During their due diligence, investors usually concentrate most of their efforts in investigating hedge funds’ investment manager. But in the light of the two following cases, the risk of fraud can also come from the fund’s back-office.
At the end of June this year, a hedge fund's chief operating officer has been charged with forging documents so he could steal $250,000 from one of the funds he managed. Prosecutors say Mark A. Focht of Suffern, N.Y., used a forged authorization form in April 2007 to take money from a bank account belonging to Pierce Diversified Strategy Master Fund.
This week, The CFO of New York hedge fund Boston Provident Partners has been arrested and charged with stealing more than $1.3 million from the firm. Ezra Levy has been hit with 11 counts of securities and wire fraud. According to federal prosecutors in New York, Levy transferred $726,000 from Boston Provident accounts to his own, and also sold shares of Atlas Energy from an account he controlled to the hedge fund at an inflated price, earning a $600,000 profit.
Segregation of duties between the front and the operations is a must but without the adequate checks and balances at the back office level a window of opportunity for fraudster remains open. The two cases advocate for an increase role of the funds’ administrator in providing an independent oversight on the fund’s operations.
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