Friday, December 07, 2007

Something New and Naughty in Hedge Fund-land

Just when you think that hedge funds have figured out every possible way of stock market grifting, a new method comes to the fore. Today comes word that six persons have been indicted in a scheme in which they tried to bribe a "hedge fund" (really an FBI agent) to buy shares of stock.

While no hedge fund was named, obviously the FBI is on to a new and creepy form of nastiness in hedge fund-land.

The SEC litigation release gives the tawdry details:

The defendants are insiders or promoters of publicly traded companies who made stock sales to a hedge fund in exchange for illegal kickbacks to an individual whom they believed to be the hedge fund manager, but who was in reality an undercover FBI agent. In related criminal prosecutions, the United States Attorney’s Office for the Southern District of Florida today announced the criminal indictments of 6 individuals involved in the schemes.
This is a variation of (and, I daresay, an improvement on) the old boiler room practice of paying off brokers under the table to sell stocks. Except in this case you have the buyer getting kickbacks.

Pretty neat, huh? Here's more:

The Commission’s complaints allege that, in each case, the undercover FBI agent purporting to be a hedge fund manager told the seller or promoter that the kickback had to be kept secret, because buying stock in exchange for kickbacks would violate his fiduciary obligations to the hedge fund. The FBI agent also told the seller or promoter that he had created a phony consulting company to which the kickback could be paid pursuant to a consulting agreement. The sellers or promoters were told that the consulting entity did not exist, that no actual consulting work would be performed, and that the phony consulting arrangement was simply a means to secretly funnel a kickback to the purported hedge fund manager. All of the defendants agreed to pay a kickback. With one exception, the defendants actually paid the promised kickback after the hedge fund bought the stock defendants were promoting.
This could be an isolated incident or the tip of the iceberg. My bet would be on the latter.

UPDATE: A new and intriguing blog called "Crazyman's Economics" weighs in on this.

© 2007 Gary Weiss. All rights reserved.

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