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The purpose of this study is to show that despite the profound and commendable efforts of the SEC staff and many others in the legal system, aimed at combatting a billion-dollar hedge fund manager fraud, the perpetrators were effectively not held accountable for the unlawful conduct and hence did not bear the consequences of the conduct. This case highlights the presence of a significant risk that hedge fund investors are not fully accounting for and very likely not earning a commensurate premium for it. During the 1999–2002 period, Lauer and Associates inflated hedge funds’ valuations, misrepresented the holdings of the funds, shared fake portfolios with investors, did not provide reasonable basis for the excessive valuations of the investee companies and manipulated their security prices. In 2009, Lauer was found guilty of violating anti-fraud provisions of the federal securities laws and was ordered to pay US$18.9m in prejudgment interest and to surrender US$43.6m in ill-gotten gains. Despite the substantial evidence, on 11 April 2011 Lauer was acquitted in federal court, of wire fraud and conspiracy to commit securities fraud. Five other associates received light sentences. Yet investors were around US$1.0bn which were never recovered or compensated.

The study applies clinical case analysis. The study produced detailed research and analysis of the of the US based Lancer Management Group fraud case. The focus is on the consequences to investors and other stakeholders in the hedge fund industry.

In 2009, Lauer was found guilty of violating anti-fraud provisions of the federal securities laws and was ordered to pay US$18.9m in prejudgment interest and to surrender US$43.6m in ill-gotten gains. Despite the substantial evidence, on 11 April 2011 Lauer was acquitted in federal court, of wire fraud and conspiracy to commit securities fraud. Five other associates receive light sentences. Yet investors were around US$1.0bn. Investors’ losses were never recovered or compensated.

This is a clinical case study. It is not an empirical study. Findings should be carefully construed.

This study directs hedge fund investors and industry stakeholder to the real possibility of not fraud but also to the limited efficacy of the system in terms of providing protection and compensation to investors. Investors and stakeholders must pay close attention in the due diligence process to minimize probability of fraud.

Hedge fund industry fraud leads to devastating consequences to investors and obviously to their wealth and very possibly adversely impact local economy and community.

This study presents many events that show the extent of the fraud and how it was conducted. This paper shows despite the extensive effort of the regulatory and judicial system, the perpetrators of the fraud were not held accountable for their actions. This case does not point toward a macro system failure. It highlights the presence of a real risk that investors are not accounting for and very likely not earning a commensurate reward for it.

The objective of this research is to educate investors and hedge fund industry stakeholders about a hedge fund manager's alarming activities prior to recognition of the fraud by the authorities. The lessons serve as red flags to stakeholders in the hedge fund industry such as prime brokers, auditors, administrators, accountants, custodians and government regulators, and especially investors conducting due diligence on hedge funds. A far‐reaching proposal is for the industry to found a hedge fund information depository (HFID) where participants/stakeholders provide information on any hedge fund on a regular basis. Such an information clearing‐house would facilitate a long overdue timely communication among hedge fund industry constituents. The services would be available for a fee. This service elevates transparency in the hedge fund community to an unprecedented level and could ultimately mitigate a manager's fraud.

A major hedge fund fraud case, Lancer Management Group, is used an example and application of HFID.

Investors in the Lancer funds lost more than $500 million. In the case of Lancer, there were several “alerts” or “triggers” many months before the actual filing of the SEC complaint against the fund. Hedge fund manager fraud could be mitigated through the establishment of the information depository. Had the depository been in place, some Lancer funds stakeholders could have made different decisions.

Some hedge fund industry stakeholders may reluctantly join HFID. Researching the willingness of hedge fund industry stakeholders to join HFID would be a good extension of the current research.

Had a third party become aware of the alerts, this third party could have made a different investment decision. Most importantly, this depository would allow all the hedge fund industry stakeholders (accountants, administrators, auditors, marketers, prime brokers, custodians) to contemporaneously communicate with one another.

The approach and the solution are both unique. In addition, the topic is very controversial and timely, yet few business professionals explore research projects on fund manger fraud. HFID would be of great value to hedge fund industry stakeholders, especially investors.

