It’s been over a year in the making. EU Finance ministers have overcome a long stalemate that featured bickering and dashed compromises, and agreed to move forward on adopting new regulations for foreign hedge funds and other alternative investments.
France – which wanted to give individual countries veto power over hedge fund access — backed down as it became increasingly clear it was alone in its objection to the passport regulations. The 27-nation bloc’s finance ministers today struck a deal when France succumbed to UK demands for far more industry-friendly rules. It was only a month ago that France announced it would oppose the so-called “passport” provision for third-country funds, which would give those that meet the tougher new European standards the right to operate across the EU.
Germany initially supported France’s move, but the country’s finance minister, Jörg Asmussen, became increasingly unhappy with France’s refusal to compromise, especially after U.S. Treasury Sec. Timothy Geithner blasted France’s opposition as protectionist.
The key concession was on the passport. France agreed to extend it to foreign hedge fund and private equity managers, and backed off its demand that it be issued by a new pan-EU financial regulator. In exchange, the U.K. agreed to delay the implementation of the passport for foreign funds until 2015.
French Finance Minister Christine Lagarde could barely disguise her contempt for the deal.
“It is indeed a compromise,” she said. “We could have probably come up with something better.”
The industry lobby, by contrast, could barely hide its delight.
“There is still much in the directive that will be difficult to implement and there will be a heavy compliance burden that the industry will have to bear,” Andrew Baker of the Alternative Investment Management Association said. “But the impact will be far less severe than if something closer to the original proposal had been agreed.”
Under the compromise, alternative investment firms will be placed under the supervision of new EU regulator. They will also face tougher reporting and custody requirements and will be subject to a summary bans on short selling.
The new language is set to be approved by the European Parliament next month.
Tags: alternative investment management association, alternative investments, andrew baker, asmussen, christine lagarde, compliance burden, compromises, finance ministers, financial regulator, french finance minister, hedge fund, hedge funds, investment firms, passport regulations, private equity managers, stalemate, timothy geithner, u s treasury, veto powerOctober 20, 2010 at 12:01 am | Hedge Fund Regulatory News | 
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Colorado hedge fund manager Sean Mueller will enter a guilty plea for rooking investors out of $20 million in a Ponzi scheme that featured a suicide attempt.
As Start a Hedge Fund .Com reported last week, Mueller has been charged with theft, securities fraud and racketeering. Then, last Friday, Mueller announced he would waive a preliminary hearing. His lawyer then disclosed that Mueller and prosecutors agreed on a guilty plea.
“We have reach an agreement that will be settled,” Rick Kornfield said. The plea deal will be made public at a Nov. 1 hearing.
Mueller has been held in custody since turning himself in last week, and has not sought bail. “Mr. Mueller is very sorry and very remorseful,” Kornfield said. “It is genuine.”
According to prosecutors, Mueller lied to investors about the size and success of his Mueller Capital Management and its Mueller Over Under Fund. According to the state’s lawsuit against him, Mueller admitted he scammed investors in a series of e-mails and notes written prior to his suicide attempt in April, when he was talked down from a building in suburban Denver. In a note written after the suicide attempt, Mueller admitted that documents claiming his Over-Under Fund managed $122 million were falsified. He wrote that only $15 million remained of the $20.6 million he collected.
Mueller also allegedly promised double-digit returns regardless of market conditions, telling potential investors he had never lost money in eight years and consistently returned between 12% and 25% annually.
Among the 65 victims listed in court documents were Denver Broncos Hall of Fame quarterback John Elway, and Blaine Rollins, a board member of the Lance Armstrong Foundation and the Burridge Center for Security Analysis and Valuation at the University of Colorado.
According to prosecutors, only $9.5 million remains.
Tags: capital management, denver broncos, guilty plea, hall of fame, hedge fund manager, hedger, lance armstrong, lance armstrong foundation, plea deal, ponzi scheme, preliminary hearing, quarterback john elway, securities fraud, security analysis, suburban denver, suicide attempt, university of coloradoOctober 19, 2010 at 12:01 am | Hedge Fund Crime | No comments
Charles Ponzi, the original schemer
It’s been two years since the collapse of the Tom Petters Ponzi scheme, yet the bodies keep floating to the surface. Last week, Palm Beach Capital Management and fund managers Bruce Prevost and David Harrold were charged by the Securities and Exchange Commission (SEC) for swindling investors out of $1 billion, nearly a third of the total $3.65 billion in losses resulting from the fraud.
