The Preposterous Fraud of Andrey C. Hicks and Locust Offshore Management

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Originally posted at the hedge fund operational due diligence blog www.Corgentum.com/blog an overview of hedge fund fraud Andrey Hicks

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The Preposterous Fraud of Andrey C. Hicks and Locust Offshore Management

  1. 1. The Preposterous Fraud of Andrey C. Hicks andLocust Offshore ManagementA man claiming to run a high profile hedge fund recently pleaded guilty to stealing approximately $2.3million from investors. The plea came at the end of 2012 and slipped off many people’s radar, however,the preposterousness of the case is worth revisiting.In October 2012, the SEC charged Andrey C. Hicks and his firm Locust Offshore Management withemploying a fraudulent scheme to dupe investors into investing in a purported British Virgin Islands fundcalled the Locust Offshore Fund, Ltd. The problem, the SEC alleged, was that there was never any suchfund. Furthermore, the SEC complaint alleged that, “Hicks has transferred substantially all of theinvestors’ funds to bank accounts in his personal name and, on information and belief, for his personaluse.”Mr. Hicks claims about his firm were so outlandish that it was reported he stated to prospective investorsto have grown “assets under management from $100M USD to nearly $1B USD in six (6) months throughcapital raising and high returns.”To provide some additional perspective on the outlandishness of this case, here is partial description ofwhat Mr. Hicks claimed his firm was doing:Locust Offshore Management, L.L.C. develops and executes sophisticated quantitative strategies acrossasset classes to produce absolute, risk-adjusted returns with high alpha. The firm’s quantitativestrategies are based on mathematical models developed by the fund’s manager, Andrey C. Hicks, duringhis tenure at Harvard University and are executed by computer software. Human involvement in thestrategy life cycle is limited to model and code development and refactoring. The firm is primarilyengaged in the U.S. equity markets and adheres to a market-neutral, risk-averse trading philosophy.Mr. Hicks also ran a Twitter account in which he would tweet such comments as: “A tidbit for tech investors: racetrack memory. Cloud services and storage escalation compound datadensity bottleneck in plater-driven HDDs“ “Long opportunities for companies with secured Afghan contracts in mining / commodities“ “Ah, the sweet smell of earnings season. Very happy that I’m not an analyst“Some of the more interesting things alleged by the SEC include that Mr. Hicks:  Lied about his education – he claimed to have obtained undergraduate in biochemistry (for with a 4.0 grade point average) as well as a graduate degree from Harvard. Mr. Hicks wasn’t satisfied claiming just any graduate degree such as an MBA. Instead, he claimed to have obtained a PhD in Applied Math in just two years. According to the SEC, Mr. Hicks was indeed enrolled at Harvard as an undergraduate but was forced by the university to withdraw on two separate occasions and he never graduated.
  2. 2.  Lied about his employment background – he claimed to have not only worked at Barclay’s Capital (which was a lie) but that, “he grew his book nearly two-fold and expanded his group’s assets under management to roughly $16 [billion]” (which was also a lie)  Lied about the fund’s auditor – he claimed Ernst & Young served as the fund’s auditor, they didn’t (besides there was never any fund to audit)  Lied about the fund’s prime broker and custodian – he claimed that the fund had a relationship with Credit Suisse – it didn’t  Opened business a checking and savings accounts for the firm and funds with the intent to defraud investors  Created and maintained a website for the non-existent firm and fund  Created fake offering documents for the fund  Created fake business cards, stationery and email signature blocks describing Mr. Hicks as a Locust’s principal and the fund’s director.Unfortunately for Mr. Hicks, the SEC allegations were true. Despite all these red flags, Mr. Hicks didattract investors in the fund including celebrity basketball player Kris Humphries.He was eventually arrested while attempting to flee in Switzerland. He has since pled guilty to five countsof wire fraud and is scheduled to be sentenced on March 6, 2013. He faces up to five years in prison.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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