Former NY State Comptroller Sentenced

Alan Hevesi

Alan Hevesi, 71, will be spending from one to four years in the Big House for his role in a pay-to-play scandal that occurred at a the state’s principal pension plan. The scandal has sunk several investment firms, and now Hevesi is going down as well.

Hevesi’s guilty plea to official corruption last October doesn’t seem to have earned him a lesser sentence. The judge, New York State Justice Michael Obus, rejected pleas for mercy based on Hevesi’s age, health, and prior service. The judge ruled:

"When a person in [Hevesi's] situation violates [the public's] trust, the damage, though not easily quantifiable, is quite profound."

Hevesi could spend less than a year in prison if he is a good boy. On the other hand, he could spend the entire four years behind bars. His former aid, Henry Morris, has already admitted being the leader of the conspiracy, has been sentenced from 16 months to four years.

In his guilty plea, Hevesi admitted approving a $250 million investment into private equity firm Markstone Capital Group. The investment was made by the New York State Common Retirement Fund. Hevesi received a $1 million kickback for facilitating the deal. The kickback came from Markstone Chairman Elliot Brody.

Eric Bank, Freelance Writer

© 2011 Hedge Fund Writer LLC

Surprise Confession at German Ponzi Trial

Kiener Faces 15 Years in German Prison

What was supposed to be an epic battle on the witness stand between German prosecutors and accused hedge fund Ponzier Helmut Kiener changed dramatically when lawyers read a statement admitting guilt in the affair. The statement said the Kiener did in fact run a €345 million Ponzi scheme because:

"I just didn't have the courage to liquidate the K1 funds when I saw they got into trouble. I trusted that I could make up losses by investing just more and more new money."

Ironically, Kiener is a trained psychologist, yet he blamed his behavior on “enormous psychological pressure.” and that he

"came up with the idea to use my computer to forge some of the account statements. After getting through with it one time, that nasty habit sort of slipped in."

There are 121 counts of forgery lodged against Kiener, who may enjoy the hospitality of the renowned German prison system for 15 years. Seven other individuals were arrested in the case, including one who committed suicide as being chased by police.

Kiener didn’t take the full blame, but rather sought to spread it around the likes of Barclays and BNP Paribas:

"As the banks approved all my investment suggestions, I felt on the safe side. I thought my investment decisions would be equivalent to market practices. I know that this was a conflict of interest and that I violated investment rules I had with the banks, and I bitterly regret it,"

What he means, of course, is that he bitterly regrets getting caught.

Eric Bank, Freelance Writer

© 2011 Hedge Fund Writer LLC

FrontPoint Executive Arrested for Insider Trading

Joseph Skowron

It’s not been a good year for people associated with SAC Capital Advisors. Just yesterday we featured a story involving SAC fund manager Donald Longueuil, who is seeking to dismiss charges against him. This morning, another SAC alumnus and current healthcare chief at FrontPoint Partners, Joseph Skowron, surrendered to Federal Bureau of Investigation agents and was arrested.

Skowron is charged with receiving inside tips from well-known kidney doctor Yves Benhamou regarding negative Hepatitis-C drug test results at Human Genome Sciences. Dr. Benhamou has already pleaded guilty to prosecutors on Monday in an arrangement worked out with the U. S. Attorney’s Office. The doctor had consulted at half a dozen hedge funds before his arrest last November.

Dr. Benhamou transmittal of confidential information allowed Skowron to save his firm $30 million in losses on Human Genome Sciences by selling 3.3 million shares in January 2008, ahead of the drug trial announcement. When reporters linked Benhamou’s arrest to FrontPoint, investors jumped ship and forced the hedge fund to close down its healthcare unit and firing all its employees. Skowron went on leave sat that time.

Seeking to rehabilitate Dr. Benhamou’s reputation, his lawyer David Zornow offered the following spin:

"Dr. Benhamou has acknowledged his serious mistakes in judgment and intends to live up to his obligations under his cooperation agreement. Dr. Benhamou's conduct in this instance must fairly be considered in the overall context of his extraordinary contributions to his patients and to medical science."

Whatever.