The fund and its two Florida-based managers face a SEC civil action for violating federal securities regulations by lying to investors about the status and quality of their funds “invested” with Petters.
The SEC complaint said that the fund managers pocketed $58 million in fees between 2004 and 2008 when they were making the Petters investments.
Investors with Palm Beach Capital Management and an affiliate fund were characterized by the SEC as individuals, foundations, family trusts and other hedge funds from across the United States.
“Prevost and Harrold portrayed themselves as guardians of their hedge fund investors while in fact they facilitated Tom Petters’ fraudulent scheme through lies and deceit,” said Robert Khuzami, director of the SEC’s Division of Enforcement.
The SEC said investors with the Palm Beach fund thought they were financing consumer electronic goods that were being sold to big-box retailers and that the retailers, in turn, would pay the funds directly. In reality, the funds came from Petters, who raised the money from newer investors.
“Prevost and Harrold did not disclose this material fact to investors in the funds and instead continued to lie about the operation,” the SEC said in a statement.
By 2008, as the Ponzi scheme began to collapse, Prevost and Harrold began exchanging old loan documents from Petters with new ones to make it look as if business was still profitable, the SEC said, while telling investors that the funds were generating “the same steady profits” as before.
The SEC is seeking a permanent injunction against the two fund managers, disgorgement of profits and an unspecified financial penalty.
Harrold and Prevost could not be reached for comment.
Petters was sentenced to 50 years in prison in April after being found guilty on 20 counts of wire and mail fraud.
Tags: capital management, david harrold, disgorgement, family trusts, fraudulent scheme, fund investors, fund managers, hedge fund, hedge funds, palm beach, ponzi scheme, robert khuzami, securities and exchange commission, securities regulations, tom pettersOctober 18, 2010 at 12:01 am | Hedge Fund Crime | 1 comment
Compromise talks failed again yesterday in the European Union’s long chess match over proposed “passport” regulations for hedge funds.
The U.K. and France have checked each other’s efforts to break the stalemate over the issue. At stake is whether qualified foreign hedge funds will have centralized access to all 27 EU markets, a move that is opposed by the French unless counterbalanced by some sacrifices extracted from the proponents.
The issues presented at the negotiations are not black and white, although some of the smaller nations may feel like pawns caught between the two sides in the battle. Clearly, some concessions are needed to advance the talks.
Agreeing on those concessions now falls to Christine Lagarde and George Osborne, the French and British finance ministers. The two are expected to attempt to reach an accord in advance of next week’s meeting of EU finance minister, where it is hoped a deal can be reached.
One of the non-starters in this week’s negotiations were a plan that would allow EU countries to decline the passport agreement.
“Britain believes this would be an opt out,” one diplomat told reporters. “It allows member states to pick and choose.”
The U.S. is pushing hard for a version of the passport that will be available to foreign hedge funds. In addition, the European Parliament, which must approve the alternative investments directive alongside EU governments, is also demanding it.
One diplomat underscored the urgency of reaching a deal next week.
“If there is no agreement now, it is going to last for another two years,” a diplomat said.
Tags: alternative investments, chess, christine lagarde, concessions, diplomat, eu countries, european parliament, finance minister, finance ministers, george osborne, hedge funds, member states, negotiations, passport regulations, pawns, proponents, sacrifices, stalemate, urgencyOctober 15, 2010 at 12:30 am | Hedge Fund Regulatory News | No comments
John Elway was sacked for a loss
Sean Michael Mueller, 42, may wish he carried out his suicide threat last April. Instead, the Greenwood Village hedge fund manager was charged on Tuesday with fraud, theft, and organized crime by running a $71 Ponzi scheme. Mueller was a complete phony: he produced fake investment statements for investors and accountants while using the money to buy multiple homes and cars. He even got himself into exclusive country clubs.
In Aprils, regulators seized Mueller Capital Management LLC after Mueller showed an employee a note to investors admitting that the funds had “lost money from the start. The confusion has finally won its battle with me, and I feel like there are no good options left,” Mueller wrote in an e-mail April 22. “I always thought I could make it back, but that’s not going to happen.”
