Hedge Fund Startup Guru.com

New York – January 27, 2011 – ICS Compliance Assistant Director Aaron Kahler, CFE, CAMS, has been chosen by the Association of Certified Fraud Examiners (ACFE) to serve on its Advisory Council. The ACFE is a large anti-fraud organization and provider of anti-fraud training and education.

Mr. Kahler is an anti-money laundering (AML) regulatory compliance expert who also specializes in fraud management / investigation and business intelligence / due diligence.  He has nearly 10 years of experience in the commercial / retail, private banking, and brokerage sectors. He serves on other advisory and expert boards as well, including the International Association of Asset Recovery (IAAR) and the Eurasian Group on Combating Money Laundering and Terrorist Financing (EAG).

“Aaron’s great dedication to the world of AML is notable and commendable,” states ICS Compliance President John C. Soffronoff, Jr. Mr. Kahler responds, “The Association of Certified Fraud Examiners (ACFE) is a world-class leader in anti-fraud, I am honored to have been chosen to serve on their advisory board and look forward to contributing to the fraud community.”

Mr. Kahler’s complete professional biography can be found (alphabetically by last name) at: http://www.ICScompliance.com/ComplianceProfessionals.aspx?cid=3

Posted by Carmine Angone, Director, ICS Compliance - Confidence in Compliance for Hedge Fund Managers, Investment Advisors and Broker-Dealers

A hedge-fund industry group asked federal securities regulators for guidelines on the use of “expert networks,” which have been under scrutiny in a federal insider-trading probe, the organization’s chief executive said.

The request Monday by the Managed Funds Association, a Washington lobbying group, comes amid continuing developments in the investigation, which is examining whether hedge funds and other investors traded on inside information received from corporate employees freelancing as consultants for expert-network firms.

Monday, an investor in hedge-fund firm Barai Capital Management told clients that Barai said it is cooperating with prosecutors in the probe and has begun to wind down its portfolios.

The move followed a Wall Street Journal report Monday that Barai Capital was raided by Federal Bureau of Investigation agents as part of the probe and that its founder was an alleged co-conspirator in a previously filed criminal case.

Samir Barai, the founder, didn’t respond to requests for comment. Prosecutors haven’t disclosed charges of wrongdoing against Mr. Barai or his firm.

Expert-network firms link investors with industry experts, including employees of public companies, for a fee. Investors, primarily hedge funds, tap these experts to try to get an information edge.

But federal prosecutors have been investigating whether confidential material is being passed along in meetings and calls between the network consultants and the hedge funds and other investors who pay to speak with them.

“Our members would like to know where the sidelines are,” Richard Baker, the association’s chief, said at the group’s conference in Palm Beach, Fla., using a sports reference to a play that goes out of bounds.

The request, made to the Securities and Exchange Commission, followed concerns by some of the association’s 3,000 members, which include hedge funds, about what they saw as a lack of clarity surrounding the use of expert networks.

Mr. Baker said the federal investigation, first disclosed by the Journal in November, had some members worried about “inadvertently” crossing a line.

An SEC spokesman declined to comment.

The government’s insider-trading probe has resulted in criminal charges against eight employees or technology-industry consultants who worked for a California expert-network firm, Primary Global Research LLC

In the Barai matter, the fund “informed us that they are cooperating fully with the government’s investigation,” according to a letter sent Monday to clients of Protege Partners, a New York investment firm that focuses on providing seed money to hedge funds. Barai “also has informed its investors that it commenced an orderly wind down of the BCM funds,” the letter said.

Protege Partners’ chief financial officer, Daniel Federmann, whose name appears on the email to Protege clients, and other representatives of the firm didn’t respond to requests for comment. The letter was signed by Jeffrey Tarrant and Ted Seides, Protege’s co-founders and senior executives.

Mr. Barai and other employees of Barai Capital either didn’t respond to requests for comment or declined to comment in recent days. A message left Monday on a cellphone identified as belonging to Mr. Barai wasn’t returned.

The insider-trading probe is having “an overwhelmingly negative impact” on investors’ confidence in stock markets, according to results of a survey published in January by investment- and markets-research firm TABB Group.

