Sunday, May 25, 2008

Fun and games in hedge fund land (or what does it take to go to prison?)

Forgive me for a non-stock post. But it will cover the dubious goings on off Wall Street - and is fun.

A while back I went looking for a new name for a fund. In passing I came accross New World Capital Management - the most intriguing hedge fund you have never heard of. The fund was run by someone who called themselves Greg Duran - and who hailed from New Mexico.

Their record was unbelieveable. Below I have extracted from their marketing materials the records for their two funds. The equities fund monthly return is below:



The return for the multi-curreny fund is below:




In both cases you should click for more detail - just to show how truly extraordinary these returns are. In July 2007 the multi-currency fund claims to have scored a 66% month.

The first cockroach

It is sometimes said there is never just one cockroach. But the first cockroach I found was a doozy. The annual returns in this table are not consistent with the monthly returns!

In particular the monthly returns in the 2007 currency fund compound to more then the stated annual return. Similar mathematical errors exist throughout their documentation.

Some due diligence

Given the very attractive returns listed I figured maybe I could give up the game altogether and put my money with Mr Duran. But of course I would need to do some due diligence.

Mr Duran made this fairly easy. His literature listed (for the currency fund) the Prime Broker as Ikon Global Markets, the auditor as Spicer Jeffries LLC, the legal council as Pillsbury Winthrop Shaw Pittman.

As a basic due diligence I thought that I would approach these firms. In particular the auditor is expected to stand behind the accounts that they sign - so they would be good people to approach.

The Prime Broker's less than Prime response

The Prime Broker's (reasonable) response is repeated below:

Mr. Hempton:

Thank you for contacting us regarding this situation. As per our privacy rules, we cannot disclose details regarding client’s of the firm unless directed by the client. IKON is a prime broker for FX trading and acts as a counterparty for FX trades. In this capacity, we do not endorse, verify or audit the returns or claims of any client (individual or fund). If the fund is rated, then you can research their results through the rating agency. You can also ask to speak to their auditor, legal advisor or request further information. I am sorry we cannot be for further assistance and I recommend that you do thorough research and due diligence before you select any money manager.

Thank You

Diwakar Jagannath

Managing Director/CEO

IKON GLOBAL MARKETS, Inc.

99 Wall Street, 11th floor

New York, NY 10005


What Ikon did next however staggers me. They contacted Greg Duran - and I received an indignant email from New World. [If it is a fraud - why tip-off the perpetrator? Confidentiality applied to the customer but not to me.]

The auditor

The auditor was at least polite - but at first had never heard of New World. It turns out that a partner had discussions with Duran about becoming his auditor - but that no appointment had been made and Spicer Jeffries had never audited any New World accounts. [This was despite New World literature asserting that Spicer Jeffries had conducted such audits.]

I would have assumed that an auditor would want to protect the integrity of the statement "audited by us" and called the police. No such luck. I think they were interested in protecting a potential client.

Further conversation with Greg Duran

As Duran now knew I had contacted his Prime Broker he might as well know that I had contacted his auditor as well. This led to the following fascinating exchange:

I started the fund in 2005 with myself and two small investors. We built up a track record up till April of 2007, when we launched the fund LP. We started taking clients accounts in November of 2007. In November of 2007, we hired on Spicer Jeffries to do our audits. Because it is an LP, we have a choice of whether to do an audit at the end of the 2008 or do an audit now. We are in the midst of getting feedback from our current investor base to determine if they want to wait to do the audit or, if they want to do it now. The investor pool has to decide since they are paying for the audit. Now, we started a relationship with Dranger Capital, whom is our CTA and who also gave us notice to the contact you had with IKON's Manager so that they can speak on our behalf.



The plot is thickening here. Note this email has him starting the fund in 2005. He gives (above) records for the 2003 and 2004 years. Peculiar.

Does the fund exist?

This is a good question. Greg Duran seems to exist. Indeed he was often good for a quote in the Santa Fe New Mexican - by a journalist called Bob Quick - who seemed to put his stories out that way. Here is an example where Greg Duran is seen (in January this year) backing the solidity of Thornburg Mortgage. (He got that wrong.)

