The Securities and Exchange Commission charged an investment advisory firm on Tuesday with “scheming to collect extra monthly fees from a pair of hedge funds they managed”. The firm, Hope Advisors Inc., owned by Karen Burton, allegedly orchestrated trades that enabled the Advisors to receive inappropriate incentive fees. Unfortunately, it appears that the trades merely pushed off large losses to a later date. In the end, it seems as if the investors in the Fund will be left suffering from those losses.
The theme of fraud hits Wall Street every now and again. As far back as Ponzi or Nicholas Leeson and Barings Bank and more recently with Bernie Madoff, fraud permeates the culture of Wall Street. Whether it is large banks paying spectacular fines without “admitting wrongdoing” or chop shops ripping off the elderly with penny stock schemes, Wall Street provides the appropriate combination of greed and lack of understanding to enable fraudulent situations to occur.
Despite the occasional announcement of a case of major fraud, it’s the minor fraud that exists which may be of concern to most participants on Wall Street. There have been issues at hedge funds, allegations against algorithms, infractions in the world of commodities trading and numerous actions against firms by both the Securities Exchange Commission and the Commodities Futures Trading Commission.
One question is can these two, relatively small agencies, have a significant impact on quelling the greed that frequently precedes the allegations that are brought. In addition, do they really get a picture of all of the infractions that occur? In the case of “Supertrader” Karen Bruton, allegations that she misled clients and the investing public, and misappropriated trades will take some time to sort out.
The “greed” factor as first laid out by Gordon Gekko in the movie Wall Street permeates the industry. There are numerous hard working individuals currently performing their fiduciary responsibilities while earning a very nice living. Unfortunately, there is an element of the Wall Street community willing to do anything to make an extra buck. This can occur through either ethical or unethical means. In the case of the “Supertrader”, her alleged claims of remarkable returns should always tip off investors that they may need to look at their investment more closely.
Allegations of fraud and general mismanagement hit Wall Street pretty often. Whether it was the mismanagement that closed Long Term Capital, L.P. or Amaranth, or outright frauds like those mentioned above, investors have plenty to be wary for. In addition, while algorithmic trading certainly would not be considered fraud, it may provide an uneven playing surface for investors to trade in.
While there is definitely no stopping greed, analyzing the investments you make may reduce the likelihood of falling prey to a particular scam. It’s amazing to me that Bernie Madoff’s clients found no red flag when their investments had consistent returns over a long period of time despite the stock market’s varying returns. A little bit of logic and common sense can go a long way in preventing financial abuse. Remember: a hedge fund being paid a 2% fee plus 20% of the gains may provide larger returns than the Stock Market, but the desire to participate in the fund caters to greed. It’s clearly the greed factor that motivates investors to seek the extraordinary. The question is do the hedge fund managers have your best interests at heart? 2015 was a bad year for hedge funds. It wasn’t due to fraud; it was just poor trading and perhaps a bit of mismanagement.
Ultimately, you can’t rely on government agencies to protect you against investment fraud. Common sense and evaluating the claims of an investment organization, or trader, can go a long way to protecting you. The SEC and CFTC do their best to protect the investing public, but with fraudulent participants preying on greedy investors, there is plenty of room for the occasional noteworthy fraud.
Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results.