Articles By Topic
By Topic: Signature Authority
From Vol. 6 No.19 (May 9, 2013)
What Measures Can Hedge Fund Managers Take to Prevent Employees from Forging Checks to Steal Assets from Client Accounts?
The SEC recently entered into a settlement order with a private fund manager that was accused of: failing to supervise an employee that forged checks to misappropriate assets from fund investors; engaging in violations of the custody rule (Rule 206(4)-2 under the Investment Advisers Act of 1940); and failing to have policies and procedures reasonably designed to prevent violations of the custody rule. See “How Does the SEC Approach Custody Issues in the Course of Examinations of Hedge Fund Managers?,” The Hedge Fund Law Report, Vol. 5, No. 18 (May 3, 2012). This settlement is important for several reasons. First, it highlights the dangers of failing to implement proper controls with respect to signing authority over client accounts. See also, on this topic, “Ten Steps That Hedge Fund Managers Can Take to Avoid Improper Transfers among Funds and Accounts,” The Hedge Fund Law Report, Vol. 4, No. 13 (Apr. 21, 2011). Second, it represents one of the most prominent actions initiated against a private fund manager for a custody rule violation. Additionally, the settlement sheds light on the SEC’s current approach to the imposition of sanctions against an investment adviser where the respondent self-reports violations to the staff and cooperates with the staff in its investigation. For a discussion of another enforcement action in the private funds context involving self-reporting, see “SEC Enforcement Action Against a Private Equity Fund Manager Partner Calls into Question the Value of Self-Reporting in the Private Funds Context,” The Hedge Fund Law Report, Vol. 4, No. 36 (Oct. 13, 2011). This article describes the factual background, legal violations and sanctions in this case. This article also offers several recommendations to reduce the risk of employee misappropriation of fund assets in similar situations.Read Full Article …
From Vol. 4 No.13 (Apr. 21, 2011)
On April 8, 2011, the SEC filed a complaint in the U.S. District Court for the Southern District of New York against Perry A. Gruss, the former chief financial officer of D.B. Zwirn & Co., L.P. (DBZ). The complaint generally alleges that Gruss inappropriately authorized the transfer of cash from hedge funds and accounts managed by DBZ for four purposes: investments by the onshore fund with cash from the offshore fund; repayment of debt of the onshore fund with cash from the offshore fund; early payment of DBZ’s management fees by various funds and accounts; and purchase of an aircraft with funds from the onshore fund and a managed account. The complaint relates a tale of meteoric growth at DBZ from October 2001 through October 2006. By our reckoning based on figures in the complaint, DBZ’s AUM grew by $2.74 million per day during that five-year period. However, the complaint also illustrates the fragility of even the most successful hedge fund management businesses. DBZ was a great business that was laid low by alleged legal violations that in retrospect appear pedestrian and preventable. This article relates the factual and legal allegations in the SEC’s complaint, then offers 10 detailed suggestions on how hedge fund managers can avoid the adverse consequences of violations such as those alleged against Gruss.Read Full Article …