Of 112 individuals who responded to the survey the week of Dec. 20 from across the technology, investment and brokerage industries, about eight out of 10 said expert-network firms generally don’t have the compliance standards they need to prevent experts from passing inside information to investors.

More than two-thirds of those surveyed said employees of publicly traded companies should be banned from earning money by serving as expert consultants, TABB Group said.

Posted by Carmine Angone, Director, ICS Compliance - Confidence in Compliance for Hedge Fund Managers, Investment Advisors and Broker-Dealers

Technology-focused hedge fund STG Capital, which did business with an expert network firm that has figured prominently in an ongoing U.S. insider trading investigation, is shutting down, said people familiar with the situation.

Steven T. Glass, the founder of STG, which once had more than $200 million under management, notified investors last week he was shutting down his fund, said one investor familiar with the situation, who declined to be identified. 

STG is the second New York hedge fund to shut down in the wake of a series of arrests of people associated with Primary Global Research, a California-based expert network firm that matches hedge funds with industry consultants. 

The Wall Street Journal reported on Monday that Barai Capital Management, a small $80 million hedge fund raided by federal agents in November, is also closing. 

Four people familiar with the investigation said both STG and Barai regularly employed Primary Global consultants to gather information on tech stocks. 

Glass said in an email that his fund’s relationship with Primary Global had nothing to do with the closing, but he declined to elaborate. 

“You are factually incorrect in much of that, sir,” he said. “As I informed our investors last week, assets were not at a critical mass to sustain the business.” 

 Glass opened the fund in 2002 after a stint as a trader at Kingdon Capital Management. He also previously worked at Credit Suisse Group AG and Deutsche Bank AG. Glass’ fund, which most recently had about $150 million, was up about 8 percent last year, said an investor source. That compares with gains of about 17 percent in the tech-heavy Nasdaq. 

According to SEC filings, some of STG’s top stock holdings as of Sept. 30 were STG Semiconductor Corp, Qualcomm Inc and Apple Inc. 

The closing of STG Capital was reported last week by Dealbreaker.com. The popular Wall Street blog did not offer any explanation for the closing of the fund, which takes its name from its founders initials. 

Neither Glass nor anyone associated with STG has been charged in the investigation, which involves allegations of industry consultants passing on confidential corporate information to hedge fund traders and analysts. 

So far, at least eight people with links to Primary Global have been charged with helping to leak confidential information to hedge fund customers. Federal prosecutors have also secured guilty pleas from a number of cooperating witnesses and sources say authorities are likely to make a new round of arrests in coming weeks. 

The $1.9 trillion hedge fund world was rocked in November when agents with the Federal Bureau of Investigation raided three funds in connection with the insider trading investigation on Nov. 22. Soon after, federal prosecutors in New York sent out dozen of subpoenas to hedge funds and mutual funds that did business with a variety of expert network firms and consultants, including Primary Global.

But the investigation, which began with a bang, has since moved along at a snail’s pace. Securities lawyers said that is not unexpected given that authorities tend to focus on lower-level suspects first. 

“Prosecutors sometimes go after smaller funds and companies in the hopes that those companies will cooperate and provide evidence against larger firms,” said Robert Heim, a securities lawyer and former assistant regional director with the Securities and Exchange Commission. 

Meanwhile, the three hedge fund raided by the FBI on Nov. 22 — Diamondback Capital Management, Level Global and Loch Capital Management — all have denied any wrongdoing. 

Earlier this month, Reuters reported that a fourth hedge fund was raided by the FBI, but the fund’s name remained a mystery. The Wall Street Journal reported on Monday that the mystery fund was Barai Capital, a small hedge fund founded by Samir Barai, formerly with Citigroup Inc. 

Evan Barr, an attorney for Barai, declined to comment on the investigation. 

Barai founded his fund after leaving Citigroup’s alternative investment group. In December, federal prosecutors charged Winifred Jiau, a Primary Global consultant, with passing on confidential information to the founder of an unnamed hedge fund. People familiar with the investigation confirmed the Journal’s report the unnamed hedge fund is Barai’s.