For its part, FrontPoint maintains it is fully cooperating with the ongoing probe. Skowron is almost certainly the most educated prisoner on the cell block, as attested to by his Ph.D. in biology from Yale. His journey from Yale to jail demonstrates once again that hedge fund crime doesn’t pay – if you get caught!

UPDATE April 14

Skowron was released on bail today, even as he was slapped with a SEC civil suit to accompany his criminal indictment. Meanwhile, his firm, FrontPoint Partners, will pay a $33 million settlement to the SEC for their role in the case. This includes $29 million in disgorgement and $4 million in interest.

Eric Bank, Freelance Writer

© 2011 Hedge Fund Writer LLC

Two Alleged Tipsters Seek Dismissals of Charges

Winifred Jiau

Expert network consultant Winifred Jiau, currently jailed without bail for her alleged part in an insider-trading scandal, is seeking dismissal of charges, citing lack of evidence. She is accused of passing along insider tips regarding Marvell Technology Group and Nvidia Corp.

Jiau, who consulted at Primary Global Research – a scandal nexus that employed eight arrested defendants in the case – claims that there is no evidence that her information was provided via insider tips. Jiau is cooling her heals in prison since the judge declared her a flight risk and revoked bail. Lawyers for Jiau say her continued incarceration hampers her defense because she lacks access to prosecutors’ documents. They want the government to specify which of the “tens of millions of pages of documents” in evidence pertain to Jiau.

Donald Longueuil

The second defendant seeking dismissal is former SAC Capital Advisors fund manager Donald Longueuil. He stands accused of receiving tips from Noah Freeman, another SAC manager who has pleaded guilty and is a prosecution witness. Longueuil’s lawyer, Craig Carpenito, filed a motion claiming:

“The indictment fails to allege Mr. Longueuil knew or should have known that material non-public information he received from non-inside sources was originally obtained from an inside tipper that fraudulently breached a duty. Mr. Longueuil was a third tier recipient of the information at best.”

Jiau and Longueuil have a few things in common: they are both facing 25-year sentences if convicted, they both have pleaded not guilty, and each wants a separate trial.

Eric Bank, Freelance Writer

© 2011 Hedge Fund Writer LLC

SEC Sues Former Hedge Fund CFO For Improper Transfers

D.B. Zwirn & Co. is a defunct hedge fund, decimated when investors learned through an internal audit about improper transfers of funds. The accounting scandal resulted in the investigation of founder Daniel Zwirm, who was subsequently cleared of any wrongdoing.

Perry Gruss, the form CFO who made the transfers, may not be so lucky. Gruss is being sued by the Securities and Exchange Commission for knowingly making unauthorized transfers to help pay for a corporate jet and other expenses.  The jet was for the use of one of the firm’s partners. Apparently, the transfers were needed to keep the firm afloat.

The transfers covered a two year span beginning in 2004. The SEC began probing D.B. Zwirn over four years ago, but founder Zwirn was only cleared this year.

The internal audit that turned up the accounting irregularities included transfers from D.B. Zwirn’s offshore fund to its onshore fund ($576 million), transfers from the offshore fund to a revolving credit line ($273 million), money transferred to plug up cash flow shortfalls ($22 million), and of course the private jet ($3.8 million). Every failing company needs a private jet, right?

After the 2006 internal audit and his subsequent departure, Gruss sued D.B. Zwirn in 2009 for telling investors:

"a series of false and misleading statements … which sought to blame Gruss for any conceivable control issues at the company, and to shift the blame to Gruss without implicating Zwirn."

Gruss’ attorney, Nick Ackerman said of the current lawsuit that Gruss:

“…categorically denies the allegations in the SEC's complaint as being without merit. At all times, Mr. Gruss acted in the best interests of the shareholders, and there is not even an allegation that he obtained any financial gain whatsoever from any of the transactions alleged in the complaint."

In any event, it was all too much for investors in the former $5 billion hedge fund. By February 2008, the company was forced to close its largest fund, which went to Fortress Investment Group the following year.

Eric Bank, Freelance Writer

© 2011 Hedge Fund Writer LLC