The purpose of this paper is to draw lessons to investors from the conduct of a hedge fund manager who according to the Securities and Exchange Commission (SEC) complaint made false and misleading statements before and after an auditor’s reports, misappropriated for personal benefit over $1m, misappropriated clients’ assets, failed to conduct due diligence on third-party buyer, instructed an employee to mislead investors and satisfied some investors’ redemptions with other investors’ subscriptions (Ponzi scheme) without disclosing it to investors. Ironically, the scheme was unveiled by the economic crises and not the investors, their advisers or third-party hedge fund vendors. Corey Ribotsky set up the investment adviser NIR Group to manage four AJW Funds that invested in private equity in public companies in 1999. Through manipulation of financial statements, he also managed to collect about $136m in management and incentive fees over an eight-year period. The SEC complaint alleged the AJW Funds’ assets to be $876m in 2007, yet this figure was not verified, and no assets were traced. Ribotsky did not pay any monies to SEC, as ordered by court settlement, and hence the victims did not recover any of their monies. The SEC could not produce criminal charges; hence, Ribotsky did not go to jail. This case highlights sterility of law enforcement when confronted with brazen fraud.

Investors fail to monitor hedge fund managers. Fraud was detected late and not through investors. Fraud was unraveled by the economic crises of 2008. The SEC had sued the fund manager. The fund manager consented to making payment to the SEC but did not make any payments. The SEC could not bring evidence to criminally charge the fund manager.

The findings based on the case study are valuable to investors and hedge fund industry stakeholders. The findings are not based on an empirical study.

Investors need to carefully vet all hedge fund managers before allocating and funds and understand how managers make money through the claimed strategy. Also, there are limitations to law enforcement even with confronted with profound fraud schemes.

The case was built up from public sources to benefit investors considering making allocations to hedge fund managers. The public information about the case is of either legalistic or journalistic in nature.

To describe the fraudulent activity of investment manager Kirk S. Wright and to discuss its implications for investors and professional associations.

Describes how Mr Wright established and built his fund business, how he solicited investors, how he falsified financial reporting to investors, how investors discovered his fraud and filed lawsuits, how the US Securities and Exchange Commission (SEC) and the Federal Bureau of Investigation (FBI) took disciplinary action, and how National Football League (NFL) players unsuccessfully sued the NFL and its players’ union for recommending Mr Wright’s firm. Draws lessons from the story for investors and associations.

Since hedge funds are not as strictly regulated as other investment vehicles, investors need to take extra steps to not fall prey to unscrupulous fund managers.

Detailed, informative case study.

The purpose of this paper is two fold: educate investors about hedge fund managers' activities prior to the fraud recognition by the authorities and to help investors and other stakeholders in the hedge fund industry identify red flags before fraud is actually committed.

The paper investigates fraud committed by the Bayou Funds, Beacon Hill Asset Management, Lancer Management Group (LMG), Lipper & Company and Maricopa investment fund. The fraud activities took place during 2000 and 2005.

The five cases alone cost the hedge fund investors more than $1.5 billion. Investors may have had a good opportunity for avoiding the irrecoverable costs of the fraud had they carefully vetted the backgrounds of the hedge fund managers and/or continuously monitored the funds activities, especially during turbulent market environments.

This is the first research paper to identify and extensively investigate fraud committed by hedge funds. In spite of the size of the hedge fund industry and relatively substantial level and inevitably recurring fraud, academic journals are to yet address this issue. The paper is of great value to hedge funds and their individual and institutional investors, asset managers, financial advisers and regulators.

The purpose of this paper is to offer case studies of hedge fund fraud, solutions that could mitigate hedge fund fraud risk, and a proposal for the industry to establish a hedge fund information depository (HFID) where participants/stakeholders could provide information on any hedge fund on regular basis.

Four major hedge fund fraud cases, Bayou Funds, Lipper Holdings, Manhattan Investment Fund and Maricopa Investment Corporation are used as examples of the complete absence of independent oversight and the application of HFID.

The paper finds that investors in the four funds lost more than $1.3 billion. In all four fraud cases, independent oversight and compliance function were conspicuously missing. In each fraud case there was at least one serious alert (warning) that took place at least 14 months prior to SEC first filing against the fund.

Some hedge fund industry stakeholders may reluctantly join HFID due to concern over possibly disclosing information deemed crucial for their own competitive advantage.