Mueller was threatening to jump off of a parking structure when Greenwood Village police intervened and took Mueller to a hospital. Mueller estimated that only $15 million remained in a fund that was supposed to have $122 million in assets.
Among the victims listed in court documents were Denver Broncos Hall of Fame quarterback John Elway, and Blaine Rollins, a board member of the Lance Armstrong Foundation and the Burridge Center for Security Analysis and Valuation at the University of Colorado.
Investigators found that 65 investors had given Mueller $71 million to invest, but he only had $9.5 million in cash and investments when he threatened to kill himself. He owed approximately $45 million to investors.
Mueller’s attorney Richard Kornfeld declined to discuss whether Mueller remained suicidal or to say when Mueller might turn himself in.
“He’s been actively cooperating,” Kornfeld said. “We knew and understood that the discussions would result in criminal charges.”
Lynn Kimbrough, a spokeswoman for District Attorney Mitch Morrissey, said Mueller was expected to be in custody before a scheduled court appearance Friday. Bail was set at $2 million cash.
Rollins said his investment with Mueller had nothing to do with the foundation. Elway did not immediately return a message.
Tags: broncos hall of fame quarterback john, capital management llc, country clubs, criminal charges, denver broncos, greenwood village, hall of fame, hedge fund manager, lance armstrong, lance armstrong foundation, michael mueller, parking structure, ponzi scheme, quarterback john elway, security analysisOctober 14, 2010 at 12:01 am | Hedge Fund Crime | No comments
Saving Face
The saga of European Union “passports” for foreign hedge funds may be approaching its climax, as a deal between France and the U.K. seems to be in the works. The proposed new regulations would allow foreign hedge funds and private equity funds to gain access to all 27 EU markets through a centralized registration process. Currently, foreign funds must separately register in each market. To qualify for the proposed regulations, the foreign funds must meet stringent criteria.
In a face-saving gesture, the French, who shook up the process last week by revealing their opposition to any rules that granted foreign hedge funds the right to operate across the EU’s 27 countries, have now indicated that it would be willing to accept such a “passport.” In exchange, France is asking the U.K. to accept greater powers for the new pan-EU financial watchdog—including the power to issue the passport.
“There are real signs of both sides coming closer together,” one EU diplomat told Reuters. “I believe that, in any case, there will be cooperation and the final solutions will be positive for both sides,” Carlos Tavares, head of the Committee of European Securities Regulators, added.
Of course, a deal is not yet done—and it was thought that one was near before France stepped in, with German support. But it is likely that the eventual compromise will at the very least delay the introduction of the passport.
France’s change of heart comes in the wake of an angry letter from U.S. Treasury Secretary Timothy Geithner to his French counterpart, Christine Lagarde, and three other EU finance ministers. While France denied Geither’s charges of protectionism, the country is reportedly sensitive to criticism from the U.S. in advance of its becoming president of the Group of 20. And the U.S. response is thought to have spooked Germany, whose support was crucial for France in the passport debate.
Tags: committee of european securities regulators, european securities, finance ministers, hedge funds, passports, private equity funds, treasury secretary, u s treasuryOctober 12, 2010 at 12:01 am | Hedge Fund Regulatory News | No comments
Griffin
Rumors are swirling that once legendary Citadel Investment Group will be closing down its vaunted I-Bank unit, Citadel Securities, despite denials from the Chicago hedge fund. Other rumors speculate that Citadel Securities will be substantially downsized, as will its fixed-income trading desk.
Citadel Securities was founder Ken Griffin’s stumbling attempt to become the next Goldman Sachs. Despite high expectations at its 2008 launch, Citadel Securities failed to achieve the much-hoped-for success that Griffin was counting on to provide his entry into the “respectable” tier of top financial executives, rather than his role as merely a hedge fund manager.
The hedge fund giant was forced to respond after the Business Insider blog reported that there might be major layoffs “connected to a wider dismantling” of Citadel Securities. The blog later backtracked on its report, which included the exits of several top Citadel Securities executives.
“There is no plan for mass layoffs,” a person familiar with the situation told Dow Jones. “Citadel is not shutting down Citadel Securities or its fixed-income operations.”
