and released it during the same week when the founders of collapsed hedge fund Bayou Group pleaded guilty to fraud, marking the latest industry blow-up. Federal and state investigators are still probing how the pair cheated investors out of an estimated $300 million.

For the SEC, admitting to staff shortages may be especially embarrassing after it worked for years to put the fast-growing industry on a tighter leash as pension funds, endowments and charities pour billions into hedge funds every year. If fund managers know the SEC's resources are stretched, the researchers said the agency's ability to protect the public may be watered down because managers will have less fear of being caught if they commit fraud. "Essentially, the SEC could fall flat in its defense of the public interest if the agency is as overwhelmed as we suspect it may be," Shapiro said. The SEC acknowledged the problem, but warned it will be vigilant nonetheless.

"Resource contraints don't allow us to have a cop on every corner," SEC spokesman John Nester said. "We must therefore use our existing resources as efficiently and effectively as possible, and identify the highest risk areas that warrant scrutiny by SEC examiners." Industry lawyers, meanwhile, said that letting a few funds slip through the cracks during the registration process will not be very harmful. "The registration form isn't where you catch bad people. The examination process is where you catch bad people," said Elizabeth Fries, partner at law firm Goodwin Procter. Schulte Roth & Zabel's Roth agreed. "If some funds become effective without being reviewed, they will be reviewed later. It does not seem to be a particular problem," Paul Roth said.

The original article appears here.

-- MDT

Labels: Bayou Group

More word on the regulatory fallout from fall of Bayou Management, via CNNMoney:

Why regulators are looking at hedge funds and derivatives -- and how they could affect you.

September 24, 2005
By Amanda Cantrell
CNN/Money staff writer

NEW YORK (CNN/Money) - In the summer blockbuster "War of the Worlds," ordinary Americans are forced to run for their lives when alien invaders wreak havoc on their planet. What the victims didn't know was that the seeds for the attack had been germinating beneath their feet for years.

While that was a movie, some financial regulators fear that a less dramatic but similar scenario could be developing in the nation's financial markets. Their target? Two key segments of the markets -- hedge funds and credit derivatives -- that have been mostly invisible to many ordinary investors but have grown to massive proportions in recent years.

What's making regulators take notice now? Many complex factors, but it boils down to this: those pieces of the capital markets have grown so big so fast, and are so complicated, that any problems could mushroom and spark big losses -- and huge volatility -- for investors around the world. Hedge funds now manage an estimated $1 trillion in assets worldwide, and in some cases, a single fund can account for a big chunk of the volume on some exchanges. (For more on hedge funds, click here).

The credit derivatives market has swelled to an estimated $8.4 trillion -- that's trillion with a 't' -- and regulators are concerned about trading in these largely unregulated investments. (For more on credit derivatives and how they work, click here.) "Credit derivatives and hedge funds have grown fairly spectacularly over the last five years," said Andrew Lo, director of the MIT Laboratory for Financial Engineering and a managing member at the hedge fund Alpha Simplex Group.

"There are enormous amounts of capital that have come in and are being deployed in fairly highly leveraged transactions. We don't know the exact amount of leverage being used, and there's even less data about credit derivatives market," he said. Because of this rapid growth, regulators are concerned that if something happens in the credit derivatives space, such as several companies defaulting on their debt at once, this would affect not just hedge funds but could unnerve financial markets, and affect interest rates and the broader economy.

To be sure, big losses from a series of credit defaults or hedge fund blowups would hurt mostly big investors on Wall Street, but with more and more pension funds putting money into hedge funds, average workers and investors could also suffer. Concerns about the credit derivatives, which derive their value from underlying corporate bonds, prompted the New York Federal Reserve to meet with several Wall Street firms recently.

The regulators want to make sure that if several companies default on their debt at once or in rapid succession, the financial markets could handle the losses and selling in the derivatives market, without sparking a broader round of panic selling on Wall Street. Two complex derivatives -- credit default swaps and collateralized debt obligations -- have become especially popular with hedge fund investors in recent years.

People familiar with the matter say regulators want to ensure that the players in the market have enough money to live up to their obligations. And they want to encourage orderly growth in these exotic investments to help curtail the risks of a "systemic" shock to the financial markets. While regulators are shining their lights on the credit derivatives market, this doesn't mean the regulatory scrutiny for hedge funds will lighten up any time soon.

