Due diligence is often thought of as something an investor does prior to making an investment. The story below illustrates that due diligence must be done periodically through the life of the investment. Even though a hedge fund manager may act with fraudulent intent, as appears to be the case here, from the outset of the relationship, managers can run into tough times along the way leading them to make very bad decisions.
The Securities and Exchange Commission (SEC) filed a complaint alleging a scheme by Stephen Kim to defraud investors in Spyglass Capital Partners, L.P., a hedge fund managed by Kim through Spyglass Management. The SEC alleged that, between 2004 and 2006, Kim raised approximately $4.7 million from investors located primarily in Texas using offering materials that contained misleading information relating to Kim’s education and business backgrounds. From the outset, after raising capital from investors, Spyglass Management lost a significant amount of those funds through trading. Rather than report the losses, Kim had Spyglass Partners produce investor statements that showed that the fund was profitable. In addition, Spyglass Management provided false forms to investors and the IRS showing income for the 2004 tax year, when in fact Spyglass Partners had incurred significant losses. In 2005, Spyglass Management began making Ponzi payments to its investors in order to obtain additional funds and to lure capital from new investors. And, through 2006, Kim and Spyglass Management repeatedly made false statements to investors concerning the valuation and profitability of Spyglass Partners’ investment activities.
If you would like to talk about how due diligence can be accomplished during the investment period, contact Jeffrey Wittenberg at 877-352-2010.