Operational Due Diligence

Just a heads up, I’ve been reading a lot of articles in Google News lately on hedge funds and have noticed many familiar manager names popping up. There are a lot of new articles coming out saying that a manager is either a.) not doing well b.) doing well or c.) commenting on the market turmoil.

I’m guessing that people in the fund of funds industry (our clients) are also reading the media too and are more likely to know if you omitted a recent media article in a report. To combat this, I’ve started doing a Google News search on top of the standard Google search. This seems to check for the most recently published articles.

With the influx of updates, they are probably looking for just this kind of information.

I had a report recently where we went to confirm employment. When searching for company contact information, I realized that my subject had worked at two of the same companies at the same time as a fraudster. The fraudster had worked at one company, then went on to found his own firm in the 1980s. In the early 1980s, he was indicted. At the time he was out of the country and never came back.

There was no connection to my subject, other than they worked at the same seemingly small company, and then my subject went on to work at the company that the fraudster had started. He also appears to have worked at this company during the time that the fraudster committed the crimes that the US Govt accused him of.

I had a hard time deciding how to report that information. Ultimately I decided that the best thing to do was to provide details on the criminal activity and simply report that my subject had worked at the same companies during the same time as the fraudster.

A client recently provided a CRD number and said that she was able to obtain a FINRA record on an individual. Yet our researcher was unable to obtain one. We searched the online Brokercheck, then contacted FINRA directly, then contacted the local regulatory agency at the state level. All of which stated that there was no person by that name or with that CRD number registered.

I discussed with the client and she said that she might have special persmission because her company is considering the person as a registered rep. Might give her more authority than a background checking firm can do?

National Student Clearinghouse to Acquire Degree and Enrollment Verification Services from Credentials Inc.
HERNDON, VA, May 30, 2008 - The National Student Clearinghouse and Credentials Inc. today jointly announced the acquisition of Credentials’ online degree and enrollment verification services by the Clearinghouse. Credentials, Inc., located in Northfield, Illinois, provides educational verification to employers and others on behalf of colleges via its Web-based services, DegreeChk and EnrollChk. The Clearinghouse, a non-profit organization located in Herndon, Virginia, will work with institutions that participate in these services to transition them to its online verification services, DegreeVerify and EnrollmentVerify. Terms of the transaction, which is effective May 31, 2008, were not disclosed.

For the entire story: https://www.studentclearinghouse.org/about/news/release_2008-05-30.htm

The “Chartered Financial Analyst” program is administered by the CFA Institute. This organization is very particular about who can claim the title of “CFA” after their name.

See http://www.cfainstitute.org/

We do find a fund manager who claims to hold a CFA, but is not entitled to that title. Typically they have either not completed their studies, or have not kept their dues and credentials up to date.

We can only verify education when we know which institution to contact. A resume or biography will usually contain this information. Most institutions in the US do not require signed consent to verify education.

A report recently yielded an abundance of controversial criminal and traffic records:

Mr. X was charged with disorderly conduct, resisting an officer
>without violence, and two counts of trespassing on property in Orange
>County, FL in January 2005.
>
>On November 5, 2002, Mr. X was charged with criminal mischief in
>the first degree involving damages ranging from $200-$1,000. He was also
>charged with a second count of criminal mischief (in the second degree)
>involving damages less than or equal to $200. Court proceedings for this
>case began in November 2002, and ended in September 2003. It appears as
>though the end result was a nolle prosequi entry; this means that the
>prosecutor applied to discontinue criminal charges.
>
>
>Traffic:
>
>Mr. X was charged with failing to yield/stop at a stop sign in Lee
>County, FL in May 2007. For this he incurred a $113.00 fine.
>
>Mr. X was charged with failure to pay a toll in Orange County, FL in
>October 2005. During the course of this case, Mr. X drivers license
>was suspended. It appears as though this case ended in May 2006, with Mr.
>X “electing” to pay the toll.
>
>Mr. X was charged with failure to pay a toll in Orange County, FL in
>September 2005. His drivers license was suspended in February 2006, and
>reinstated in May 2006.
>
>Mr. X was charged with making an improper right turn in Orange County,
>FL in August 2005. This case was satisfied (a fine was probably paid) by
>November 2005.
>
>Mr. X was charged with failure to signal for a stop or turn in Orange
>County, FL in August 2005. His drivers license was suspended in 12/2005,
>and this case was closed by March 2006.
>
>Mr. X was charged with parking on a highway outside of municipalities in
>Orange County, FL in April 2005. To this charge, he pleaded not guilty.
>
>Mr. X was charged with unlawful speed in Orange County, FL. He was
>sentenced to traffic school.
>
>Mr. X was charged with DRIVING UNDER THE INFLUENCE in Orange County, FL
>in March 2001. During the course of this case, Mr. Davis failed to appear
>for his arraignment. He was sentenced to probation, jail time (it seems that
>this was “time served” on the day of the incident and arrest), driver’s
>school, a fine and court costs.

The question is, how may this reflect a manager’s stability and reliability? When criminal records indicate that they cannot control themselves, what must one assume about their professional personality? This blog has discussed red, yellow, and green colour codes for reports - and has often agreed that traffic records aren’t usually of much concern. When there is a perfect record trail of disregard for moderation and self-control, though, even when it is documented through traffic records (supported, of course, by the two non-traffic criminal records), what is the conclusion? Is this a compliance nightmare, or is it all overlookable?

What is needed to order investigations in South America? Ideally, we would like to see the individual’s full name, date of birth and National ID number. If the National ID number is unavailable, we are likely to still identify the individual with name and date of birth, but it will often delay the investigation by several days.