Had third parties become aware of the alerts, they could have made a different investment or business decision. Most importantly, this depository would allow all hedge fund industry stakeholders (accountants, administrators, auditors, investors, marketers, prime brokers, custodians and regulators) to communicate with one another regularly.

The paper makes two proposals: the founding of a hedge fund information depository; and outsourcing of the compliance function for hedge funds where it is more cost effective.

In December 2008, as the financial and economic crisis continued on its devastating course, a new scandal erupted. After the 1998s failure of Long-Term Capital Management, Madoff's fraud once again discredits the hedge funds industry. This scandal is, however, of a different kind. Indeed, Madoff's firm is not a standard hedge fund but a developed Ponzi scheme. By explaining Madoff's system and exploring the reasons for its collapse, this paper draws risk management lessons from this fraud, especially for operational risk management, due diligence processes, and the use of quantitative replication, regulatory, and standardizing approaches of the hedge fund industry.

The loss of an amount in excess of $100m cash deposit can be disruptive to the operations, definitely the liquidity of the hedge fund. Should a hedge fund liquidity position deteriorate, its compromised solvency could impact its vendors, most notably creditors and prime brokers. Large successful hedge funds do make basic mistakes. Lawyer Marc Dreier committed the criminal act of selling fraudulent promissory notes to hedge funds and others. Mr Drier’s success in selling fraudulent promissory notes was facilitated by his accomplices who posed as fake representatives of legitimate institutions. Drier and team presented bogus “audited financial statements” and forged developer’s signatures, and even went as far as using the unsuspecting institutions’ premises for meetings to meet potential notes buyers to further falsely legitimize the scheme. He had the notes buyers send their payments to his law firm account, to secure the money. His actions cost his victims, who include 13 hedge fund managers, other investors and entities, $400m in addition to his law firm’s employees who also suffered when his law firm was dissolved. For his actions, he was sentenced 20 years in federal prison for investment fraud. This study aims to direct hedge fund investors and other stakeholders to thoroughly vet the compliance function, especially controls on cash disbursements, even if the hedge fund is sizable (in excess of $1bn). Investors and even other stakeholders also should place a greater focus on what is usually overlooked issue; most notably the credit quality and authenticity of short-term investments bought by their hedge funds.

A thorough investigation of a fraud committed by a lawyer against a number of hedge funds. Several important lessons are identified to professionals who conduct due diligence on hedge funds.

The details of the case are very remarkable. This case directs investors’ attention to place greater efforts on certain aspects of operational risk and due diligence on not only hedge funds but also other investment managers. Normally investors conduct operational due diligence on the fund and its operations. Investors also vet fund external parties such as prime brokers, custodians, accountants and fund administrators. Yet, investors normally do not suspect the quality of short-term fund investments. In this case, the short-terms investments were the source of unforeseen yet substantial risk.

Stakeholders in hedge funds need to carefully investigate the issuer of and the quality of short-term investments that a hedge fund invests in. Future research can investigate the association of hedge fund manager failure with a liquidity position of the fund.

Investors must thoroughly the entirety of the fund including short-term securities.

Normally, it is the hedge funds that commit the fraud against investors. In this case, it is the multi-billion hedge funds run by sophisticated fund managers, who are the victims.

The current financial crisis revealed weaknesses in the US financial system, including the difficulty of valuing complex assets. This paper seeks to examine regulatory and compliance issues for hedge funds valuing complex assets.

Within the context of hedge fund valuation, the paper provides a general overview of: the regulatory background of hedge funds and the central role valuation plays in the operation and regulation of such funds; relevant cases brought by the SEC; and a discussion of valuation best practices.

Hedge funds are not “unregulated.” There is a body of law and accounting standards that applies to hedge fund valuation. Nevertheless, hedge fund valuation standards are evolving in this era of heightened regulatory scrutiny. The common concepts that have emerged from valuation best practices will likely provide the underpinning for any regulatory initiatives regarding hedge fund valuation.

By the time of publication, Congress may pass pending legislation governing hedge funds and there may be additional notable SEC cases on hedge fund valuation.

The economic crisis has revitalized the SEC's interest in this area. Consequently, hedge funds should consider adoption of a compliance program that specifically targets valuation by stressing investor disclosure, independence of the valuation function, comprehensive written valuation polices and procedures, and internal controls.

The paper compiles and organizes in one place the regulatory and compliance standards governing asset valuation by hedge funds.