Posted by Carmine Angone, Director, ICS Compliance - Confidence in Compliance for Hedge Fund Managers, Investment Advisors and Broker-Dealers

The Securities and Exchange Commission today instituted administrative proceedings against a California-based attorney for engaging in improper professional conduct during an SEC examination.

The SEC’s Office of the General Counsel alleges that David M. Tamman — in the course of an SEC examination of his client NewPoint Securities LLC in April and May 2009 — altered private placement memoranda (PPMs) purportedly used in the offer and sale of securities issued by NewPoint Financial Services. The original PPMs purportedly provided to investors stated that the funds raised in the offerings would be used primarily for real estate related investments. In fact, the vast majority of money raised in the offerings was misappropriated by NewPoint’s principal John Farahi.

The SEC’s Office of the General Counsel alleges that Tamman — a member of the California Bar and a partner at a large international law firm — added language to the PPMs to make it appear that it was disclosed to investors that much of the money raised by NewPoint would be loaned to Farahi. The PPMs were then produced to the SEC’s examination and enforcement staff. According to the Office of the General Counsel, Tamman knew that the language he added to the documents was not included in the PPMs actually provided to investors.

Through his conduct, the SEC’s Office of the General Counsel alleges that Tamman engaged in unethical and improper professional conduct in violation of Rule 102(e) of the SEC’s Rules of Practice. An administrative hearing will be scheduled to determine whether the Office of the General Counsel’s allegations are true, to provide Tamman an opportunity to establish any defenses to the allegations, and to determine what sanctions, if any, are appropriate and in the public interest, including the denial, temporarily or permanently, of the privilege of appearing or practicing before the Commission pursuant to Rule 102(e).

The SEC’s investigation was conducted by Brent Smyth and Finola H. Manvelian of the SEC’s Los Angeles Regional Office. The SEC’s litigation will be led by Donna McCaffrey and Christopher Bruckmann of the SEC’s Office of the General Counsel.

Posted by Carmine Angone, Director, ICS Compliance - Confidence in Compliance for Hedge Fund Managers, Investment Advisors and Broker-Dealers

The Securities and Exchange Commission today obtained a court order freezing the assets of a Stamford, Conn.-based investment adviser and its principal, Francisco Illarramendi, charging that they misappropriated at least $53 million in investor funds and used the money for self-dealing transactions.

The SEC alleges that Illarramendi defrauded investors in the several hedge funds he managed by improperly transferring their money into bank accounts that he personally controlled. He then invested the money for his own benefit or for the benefit of the entities that he controlled, rather than for the benefit of the hedge fund investors.

“Illarramendi treated his clients’ money like it was his own, diverting millions of dollars that did not belong to him,” said David P. Bergers, Director of the SEC’s Boston Regional Office. “He abused his position of trust with his clients and breached his responsibilities as an investment adviser.”

According to the SEC’s complaint filed in U.S. District Court for the District of Connecticut on January 14, Illarramendi is the majority owner of the Michael Kenwood Group LLC — a holding company for, among other entities, investment adviser Michael Kenwood Capital Management LLC. Through this adviser entity, Illarramendi manages several hedge funds, including one that contains up to $540 million in assets. The SEC’s complaint alleges that Illarramendi took at least $53 million in investor money out of this hedge fund without the knowledge or consent of the hedge fund’s investors

The SEC sought an asset freeze and other emergency relief because it alleged that Illarramendi was imminently planning to make additional investments using investor funds without the knowledge or consent of the investors. Since the filing of the complaint, the Honorable Janet Bond Arterton, U.S. District Judge for the District of Connecticut, has held a series of hearings pertaining to the SEC’s request for an emergency relief against Illarramendi and Michael Kenwood Capital Management. Judge Arterton then entered an order freezing the assets of the defendants.

The SEC’s complaint charges Illarramendi and Michael Kenwood Capital Management, LLC, with violating Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The complaint also names the following Illarramendi-controlled entities as relief defendants, alleging that they received investor funds to which they have no right: Michael Kenwood Asset Management LLC, Michael Kenwood Energy and Infrastructure LLC, and MKEI Solar LP. In addition to preliminary emergency relief, the SEC’s complaint seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties from the defendants, and disgorgement plus prejudgment interest from the relief defendants.