In fact, the latter has enjoyed positive trading revenue this year, contrary to reports that it had taken a bath on some high-yield loans.
Dow Jones did note that some staffing changes are possible after Citadel Securities’ annual business review in the fourth quarter. And certainly, the upper echelons of the firm’s management team has had something of a revolving door, losing two heads within eight months on top of several other high-level departures. Citadel is notorious within the financial industry for almost constant turnover of its top executives once they have extended dealings with Mr. Griffin, whose reputation for cold-blooded ruthlessness is only surpassed by reports of his stinginess.
Tags: citadel investment group, financial executives, fixed income trading, goldman sachs, hedge fund manager, ken griffin, ruthlessnessOctober 11, 2010 at 2:18 am | Hedge Fund News | 2 comments
Treasury Secretary Geithner
Timothy Geithner, the Secretary of the Treasury, has placed himself in France’s crosshairs by rebuking his French counterpart for his opposition to the European Union’s proposed hedge fund “passport” regulations.
Geithner yesterday sent a written message to Christine Lagarde, containing a warning against preventing access for foreign hedge funds to EU markets. Lagarde last week led the effort to shoot down a compromise that would have allowed “passports” giving access to all EU jurisdictions to foreign hedge funds that meet the stringent new requirements of hedge funds and private equity firms in the proposed alternative investments directive.
The U.S. is far-and-away the largest hedge fund center in the world.
“A proposal that limits or delays the access of third country firms to a passport—while granting EU domiciled managers and funds access to the European market—would be discriminatory and contrary to G20 commitments,” Geithner wrote. “We would consider adoption of such a proposal as unfair and damaging to our shared interest in maintaining an open, global financial system.”
Geithner’s warning to Lagarde is the third he’s written to EU leaders on the issue, and his second to Lagarde. In April, he wrote to Lagarde and his British, German and Spanish counterparts urging them not to “discriminate against foreign firms.” In March, he wrote to Michel Barnier, the EU’s internal markets commissioner, earning something of a rebuke from Barnier, who said the EU wouldn’t be “bullied” by the U.S.
Barnier now says that the passport will have to be included in the hedge fund rules.
Tags: alternative investments, counterparts, European Union, french counterpart, geithner, global financial system, hedge fund center, hedge funds, internal markets, jurisdictions, michel barnier, passport regulations, passports, private equity firms, secretary of the treasury, treasury secretaryOctober 7, 2010 at 3:30 am | Hedge Fund Regulatory News | 1 comment
Raj Rajaratnam
He’s had a year to prepare for this day. It was a year ago that FBI agents placed Raj Rajaratnam under arrest for insider trading. On Monday the former manager of the Galleon Group hedge fund was a witness in front of Federal District Judge Richard J. Holwell at a pretrial hearing. The outcome of the actual trial may hinge on the ruling handed down by the judge at the hearing in Manhattan.
The issue: there are about 2,400 wiretapped conversations featuring Mr. Rajaratnam and his accomplices that the defendant is seeking to exclude as evidence. His lawyers have made a long series of arguments that the wiretaps were tainted because of withheld information by the FBI and the SEC.
The 53-year-old Mr. Rajaratnam has been indicted for securities fraud and conspiracy in most extensive hedge fund insider-trading case in American history, according to the Justice Department. Both he and his co-defendant Danielle Chiesi were at the hearing and both have pled not guilty. Of the twenty-one arrests arising from this affair, several have ended with guilty pleas. Mr. Rajaratnam will have to wait to January for his trial to start.
The reason for Rajaratnam’s appearance at the witness stand was to answer questions about a possible conflict of interest his law firm, Akin Gump, might have. That is because the law firm also works for AM General, the Humvee and Hummer manufacturer, and that a former prosecutor and potential government witness, Lauren Goldberg is an in-house counsel for AM General’s parent company, which is owned by Ronald Perelman.
Judge Holwell pointed out that Akin Gump’s divided loyalties could cause their lawyers to softball the questioning of Ms. Goldberg “so as not to disturb the relationship with AM General and its owners.” Mr. Rajaratnam denied any concern over the matter. Rather, he emotionally endorsed Akin Gump, and in response to the judge’s question as to whether he was satisfied with representation up to this point, replied “Very much so, your honor.”
