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Due Diligence

SEC investment adviser appoints fictitious audit firm

Posted on 29 Mar 2012

When a fund manager assists in appointing third party service providers to a fund, it does so with the investor’s best interest in mind, ensuring that the appointed entity is completely independent and, more importantly, legitimate.

Yet it seems that for Mr. James Michael Murray, a San Francisco based hedge fund manager, this was not the case. The Securities and Exchange Commission (SEC) recently brought charges against Mr. Murray, the sole member and investment adviser of Market Neutral Trading LLC, for allegedly providing investors a fake audit report from a fictitious audit firm.

It was revealed by the SEC that Mr. Murray suggested to its investors that the audit report was prepared by an “independent” audit firm called Jones, Moore & Associates. According to the SEC complaint, this company was simply a shell company that Mr. Murray had created in order to defraud investors. The company itself is neither registered nor licensed as an accounting firm in the State of Delaware, where it was claimed to be operating from.

It seems that Mr. Murray went to great lengths in order to conceal his fraudulent activities, and this included the set-up of a professional website for Jones, Moore & Associates, which also listed a number of accounting professionals of whom at least five are said by the SEC to not even exist.

When it comes to “innovation” with regards to fraud, this certainly features at the very top of the list. Max Ferri, Head of Operational Due Diligence at Laven Partners says, “Apart from reading financial statements, being able to check facts directly with a fund’s appointed auditor is an important part of any professional due diligence.” He further comments, “at Laven Partners, when undertaking an Independent Process of Operational Due Diligence (IPODD) report for our clients, we adhere to our motto “Trust…but Verify”. Professional due diligence analysts should always seek to dig deeper and seek comfort, especially when fronted with unfamiliar service providers.”

For more information about Laven Partners’ Operational Due Diligence Services, please visit our website.