Carlos J. Costa-Rodrigues, Sofia T. Hussain, Michelle Perillo, and LeeAnn Ghazil Gaunt of the SEC’s Boston Regional Office conducted the investigation following an examination conducted by Zerubbabel Johnson, Stephen M. Latin, Michael D. O’Connell, and Elizabeth Salini. The SEC’s litigation effort is being led by Rua M. Kelly. The SEC’s investigation is ongoing.

Posted by Carmine Angone, Director, ICS Compliance - Confidence in Compliance for Hedge Fund Managers, Investment Advisors and Broker-Dealers

Almost half of the 43 defendants who were sentenced in Manhattan federal court in the past eight years for insider trading avoided a prison term, with many never seeing the inside of a jail cell because they cooperated with prosecutors.

Nineteen who were sentenced since 2003, or 44 percent, weren’t incarcerated, an analysis of court cases by Bloomberg showed. Of the remainder, the average defendant got a prison term of 18.4 months. The greater the profit made on illegal trades, the longer the sentence. The longest term was 10 years. Danielle Chiesi, who pleaded guilty yesterday for her role in the Galleon Group LLC hedge fund insider-trading scandal, faces between 37 and 46 months in prison.

Since 2009, U.S. Attorney Preet Bharara in Manhattan has stepped up insider-trading prosecutions, charging more than 30 people in three overlapping rings. Of the three defendants sentenced so far in the Galleon ring, the average sentence has been 17 months. The nationwide investigation has implicated hedge funds, technology companies and so-called expert- networking firms.

“If you engage in accounting manipulation, you’re deceiving the entire investment community in that security, and that’s deemed to be very serious,” Kirby Behre, a partner at Paul, Hastings, Janofsky & Walker LLP in Washington and co- author of “Federal Sentencing for Business Crimes,” said yesterday in a phone interview. “But if you’re an insider trader who made $12,000 on a couple of sales, that’s a much more limited fraud.”

Trial Next Month

Galleon co-founder Raj Rajaratnam faces a trial next month on charges that he made $45 million on secret tips. If convicted, Rajaratnam, who denies wrongdoing, faces a long prison term because of the magnitude of stock trades and profits, former prosecutors said.

“He’s obviously looking at a lot of potential time because of the gains,” said Peter Zeidenberg, a partner at DLA Piper LLP and a former prosecutor who isn’t involved in the case. “It may be that the government has no difficulty in proving the gain or loss amount, but a lot of times they do. Those amounts are often not borne out at trial.”

Jim McCarthy, a spokesman for Rajaratnam, declined to comment.

Chiesi, a former New Castle Funds LLC consultant, admitted she passed inside information to Rajaratnam and others. She is to be sentenced on May 13. The advisory range of 37 to 46 months is based partly on New Castle’s profit of $1 million to $2.5 million from her crimes.

Winning Leniency

The U.S. sentencing guidelines take into account the amount of offenders’ profits, whether they acknowledged breaking the law, their role in the fraud and criminal record. Defendants who cooperate with prosecutors often win leniency, as do those who are ill or must care for ailing relatives.

“If you cooperate, that’s going to be your biggest driver,” Behre said. “The second-biggest driver is the perceived size of the fraud. That includes not only the personal gain but the overall size of the conduct investigated and prosecuted.”

None of the men who cooperated with prosecutors in a 2007 case stemming from leaks from Mitchel Guttenberg, an institutional client manager at UBS Securities LLC, was sent to prison. Guttenberg, the scheme’s ringleader, was sentenced to 6 1/2 years after pleading guilty. David Tavdy, a Bear Stearns Cos. trader who didn’t cooperate with prosecutors, got a 63-month term in that case.

Sick Spouse

Also in that case, Randi Collotta, an ex Morgan Stanley compliance officer who admitted leaking stock tips, was sentenced to two months in jail and four years of probation because her husband suffered severe heart problems. The guidelines called for a term of one year to 18 months.

“The trend in the last three to five years has been for judges to give below-guidelines sentences,” Behre said.