Indeed Quick quotes Duran more than once. Lazyness is the nicest explanation I have - though I rang Bob Quick up and suggested to him that - just perhaps - Greg Duran was the local story. There was no follow up.

Who was suckered?

I do not know how many people were suckered by New World - but one New York based fund-of-hedge-funds gave him money. They were kind of embarrassed when I spelt out the problems. I do not know whether they have recovered some or all of their funds.

Duran quite quickly realised I was doing a proper due-diligence - and he realised that maybe New World was not a "good fit [for me]". I do not know anyone else who was suckered.

Their website has now gone dead. The phone number that they gave me now rings through to someone called "Dranger Capital". Dranger Capital might be a legitimate operation - but they woud hate to know that the number of New World is being forwarded to them.

Prosecution

I didn't just tip off Bob Quick. I went to journalists with some leading publications. I copied full details to the SEC and to the New Mexico AG.

Nothing seems to have happened.

Lessons

Due diligence - just a little digging - will save you most errors.

Obvious frauds are not prosecuted. (This was an obvious fraud - and the authorities were told.)

Just because it is not prosecuted doesn't mean its not fraudulent. If you can't verify you should not put your money there.

Postscript

The website may be gone. The phone may ring to a new venture. But you can still see their logo here.

Full disclosure: this is for amusement only. Had the fund checked out I would have given them some money. But it didn't check out and that was that.

My main interest here is how easy it appears to get away with it. Unless that is changed then the capital markets will remain unsafe and deserve lower valuations.


12 comments:

SirRupertNeve said...

Congrats on your find!

I like microcaps and over the years I've come across a few that were, to various degrees, frauds. I attempted to turn them in but nothing ever happened. One of them had a message board that I posted on. That was a bit of fun.

I become a little obsessed when I find one of these things. The most fun I ever had was calling the company and acting like a potential investor. I can't explain why I wasted my time doing this. I found a group of people (most likely teenagers) who get a similar thrill to what I experienced but they only deal with the African get-rich-quick spam emails. If you ever need a sophomoric laugh then look up "scam baiting" or one site in particular, 419 eater. They take it to the extreme.

PS i love your blog. Thank you for sharing your wisdom.

John Hempton said...

I had never come by 419eater. But I had seen people scam baiting.

This scam bait is the most effective I have ever seen:

http://419eater.com/html/joyce_ozioma.htm

At various times I have dchased scammers with pink-sheet stocks - but for profits - not fun. I have shorted to 0.0001 cents companies that had market caps in excess of $100 million but did not exist.

However this leads to an ethical question. I am not going to tell you on this board who those companies were and who the scammers were - because the knowledge of who the scammers are makes me $5Ok every now and again with very little risk (though maybe a bit too much effort). I am diluting their profits. But I do not want you diluting mine.

The ethical question: when you are sure - and you have enough information to prosecute - then if you do not dob them in are you an accessory after the fact?

I have always solved this problem by turfing over my notes to the prosecutors - fairly certain in the knowledge that they will do nothing with them.

The non-prosecution of fraud is the norm.

J

msbs48 said...

Upgrade Procedure for Private Equity & Mezz (BCP, BMEZZ, & BMPII) Databases.


John,

I was one of those investors that got screwed. I invested a LOT of money with fund..

You mentioned the NY Hedge fund that got suckered...Well they were ALSO actively marketing the fund.

If you saw New World on one of the database websites asking for more information the hedge fund Capital Corp(the one that invested with new world). That is how i found the fund.

There is now an active investigation by the New Mexico Securities Division - That I started. Both Captial Corp and i have civil cases (cases filed separately) against our friend Greg.

In any case, while you did more homework than I do think you make a mistake in your interpretion. You contaced the prime broker for FX, When greg wrote you his "indignant" email he was only speaking of the Currency fund which did start in 2005..So i am not sure in isolation this would have been a trigger.

After the fact we also contacted Bob Quick, in the hope that he would do a story (and get some public pressure/awareness, but there was not follow up there either. But if is sees this and would like to do one please contact me.

