Fraud Convict Want Do-Over

If you want to get in touch with convicted hedge fund fraudster James Nicholson sometime in the next 40 years, you can reach him at the Big House. That is, unless Nicholson succeeds at getting a new, shorter sentence. It seems the Nicholson doesn't like the idea of being incarcerated until he's in his 80's, and is taking steps to get out earlier.

The plan is predictable: blame the lawyer. Specifically, his new lawyer is casting doubt on the competence of the old lawyer, who allowed Nicholson to bargain away his right to appeal his sentence. The new lawyer, Andrew Frisch, declares:

"In an atmosphere of growing judicial criticism of the fraud guidelines and increasing disparity among sentences in fraud cases based on different judicial philosophies—precisely the disparity that national sentencing policy endeavors to eliminate—it was incumbent on counsel to preserve all sentencing challenges, not bargain them away for illusory gain."

Nicholson pleaded guilty last year to scamming investors out of $140 million through his Westgate Capital Management hedge fund. The New Jersey resident must have been unpleasantly surprised when, last November, U.S. District Judge Richard Sullivan handed him a nice stiff 40-year sentence. Apparently, Nicholson had thought that any sentence over 20 years in length was "a theoretical but not a real possibility."

As of yet, Nicholson has not sought to change his guilty plea. One wonders how much worse the sentence would have been if he had plead not guilty and lost his trial. Nicholson will have plenty of time to ponder that question…

Eric Bank, Freelance Writer

© 2011 Hedge Fund Writer LLC

Magnetar CDO Spurs Another SEC Probe

A collateralized debt obligation structured on behalf of the Magnetar Capital hedge fund has interested investigators from the Securities and Exchange Commission. It seems they have questions regarding the roles of Merrill Lynch and the hedge fund NIR Capital Management in marketing the CDO. The investigation continues the ongoing probe into banks' CDO marketing practices, and is the second time Magnetar has been involved.

The Merrill Lynch unit of Bank of America is under scrutiny from the SEC for allowing Magnetar to select securities for the "Norma" CDO – securities that Magnetar allegedly shorted. The question is whether Merrill and NIR failed to meet its obligations to the CDO investors by not disclosing the Magnetar role. The Dutch bank Rabobank settled a lawsuit against Merrill last year where it charged that Merrill:

"hand-picked a beholden collateral manager that was willing to ignore its fiduciary duties to Norma's investors by selecting Norma's collateral pool at Merrill Lynch's behest rather than on the basis of the rigorous independent analysis."

Magnetar does not stand accused of any wrongdoing and denies all allegations that it picked and shorted Norma securities. In a related investigation, the SEC is looking into JPMorgan Chase over another CDO allegedly developed for Magnetar. The Feds have warned both a JPMorgan executive and an executive at hedge fund GSC Group, the CDO's collateral manager, now bankrupt.

NIR is no stranger to controversy. It has had to deal with lawsuits that accuse it of lying about its fund performance. In addition, Federal prosecutors are keenly interested in whether NIR participated in paying kickbacks to get its assets evaluated at an inflated level.

Eric Bank, Freelance Writer

© 2011 Hedge Fund Writer LLC

Goffer and Friends Convicted

Zvi Goffer, his brother Emanuel Goffer and Michael Kimelman, all alumni of the Incremental Capital hedge fund, found themselves on the wrong side of a guilty verdict this morning as prosecutors successfully concluded the second Galleon Group insider trading trial. It was only a month ago when Raj Rajaratnam was found guilty in the first trial. The three newly minted convicts each face up to 25 years in the Big House for conspiracy and securities fraud.

The hapless trio participated in two insider-trading rings headed up by Goffer and Rajaratnam. The trial featured taped conversations and cooperating witnesses. Altogether, 27 people participated in the two rings. 

The jury was decisive, convicting Zvi Goffer on 14 counts and the other two on three counts each. The three hardly put up any defense, and one, Kimelman, turned down a plea deal that would have spared him jail time. His lawyer, Michael Sommer, said:

"We are enormously disappointed with the verdict as we believed the evidence clearly showed that Mr. Kimelman had not engaged in any insider trading. We will of course pursue all avenues of appeal."

Eric Bank, Freelance Writer

© 2011 Hedge Fund Writer LLC