“A fair comparison” for insider trading “might be an embezzlement,” he said. “What do people who embezzle $200,000 get?”

Christopher Clark, a former federal prosecutor in Manhattan who is now a defense attorney at Dewey & LeBoeuf LLP in New York, said insider-trading sentences “are probably higher than they ought to be.”

“For somebody who’s making millions at Goldman Sachs, the possibility of going to prison for three years and not being able to work again in the industry is a substantial disincentive to insider trading,” Clark said in an interview.

Madoff, Dreier

The average sentence in 7,617 fraud cases in fiscal 2009 was 21.8 months, according to the U.S. Sentencing Commission, which establishes the guidelines. Of those convictions, 94.9 percent were the result of guilty pleas and 5.1 percent came at a trial.

In non-insider trading cases that year, judges in Manhattan federal court sentenced Bernard Madoff to 150 years for masterminding the largest Ponzi scheme ever, former KPMG LLP senior manager John Larson got 10 years for selling tax shelters to wealthy clients, and law firm founder Marc Dreier received a 20-year term for cheating hedge funds out of more than $400 million.

A review of government statements issued since 2003 by the Manhattan U.S. Attorney’s Office in cases in which the chief crime was insider trading showed that many sentences included probation or home confinement. Defendants typically were ordered to pay fines and restitution.

Top Priority

Ellen Davis, a spokeswoman for Bharara, declined to comment. In an October speech, Bharara said insider trading “is rampant and may even be on the rise.” He said his office’s investigation “will remain a top criminal priority.”

Offenders who take their cases to trial and lose often get lengthier prison terms than those who plead guilty, according to court data. Only four insider-trading cases have come before Manhattan juries since 2003. One ended before sentencing when the judge threw out the jury’s conviction and dismissed the case. The average sentence after the three trial convictions was 68 months.

The longest of the 43 insider-trading sentences — 10 years — came after the 2008 trial of former Credit Suisse Group AG banker Hafiz Muhammad Zubair Naseem, who was convicted of leading a $7.8 million scheme.

In December, Joseph Contorinis, a former money manager at Jefferies Paragon Fund, was sentenced to six years when a jury convicted him of earning more than $7 million through an insider-trading scheme.

Press Attention

By contrast, the average sentence for an insider-trading defendant who pleads guilty was 14.6 months in prison, according to the data.

The second longest prison term since 2003 was in the case of Sam Waksal, the founder of ImClone Systems Inc. who was ordered to spend 87 months behind bars in 2003 after he pleaded guilty.

“Waksal was so high-profile,” Behre said. “Press attention is a factor.”

Not every trial conviction leads to stiff sentences. James Gansman, a former Ernst & Young LLP partner, was sent to prison for a year for leaking secrets to his girlfriend while guidelines recommended a term of as long as 51 months.

Others winning leniency included former Morgan Stanley Vice President Xujia Wang and ex-ING Investment Management analyst Ruopian Chen. The husband and wife were sentenced to 18 months each in 2007. Guidelines called for terms of 30 months to 47 months based on their earning of $611,000 through three trades based on secret tips.

Stepped Up Scrutiny

Twenty-eight of the 43 sentences reviewed by Bloomberg occurred in 2007 or later, when prosecutors stepped up their scrutiny of insider trading. In those cases, the average sentence was 17.2 months behind bars.

Among those sentenced was Eric Holzer, a tax lawyer who worked at Paul Hastings Janofsky & Walker. He was sent to a halfway house in 2009 for nine months after admitting he traded on stock tips gleaned from the wife of a former Lehman Brothers Holdings Inc. salesman.

In the Galleon cases, Mark Kurland, a co-founder of New Castle Funds, was sentenced to 27 months; former Atheros Communications Inc. Vice President Ali Hariri was sentenced to 18 months; and Robert Moffat, a former International Business Machines Corp. senior vice president got six months. Moffat, who said he had an “intimate relationship” with Chiesi, made no profit from leaking stock tips to her, prosecutors said.

The Chiesi and Rajaratnam case is U.S. v. Rajaratnam, 1:09- cr-1184, U.S. District Court, Southern District of New York (Manhattan).