Christopher Cox, the new chairman of the Securities and Exchange Commission, told the Wall Street Journal recently that he plans to forge ahead with a new rule requiring the funds to register with the SEC as investment advisers. While some on Wall Street had speculated Cox might reconsider the rule, many others weren't surprised. The new rule came from ex-SEC chief William Donaldson, who initiated a two-year review of hedge funds and pushed the rule through despite a divided commission, which narrowly passed it by a 3-2 vote.

Cox's decision to go ahead comes as federal and state officials investigate the collapse of Bayou Management, a Stamford, Conn.-based hedge fund. Federal prosecutors have accused the fund of raising $300 million from investors by lying to investors about returns and their funds' performance. Officials have seized $100 million believed to belong to Bayou investors.

The original article appears here.

-- MDT

Labels: Bayou Group

The popularity of hedge fund investing has engendered growth in the investigative industry, as wealthy individuals as well as institutional investors seek assistance in vetting potential investment opportunities. Hedge funds make lots of money for lots of very happy people, but as in any business endeavor there are the unscrupulous few who, in the interest of enriching themselves, turn an hontest transaction into a horror story for investors.

The following article, which originally appeared in the New York Times provides an excellent overview of the potential pitfalls of investing without adequate caution and preparation. In these areas, the services of a quality corporate investigative firm can be a tremendous asset.

Via The Ledger.com:

Want a Hedge Fund? Here's Your Homework

By Geraldine Fabrikant
New York Times
September 11, 2005

IF you're thinking about investing in a hedge fund, how can you steer clear of the likes of the Bayou Group, the recently imploded hedge fund company and brokerage firm run by Samuel Israel III? Unfortunately, getting information about individual hedge funds isn't easy.

While hedge funds have generally had positive returns, experts point out that some of them can be big money losers - and that this makes the decision to invest in any single fund a very risky business. A variety of databases provide information about hedge funds, but they are by no means infallible, and in any case many of them are often unavailable to the average investor.

The collapse of Bayou is a case in point. Federal prosecutors in Manhattan sued Bayou on Sept. 1, saying the company had defrauded investors since 1998 by misrepresenting the fund's performance. The complaint said that Bayou had misstated its assets and that its books, which it had claimed were evaluated by independent auditors, were certified by a bogus accounting firm whose registered agent, Daniel Marino, was also the chief financial officer of Bayou.

The case against Bayou began to develop in May, when Arizona authorities seized $101 million held by a man to whom Mr. Israel had turned it over in a seemingly desperate effort to make some fast money to cover his fund's losses.

For hedge fund investors determined to avoid such debacles, there are some free Web sites that offer data on legal and financial developments, including the sites of the Securities and Exchange Commission (www.sec.gov) and the National Association of Securities Dealers (www.nasd.com). While such sites contain a wealth of information, the often do not include the most telling signs of trouble in a hedge fund.

Randy Shain, the co-founder of BackTrack Reports, which researches hedge funds for institutions and some wealthy individuals, says that in the Bayou case, several red flags - including questions about Mr. Israel's character - would not have been evident to people contemplating an investment in the fund. For example, it would have been difficult to learn from publicly available data that Mr. Israel had exaggerated his position at one hedge fund, had been charged with drunken driving and had been accused in a lawsuit by a former employee of violating securities regulations.

A litany of problems like this is hardly typical of hedge fund managers, but it does underscore how difficult it is to vet a fund, said Charles Stevenson, a veteran hedge fund manager who now runs the Navigator Diversified Strategies fund, which is a fund of hedge funds. (A fund of funds is a group of individual hedge funds that has been assembled by a third party, an arrangement that provides diversification and, perhaps, a margin of safety.) "If a manager's character is not reliable enough for you to trust them with your wallet," Mr. Stevenson said, "then the returns will be less relevant than whether they actually return any of your money."

In promotional material for the Bayou funds, Mr. Israel told investors that he had worked as the head trader at Omega Advisors, a hedge fund run by Leon Cooperman, a former Goldman Sachs partner. But Mr. Israel had misrepresented the length of his employment at Omega as well as his position there, Mr. Cooperman said in an interview. Mr. Israel had worked there as a trader for 18 months, but had not been there for four years as the head trader as he had claimed, Mr. Cooperman said.

