SEC Files Suit: Beware of Fraudulent Hedge Fund Schemes

by D. Cupples |  Even after Enron fell in 2001, there's been no shortage of fund managers, brokers, and corporate execs finding creative ways to bilk investors. 

Last week, the U.S. Securities and Exchange Commission (SEC) filed suit against insiders and stock promoters in Florida, New York, California and Nevada who had allegedly tried to sell stock to a hedge fund in exchange for illegal kickbacks.  I say "tried," because the sale went through but the person posing as the hedge fund manager was actually an undercover FBI agent.  Sting!

Investors WatchBlog has valuable insights about the hidden dangers of hedge funds:

"Imagine that the hedge fund was not part of a sting, but a real hedge fund holding your money.  Do you want the hedge fund manager deciding what stocks to buy based upon the size of the kickback he can earn? 

"I’ve written on this before.  Anyone can be a hedge fund manager.  It is truly frightening how easy it is.  Virtually anyone with enough salesmanship to you convince you to part with your money can call himself a hedge fund manager.  In many cases, that’s what has happened — people with inflated resumes have lured thousands into hedge funds that are bound to fail.  Congratulations and thanks are due the SEC for this proactive approach to enforcement.

"How can you separate the wheat from the chaff when it comes to evaluating a hedge fund manager?  Only an experienced, independent, unbiased source can give you information worth relying on.  Do not hand over your money until you have done that kind of investigation." (Investors WatchBlog)

Like Investors WatchBlog, the SEC also advises people to investigate managers' backgrounds before investing in hedge funds. 

Investors WatchBlog is run by the investor-protection group Investors Watchdog.  Founder Pat Huddelston is a former SEC Branch Chief, who later went into private practice helping bilked investors sue corporate fraudsters.

For those who aren't sure, hedge funds are like mutual funds, in that they pool investors' money and invest it. One big difference: hedge funds don't have to register with or report to the SEC, meaning hedge funds aren't as regulated as mutual funds.(SEC) 

In other words, with hedge funds, almost anything goes -- though managers are still bound by laws against fraud, as were Enron's many indicted executives.

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Comments

[On a Limb with Claudia]

We have a neighbor who got into the hedge fund business. Amazing. He made money hand over fist then - surprise - disappeared fund and all. We watched people come to his house looking for them - poor suckers. Statistically hedge funds don't do better than traditional trading. Why would anyone get involved in them?

[D. Cupples]

This story does not surprise me at all!

[D. Cupples]

This story does not surprise me at all!