Posted by Carmine Angone, Director, ICS Compliance - Confidence in Compliance for Hedge Fund Managers, Investment Advisors and Broker-Dealers

The U.S. futures regulator said on Wednesday it will hold a hearing on Jan 26 to consider a proposed rule for investment advisors to hedge funds.

The Commodity Futures Trading Commission’s joint rule with the Securities and Exchange Commission is one of dozens that the agencies are working on to implement the derivatives portion of the Dodd-Frank bank reform law.

Posted by Carmine Angone, Director, ICS Compliance - Confidence in Compliance for Hedge Fund Managers, Investment Advisors and Broker-Dealers

In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Securities and Exchange Commission is proposing rule 15Fi-1 under the Securities Exchange Act of 1934, which would require security-based swap dealers and major security-based swap participants to provide trade acknowledgments and to verify those trade acknowledgments in security-based swap transactions.   For further details regarind this rule proposal, please see SEC website: http://www.sec.gov/rules/proposed/2011/34-63727.pdf

Posted by Carmine Angone, Director, ICS Compliance - Confidence in Compliance for Hedge Fund Managers, Investment Advisors and Broker-Dealers

The U.S. Securities and Exchange Commission started a broad investigation involving several financial firms to determine whether they made improper payments to secure investments from sovereign wealth funds, according to two people with direct knowledge of the matter.

The sweep in part focuses on whether banks, hedge funds and private equity firms paid placement agents to win access to the state-owned money, said the people, who declined to be identified because the investigation isn’t public. An agent working with a sovereign wealth fund may be considered a government official, making interactions with that person subject to the Foreign Corrupt Practices Act.

“The SEC takes a broad view of who is considered a government official,” said Gary DiBianco, an attorney at Skadden Arps in London. “Accordingly, we can expect the SEC will view sovereign wealth fund employees as government officials under the FCPA, and the SEC will closely scrutinize relationships with consultants or agents who may have connections to state-controlled entities.”

The nature of the probe recalls a spate of public corruption cases in the U.S. where money managers were accused of making improper payments including campaign contributions to win contracts from public pension funds. The agency adopted new rules last year to curb so-called pay-to-play practices.

Entertainment Benefits

The SEC investigation was previously reported on the Wall Street Journal’s website late yesterday. The newspaper said the SEC sent letters to Citigroup Inc. and Blackstone Group LP. SEC spokesman John Nester declined to comment, as did Citigroup spokesman James Griffiths. Helen Winning, a spokeswoman for Blackstone in London, didn’t immediately reply to an e-mail sent outside of regular business hours.

SEC investigators are also scrutinizing whether the firms improperly provided other benefits, including entertainment or travel, directly to fund employees in order to secure investments or sell securities, one of the people said. The probe marks the first time the agency has applied the anti- bribery provision to the financial services industry, said Simeon Kriesberg, an attorney at Mayer Brown in Washington.

“Turning to the financial services sector opens up a vast new area of enforcement” of anti-bribery law, Kriesberg said. “Financial services firms will be looking to see whether they’re doing everything they’re supposed to do” to comply with the statute, he said.

Wealth Fund Assets

Sovereign wealth funds’ total combined assets reached $3.59 trillion in 2010, London-based research firm Preqin Ltd. said in a May report. More than half of sovereign wealth funds are active in private equity investments, and about 37 percent invest in hedge funds, according to the report.

Regulators have conducted sweeps of other industries, including pharmaceuticals and natural resources. In November, Panalpina World Transport Holding Ltd., a Swiss freight forwarding company, Royal Dutch Shell Plc, and five oil services companies agreed to pay $237 million to settle civil and criminal claims they paid thousands of bribes to African, Asian and South American officials on behalf of customers in the oil and gas industry.

Other settlements last year included BAE Systems Plc, Europe’s largest defense company, which agreed to pay $400 million to settle bribery claims, and Daimler AG, maker of Mercedes-Benz cars, which said it would pay $185 million.

Posted by Carmine Angone, Director, ICS Compliance - Confidence in Compliance for Hedge Fund Managers, Investment Advisors and Broker-Dealers