Anyway, my blood is starting to boil as i think about this. So if you want any more info...Please contact me msbs48@hotmail.com...

ben

John Hempton said...

Ben

I am truly sorry about your loss.

I treated this as fun and games - because to me it was a fairly blatant fraud. But it is not fun and games - there are real people at the end of it - and the real people are losing their life savings and chances for a decent retirement - and ability to help kids/grandkids go to college etc.

I should not treat it as fun and games - but I was a fund manager so long that the (literally) billions we managed became numbers on a page not the embodiment of people's aspirations. We treated people honestly and fairly. It didn't stop us losing money every now and again - but we didn't do it often - and we usually made (much) more than we lost. But even then we forgot it was the embodied aspiration of real people.

I do not think my interpretation of the email is wrong. The currency fund has results for the whole of January 2005 - which means the business - if there was ever a business - had to be started in 2004.

As for the fund-of-hedge-funds I didn't name: they took equity in New World and marketed it - as well as putting money into it.

This of course disqualifies them for their core business model. It took me about two hours to determine that Greg Duran was not quite there. It should have taken the fund-of-hedge funds the same length of time. Doing due diligence on hedge funds is the CORE business of a fund-of-hedge funds - and if they can't do their core business they should fold.

I have emailed your phone number. I would like to chat if you can cope with more on this.

Sorry again about your loss.


J

Anonymous said...

This fund was actively looking for investors in 2005 (not just in 2007) as I was approached and advised what amount to invest....I came close to making the investment until I read about the 20 percent commission! Then the more I thought about the investment, the approach (I had been a customer at his previous brokerage firm..a very large company) and the ethics I stayed far, far away.
If you need more details feel free to contact me.

John Hempton said...

Comments on this post are difficult. Very defamatory things are being said in comments about individuals. As I cannot verify the comments I am having to reject them.

I think it is fair to say that you should act with extreme caution when dealing with any institution named here.

John

Lustre said...

Hi John

I do enjoy your blog and have started from the back forward to catch up on your older stuff.

I thought you'd be interested to see that your initial suspicions on Dranger were also well founded: http://www.nfa.futures.org/basicnet/Case.aspx?entityid=0385463&case=10BCC00040&contrib=NFA

I apologise if you've already bloggged further about this... as I said I'm reading older to newer.

Anonymous said...

Just an update; I received an e-mail today from a Greg Duran of Altitude.hfc Global Capital Introduction Group of Sante Fe New Mexico offering information on Princeton Advisory Group which currently manages $2.5 million USD. I quote, "The Credit Fund is excepting allocation's and is managed by a seasoned fixed income manager. The fund focuses on yield and liquidity with a target return of 8%. We have some unique strategies that can offset any potential market shift's that we may face, in these unsettling times." end quote. Though I am an excepting person, I think's I'll pass.

Anonymous said...

..and my company just received an email from Greg Duran at Altitude.hfc hoping that we might be interested in investing into "The Bald Eagle Lending Opportunities Fund".

The email itself lacked grammar in places and a couple of full stops. With a $1m minimum investment, locked in for a year, we could be making a profit of over 10% per annum before fees. I wonder if anyone will invest?

Anonymous said...

Good News! Fresh e-mail from Greg offering the following...

Attached is the performance for the Arque Tax Receivable Fund L.P. The goal of the fund is to provide:

- Non-correlation
- Preservation of wealth
- Consestant income

At least he's consestant!

Anonymous said...

Well, Mr Greg Duran seems to have changed lines of business and is now into selling spam email databases. I received the following from a Greg Duran today:

"Good morning,

I am currently moving on as a financial marketer and I have built a database of Investors, Hedge Fund Investors, Private Equity Investors and Venture Capital Database. I am in the process of selling it and I was wondering if you might be interested? There are at least 14000 + emails and 95% of the names being up to date. Let me know if this is something you might be interested in.

Thank you for your time.


Greg Duran
Altitude.hfc
Shopping better with Altitude!
Santa Fe, NM 87507"

Anonymous said...

More good news on the investment opportunity front from Santa Fe;

Greg is now offering equity based loans! These are "non-collar with the ability to appreciate the upside".

You can't make this stuff up.

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.