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  • 1. The FBI Is On the Case of Hedge Fund FraudOver the past few years, the U.S. Federal Bureau of Investigation ("FBI") has become increasinglyinvolved in policing hedge fund fraud. Traditionally, thought of by most as focusing on morecriminal activities such as terrorism and bank robbery, the FBI has seen itself become moreinvolved with other US regulators, such as the U.S. Securities and Exchange Commission, toinvestigate financial crime.Perhaps this is because hedge fund fraud schemes appear to have gotten more intricate andcomplicated over the years. Or it could be that the under resourced financial regulatory agenciesare increasingly looking to other government agencies such as the FBI for assistance. Anotherreason for increased FBI involvement may be because the types of activity involved in suchfrauds are increasingly viewed as more criminal in nature than simply lower level financialcrimes . Finally, the increasingly large sums of money involved in such frauds may havesomething to do with it as well.In addition to policing well known international hedge fund fraud such as the German based K1fund of hedge funds scam, and going after informants in insider trading cases such as theSteven Fortuna in the Galleon case, the FBI is also focused on domestic hedge fund fraud. Arecent example of such a hedge fund Ponzi scheme that the FBI was involved in, was theindictment of four North Carolina based hedge fund managers. These managers, including anindividual named, John Davey, were accused of running a Ponzi scheme. Mr. Davey, it is alleged,from October 2007 through April 2010 ran a hedge fund Ponzi scheme called Black DiamondCapital Solutions.While the exact facts of the case are not clear, the FBI alleged that Mr. Davey told investors thathe had performed due diligence on a hedge fund named Black Diamond and that it was a lowrisk hedge fund. The problem was that the entire operations was a big Ponzi scheme and it isquestionable whether there was even a Black Diamond fund to perform due diligence on. Attrial, the government showed that by the end of the scheme, Davey and other hedge fundmanagers involved had less than $1 million total in their accounts, while maintaining a websitefor victims that reflected they had over $120 million in supposed values.All told, Davey was alleged to have stolen over $40 million from over 400 investors. Mr. Daveyfunneled the money he stole into an offshore shell company in Belize. He used the money tobuild a mansion for himself in Ohio. Apparently the jury agreed with the FBI because after only45 minutes of deliberation Davey was convicted on all counts.In a related matter one of Mr. Daveys alleged co-conspirators, Keith Simmons, was convicted in2012 of securities fraud, wire fraud, and money laundering. He was later sentenced to 50 yearsin prison. The bank of Mr. Simmons, CommunityONE Bank, N.A., is also in trouble because theFBI alleges that they failed to maintain effective anti-money laundering program which therefore,allegedly effectively supported the work of the Ponzi scheme.© 2013 Corgentum Consulting, LLC
  • 2. Investors should be increasingly aware of the criminal classification of potential hedge fundwrongdoing. As the recent insider trading prosecutions have shown, even well intentioned hedgefunds who may not be running outright Ponzi schemes may find themselves on the wrong side ofthe law due to what may have previously been classified as technical violations that could havebeen satisfied with regulatory settlements. By performing detailed initial and ongoingoperational due diligence, investors can take a step in the right direction towards avoiding fundsthat may receive an unwelcome visit from the FBI.Originally posted on the Corgentum Consulting blog at www.Corgentum.com/blogAbout Corgentum ConsultingCorgentum Consulting is a specialist consulting firm which performs operational due diligence reviews offund managers. We work with investors including fund of funds, pensions, endowments, banks and familyoffices to conduct the industrys most comprehensive operational due diligence reviews. Our work coversall fund managers and strategies globally including hedge funds, private equity, real estate funds andtraditional funds. Our sole focus on operational due diligence, veteran experience, innovative originalresearch and fundamental bottom up approach to due diligence allows us to ensure that our clients avoidunnecessary operational risks. More information is available at www.Corgentum.com or follow us onTwitter @Corgentum.For More Corgentum.comInformation info@corgentum.com Tel. 201-360-2430© 2013 Corgentum Consulting, LLC

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