Directors’ pedigree as a red flag

On February 17^th, a US federal judge has ruled, in the Lake Shore Asset Management case, that investors will get back 40% of the $268ml losses they claimed.

Lake Shore was shut down in 2007 after federal authorities charged that it concealed $30 million in trading losses.

The fund claimed it lost around $130 million in the bankruptcy of Sentinel Management Group Inc.

The former chairman of Lake Shore is Laurence Rosenberg, who was chairman of the Chicago Mercantile Exchange from 1977 to 1979.

This story remembers me another hedge fund fraud case back in 2005, the name of the manager was Paul Estace and the fund was called Philadelphia or PAAM (not link to PAAMCO!).

The analogy between the two cases does not stop with their common strategy, commodity trading, or the type of fraud, concealment of trading losses. Both companies had also as director a former chairman of an exchange.

Laurence Rosenberg who was chairman of the Chicago Mercantile Exchange from 1977 to 1979, was a director at Lake Shore and John Wallace, who was the vice-chairman of the Philadelphia Stock Exchange, served on the board of PAAM.

In both cases, it is worth noting that investors recovered around 40% of their assets.

All too often Hedge Fund managers seek to attract investors' interest by having the "Hall of fame" sitting on their board. Investors should be conscious that the experience without the involvement is not even worth the few thousands dollar paid to a board member.

So please, new time you do a due diligence on a fund don't stop with the directors' pedigree but try to understand what they really do.

Now you know that investing in a fund which has a former chairman of an exchange on its board will not protect you from fraud but at least you will recover something!!!