1. The FBI Is On the Case of Hedge Fund Fraud
Over the past few years, the U.S. Federal Bureau of Investigation ("FBI") has become increasingly
involved in policing hedge fund fraud. Traditionally, thought of by most as focusing on more
criminal activities such as terrorism and bank robbery, the FBI has seen itself become more
involved with other US regulators, such as the U.S. Securities and Exchange Commission, to
investigate financial crime.
Perhaps this is because hedge fund fraud schemes appear to have gotten more intricate and
complicated over the years. Or it could be that the under resourced financial regulatory agencies
are increasingly looking to other government agencies such as the FBI for assistance. Another
reason for increased FBI involvement may be because the types of activity involved in such
frauds are increasingly viewed as more criminal in nature than simply lower level financial
crimes . Finally, the increasingly large sums of money involved in such frauds may have
something to do with it as well.
In addition to policing well known international hedge fund fraud such as the German based K1
fund of hedge funds scam, and going after informants in insider trading cases such as the
Steven Fortuna in the Galleon case, the FBI is also focused on domestic hedge fund fraud. A
recent example of such a hedge fund Ponzi scheme that the FBI was involved in, was the
indictment of four North Carolina based hedge fund managers. These managers, including an
individual 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 Diamond
Capital Solutions.
While the exact facts of the case are not clear, the FBI alleged that Mr. Davey told investors that
he had performed due diligence on a hedge fund named Black Diamond and that it was a low
risk hedge fund. The problem was that the entire operations was a big Ponzi scheme and it is
questionable whether there was even a Black Diamond fund to perform due diligence on. At
trial, the government showed that by the end of the scheme, Davey and other hedge fund
managers involved had less than $1 million total in their accounts, while maintaining a website
for 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. Davey
funneled the money he stole into an offshore shell company in Belize. He used the money to
build a mansion for himself in Ohio. Apparently the jury agreed with the FBI because after only
45 minutes of deliberation Davey was convicted on all counts.
In a related matter one of Mr. Davey's alleged co-conspirators, Keith Simmons, was convicted in
2012 of securities fraud, wire fraud, and money laundering. He was later sentenced to 50 years
in prison. The bank of Mr. Simmons, CommunityONE Bank, N.A., is also in trouble because the
FBI 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 fund
wrongdoing. As the recent insider trading prosecutions have shown, even well intentioned hedge
funds who may not be running outright Ponzi schemes may find themselves on the wrong side of
the law due to what may have previously been classified as technical violations that could have
been satisfied with regulatory settlements. By performing detailed initial and ongoing
operational due diligence, investors can take a step in the right direction towards avoiding funds
that may receive an unwelcome visit from the FBI.
Originally posted on the Corgentum Consulting blog at www.Corgentum.com/blog
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