The Curcio hearing lasted only 5 minutes, and Mr. Rajaratnam waived his right to use the potential conflict as a grounds to appeal a guilty verdict.
With that, Mr. John Dowd of Akin Gump opened the main event. In a hard-hitting opening statement, Mr. Dowd accused the government of misleading Judge Gerard Lynch into authorizing the wiretaps. He argued that because the S.E.C. had spent more than a year building a “classic insider-trading case” against Mr. Rajaratnam, the use of wiretapping, which had never been used before in an insider-trading case, should not have been granted. “They gamed the system,” Mr. Dowd said.
A federal prosecutor, Jonathan Streeter, responded that the government acted fairly and that the unprecedented surveillance tactics were necessary because the S.E.C.’s investigation had failed to yield sufficient criminal evidence.
Tags: accomplices, akin gump, chiesi, conflict of interest, curci, federal district judge, galleon, galleon group hedge fund, government witness, humvee, insider trading, mr rajaratnam, pretrial hearing, ronald perelman, securities fraud, wiretapped conversations, wiretaps, witness standOctober 6, 2010 at 12:01 am | Hedge Fund Crime | 1 comment
Gregory Bell, a hedge fund manager, is going to jail. Bell has been sentenced by a District Court judge to six years in prison for helping Thomas Petters cover up a $3.65 billion Ponzi scheme. Additionally, Harold Alan Katz, a 43-year-old accountant from Illinois, received a year and a day was sentenced by United States District Court Judge Richard H Kyle for his role in the Petters Company Inc. (“PCI”) Ponzi scheme. Katz assisted fellow-fraudsters Gregory Bell and Tom Petters in the conspiracy, and plead guilty on September 2, 2009 of one count of conspiracy to commit wire fraud.
Bell was the founder of Highland Park, Ill.-based Lancelot Investment Management. He had pled guilty last year to wire fraud. The 45-year-old faced up to 20 years in the big house.
SEC prosecutors established that Lancelot directed almost of the $2 billion it raised to Mr. Petters. Together, Bell and Petters hatched a plot to make a series of fake payments that hid Petters’ default on over $130 million of bogus notes that Lancelot bought from Petters. Bell also raised $200 million by hoodwinking investors about Petters’ business. Petters was sentenced to 50 years in prison after his conviction last year.
Harold Katz admitted that from February 26 through September 24, 2008, he assisted Bell in creating and executing a fraud scheme. Katz was a Certified Public Accountant and the vice president of finance and accounting at Lancelot Investment Management, the company owned by Bell. Lancelot Investment Management operated three hedge funds organized as limited partnerships.
Those partnerships were invested almost exclusively in short-term promissory notes issued by PCI. To further the scheme, Bell made misrepresentations to investors and potential investors regarding those investments. Bell, of Illinois, was sentenced yesterday to 72 months in prison for defrauding Lancelot investors. Petters was sentenced in April of this year to 50 years in prison for operating his own $3.7 billion Ponzi scheme.
He presently is incarcerated in the federal penitentiary in Leavenworth, Kansas. As to Katz’s role in the Bell fraud scheme, Katz admittedly conspired to make 86 fraudulent banking transactions that gave Lancelot investors and potential investors the false impression that PCI was paying its promissory notes on time. Those “round-trip” transactions involved wiring money from a Lancelot-controlled account to a PCI account. Shortly thereafter, the money was wired back to the Lancelot account, making it look like the promissory note was being paid.
Katz admitted creating a spreadsheet for investors that falsely showed the promissory notes had been paid. This case was the result of an investigation by the FBI. It was prosecuted by Assistant United States Attorneys John Docherty and Timothy C Rank. The United States Attorney’s Office for the District of Minnesota gratefully acknowledges the generous assistance of the United States Attorney’s Office for the Northern District of Illinois in the investigation and prosecution of the case.
Tags: big house, certified public accountant, district court judge, fraud scheme, going to jail, harold katz, hedge fund manager, hedge funds, investment management, limited partnerships, misrepresentations, ponzi scheme, promissory notes, tom petters, wire fraudOctober 4, 2010 at 2:23 am | Hedge Fund Crime | No comments
