Amelia Island, FL.: Currently Ground Zero for Hedge Fund Fraud

For over a year I’ve been scheduled to speak on hedge fund fraud at the Public Investor’s Arbitration Bar Association’s (PIABA) annual meeting at the Ritz Carlton Resort & Spa in Amelia Island, Florida. Give credit to the meeting planners for having the foresight to discuss this important issue so far in advance of the headlines garnered by the horrific collapse of the two Bear Stearns hedge funds. My presentation will focus on hedge fund fraud and how it affects investors and the market in general.

Hedge fund cases are indeed the new frontier for fraud because of their murky trading strategies, lack of transparency and ability to “smooth returns.” I’ll be laying out to my colleagues’ strategies for how to bring a case and the types of documentation important to help investor recover for losses due to fraud. The discussion won’t necessarily be limited to hedge fund managers either. The prime broker’s role in clearing trades, providing inappropriate leverage and valuation will be part of the discussion to be sure.

An interesting debate is whether these cases should be filed in court or in arbitration. I firmly believe arbitration is the proper venue. Wall Street has the ability and resources to bury a court case for years and more than likely many cases will be dismissed even prior to the discovery process. On the flip side, arbitration is quicker, efficient and an award is virtually non-appealable.

Interestingly, though I cannot at the moment give specifics, it’s becoming clear to me that regulators are primed for action. The scuttlebutt around here is that should federal authorities lack the wherewithal to curb hedge fund fraud, there are certainly others who will make it their mission to protect the interest of investors.