Many hedge funds do not have a public relations operation geared toward answering such questions raised by outsiders. Would Mr. Cooperman have taken a call about Mr. Israel's credentials from a prospective investor in the Bayou funds? "I can't answer that," Mr. Cooperman said. "If somebody calls me for a reference check, I will respond factually and appropriately. But certain firms are very cautious about talking about former employees."

Another cautionary piece of news for Bayou investors should have been that while Omega oversees two funds of hedge funds that invest money with 25 different managers, Mr. Israel's group wasn't among them. "We never invested in Sam Israel's hedge fund nor did one trade with his securities company," Mr. Cooperman said.

Promotional materials also stated that Mr. Israel began his career at F. J. Graber & Company, a money management firm geared "toward high-velocity trading" and run by its founder, Fredric Graber. One person who knew both men, but requested anonymity, recalled that Mr. Israel had worked for Mr. Graber as a summer intern, a position arranged through a family friend, but added that Mr. Israel "never had a leadership role" at the firm. Mr. Graber, who closed his firm some years ago, could not be reached for comment.

Potential investors might also have been concerned if they had learned other information. Mr. Israel had been arrested in New York State in 1999 and accused of "driving under the influence" and charged with criminal possession of a "controlled substance," Mr. Shain of BackTrack Reports said; the case was discontinued a year later. That case was reported without elaboration on LexisNexis, a subscription data base, where Mr. Shain's firm found it while researching Bayou for a potential investor. In order to get details about the case, Mr. Shain had to send a researcher to State Supreme Court in Manhattan.

Sometimes red flags are more immediately visible. The documents that Bayou made available to its investors say that Richmond-Fairfield Associates was Bayou's accounting firm. Charles Levenberg, a private investigator who researches hedge funds, said that lack of information about the accounting firm was a warning sign. "If they are not using somebody you have heard of, that is a big red flag," he said. "You have to wonder why." The government has contended that Richmond-Fairfield was controlled by Bayou.

Evidence of possible problems can sometimes be uncovered in news reports. James R. Hedges IV, a partner at the Imperium Partners Group, a hedge fund based in New York, recalled that in 2002 his firm was looking into an investment in the Lancer Group, a hedge fund based in Manhattan. But Mr. Hedges said he had seen a news report about a lawsuit filed in Federal District Court in Miami that same year in which the S.E.C. had accused Bruce Cowen, a managing director of the Lancer Group, of participating in a conspiracy to divert funds from Lancer investors and, ultimately, funnel some of it to his own pocket. That information "told us to stay away" from the Lancer Group, Mr. Hedges said.

A year later, the S.E.C. accused the Lancer Group of inflating the net asset values of its funds in an effort to mislead auditors and attract investors. The agency continues to seek fines, permanent injunctions against the group and penalties. For investors who are intent on picking hedge funds themselves, despite the risks, experts say that it may pay to subscribe to services that track lawsuits. For example, an investor can subscribe to Pacer, an online index to federal civil, criminal and bankruptcy cases nationwide.

A Pacer subscriber could have found that a suit was filed against Bayou in 2003 in Federal District Court for the Eastern District of Louisiana by a former employee, Paul T. Westervelt Jr., and his son. The plaintiffs contended that Bayou had failed to provide them with necessary business documents and that Mr. Westervelt discovered "possible violations of the S.E.C. regulations governing the operating of hedge funds."

The case has moved from federal court to arbitration. Lawyers on both sides did not return phone calls seeking comment. In 2004, Mr. Israel wrote to investors telling them of the suit. But an earlier warning of a former employee's decision to sue the company might have been helpful to investors. The problem for individual investors is that many of them "have made a lot of money doing something else," Mr. Shain said. "They have a false sense of security about their own sophistication in analyzing financials," he added.

To winnow out potential problems, investors may want to look for some common-sense warning signs. In addition to checking for evidence of possible deception or illegality, some analysts say they try to check whether the manager is in the midst of a difficult divorce, as Mr. Israel was, which can add psychological and financial pressures.

