On 26 September 2012, the former CEO of the hedge fund management company Osiris Partners LLC (“Osiris”), Mr. Michael J. Spak, pleaded guilty in the District of New Jersey federal court to charges for conspiracy to commit wire fraud.
In a tale all too familiar when it comes to the lack of due diligence undertaken by investors in such vehicles, approximately 76 investors were defrauded of USD 4 million over 2010 and 2011. Mr. Spak and co-conspirators (such as Osiris Chairman Mr. Peter Zuck) fraudulently diverted funds from the unregistered Osiris Fund L.P. (the “Fund”) for their own use, yet continued to list these amounts in the Fund’s financial books as “assets” or “loans”. It is even alleged that one of the purchases through the use of these funds included a sportfishing boat.
Furthermore, the complaint outlines how substantial losses to the tune of 50% that were reflected in the Fund’s trading account were not disclosed to investors in May 2010. In fact, following on from these losses it is claimed by Mr. Spak, that Mr. Zuck had instructed a USD 5 million entry be made to the Fund’s Net Asset Value (“NAV”) to account for the losses suffered. This entry was indeed a fictitious asset added to the books of the Fund, which would also lead to the improper and inflated calculation of management fees. In the last quarterly statement of 2010 sent out to investors, the Fund’s NAV was stated to be about USD 10 million, when in fact the Fund’s assets had dwindled to just over USD 2 million.
Whereas accounting fraud is understandably much more of a challenge to pin-point, the failure to conduct or mandate independent background checks on key individuals of a management company is not excusable. As the New Jersey Office of the Attorney General news release points out, the investigation into the case revealed that Mr. Zuck was in fact a previously convicted criminal for matters relating to securities fraud.
The whole case has lead Acting Director of the State Division of Consumer Affairs, Mr. Eric Kanefsky, to “urge consumers to perform their due diligence before investing their money” and further comments that “unregistered people selling unregistered securities are serious red flags, as is any past criminal history in the securities industry”.
As operational due diligence experts in the field, Laven Partners stress that mandating independent checks on key individuals’ backgrounds and obtaining an independent verification on a Fund’s NAV are all imperative steps before allocating money to such investment vehicles. Through our Independent Process of Operational Due Diligence (IPODD) we can assist investors by identifying potential weaknesses and concerns associated with various areas of alternative managers’ infrastructure.