One basic metric is the manager's employment record. Michael Steinhardt, a manager who ran his own fund for 29 years and is now starting a group of exchange-traded funds, said, "A long track record is the best endorsement." In 1997, a fund run by Barbara Doran, who had previously been an institutional equity sales executive at First Boston and then a senior vice president at Lehman Brothers, shut its doors after losing 80 percent of its value. Ms. Doran had started the fund just three years earlier. At its height it was worth only $35 million. Ms. Doran declined to comment last week.

Of course, big financial institutions have made bad bets on hedge funds, too. Through a fund offered by an investment unit, J. P. Morgan had $662,602 in Bayou as of March 31, which it has written down to zero. A spokeswoman for J. P. Morgan said that as a result of the investigation, the firm was no longer marketing the fund to investors. But over all, the odds favor big institutions. "They have a better chance of weeding out the problem funds," Mr. Shain said.

The original article appears here.

-- MDT

Labels: Bayou Group, Louisiana, Milberg

Investigative firm, Kroll's data recovery unit, Kroll Ontrack is helping businesses crawl out form under the muck...one hard drive at a time.

Via the Minnesota Star Tribune:

Rescuing the data from the morass

H.J. Cummins
Star Tribune
Published September 11, 2005

There's still mud as thick as gumbo roux in and around much of New Orleans. But as people begin thinking beyond survival to recovery, some are wading into their businesses to salvage the records they will need to start over. Don't think muddy file cabinets. They're as outdated as the rotary phone. Think computers -- specifically, the hard drives inside them whose spinning disks are now the repository of everything from employee pay scales to customer addresses to the secret formula to the company's success.

Last week, the first of the drives pulled from the bayou muck started arriving at Kroll Ontrack, a data-recovery company based in Eden Prairie. Kroll Ontrack is a unit of Kroll Inc., which is part of risk consultant Marsh & McLennan Co., both based in New York. A crescendo of phone calls started up, too, mostly from people asking, if they get their hard drives up to Kroll Ontrack, is there any hope of retrieving anything on them?

At least one business had the bad luck of Hurricane Katrina hitting both its headquarters and its backup storage site, said Jim Reinert, senior director of software and services at Kroll Ontrack. "It was just such a huge storm," Reinert said. When those calls come in, he is in fact very encouraging. "Every case is different, but in general we expect those drives to be highly recoverable," he said. "Even if they're buried in nasty water, they are mostly recoverable."

The first thing Kroll Ontrack does is advise customers how to handle the drives: Don't try to turn on the computer. Package them like they were fine china. And don't let them dry out -- a sealed plastic bag usually does the trick. At the Eden Prairie laboratories, the drives go through diagnostics to find out how many files have survived. Much of the cleaning needs to be done in a special "clean room," where air quality, temperature and humidity are hyper-controlled. A speck of dust can disable the disks.

The company manages to retrieve part or all of almost 90 percent of the drives that come through, said Jeff Pederson, manager of data recovery operations. Floods and fires often do less damage than internal problems, such as another part of the hard drive hitting the disks, Pederson said. The files under any scrape are gone, he said. Kroll Ontrack retrieved 99 percent of the contents of two laptop drives from the space shuttle Columbia, which broke apart in its return to Earth in February 2003. The drives were found at the bottom of a lake, Reinert said. Some of the other requests coming from the Gulf region involve recorded tapes, still the most common form of backup, Pederson said.

One credit union got its tapes safely out of New Orleans, he said, but then had to bring them to Kroll because it didn't have the equipment to run them. Kroll Ontrack transfers the recovered files to CDs, DVDs or external hard drives. For some idea of the volume of information involved, the company explained: The typical drive comes in with about 20 gigabytes of data. It would take more than 4 million sheets of paper to cover that much material. Those sheets, in a stack, would be taller than the Empire State Building.

For a standard PC or laptop, the company charges about $100 for the diagnosis and $1,000 to recover files, Reinert said. Prices vary for more complicated drives and for batches of 20, 50 or more drives from a client company. The diagnosis usually takes a day or two. The whole process, start to finish, usually takes two to five days. Kroll Ontrack is gearing up for a jump in business because of the hurricane, though Reinert said they really don't know yet what to expect. "It could be hundreds of jobs, or thousands; it's too soon to know," he said. "But our business usually tracks with the recovery in cases like this, so we're looking at months, for sure."

The original article appears here.

-- MDT

Labels: Bayou Group, China, Kroll