Using Operational Due Diligence To Avoid Fraud: Vishnevetsky’s Example Posted on May 9, 2012 Allegations of fund manager fraud continues to be in the news. One of the more recent items of note are the allegations brought against commodity pool operator Dimitry Vishnevetsky and his Hodges Trading and Oxford Capital. It has been alleged that this scheme has been perpetrated since September of 2006 and has caused almost $2 million in losses. In a complaint against Vishnevetsky et. al. , the CFTC alleged that he obtained money through a variety of fraudulent schemes focused around a commodities fund that he allegedly told investors that he traded in. The problem, the CFTC alleges, is that no trading actually occurred. The CFTC complaint further alleges that Vishnevetsky:
Misappropriated a portion of investors money and issued false account statements to them Defrauded customers by failing to open and fund commodity trading accounts for them Misrepresented that Hodges issued Libor Notes and invested in commodity futures contracts to enhance the value of the purported Libor Notes
The CFTC further alleges that Vishnevetsky even went as far as to allegedly create an entirely false performance overview document, which he distributed to investors. Schemes such those alleged to be undertaken by Vishnevetsky, outline the continued importance of operational due diligence in detecting and avoiding fraudulent activities. In Vishnevetsky case, based on the CFTC complaint it seems that a number of less than best practices were in place. It is likely that an operational due diligence review would have at a minimum raised many questions about the firm’s operational practices. These questions would have merited further investigation during the due diligence process. By asking additional questions and performing a detailed operational due diligence review, yellow flag items would likely have been raised in this case. Specifically, it has been alleged that Vishnevetsky did not actually conduct any trades. During a detailed operational due diligence review an investor will generally look into a fund’s service providers and counterparty relationships. In this case, as was the case with other Ponzi schemes such as Madoff, an investor who contacted service providers might have learned that Vishnevetsky’s firms may have had no relationship with these counterparties at all.
© 2012 Corgentum Consulting, LLC
Additionally, outside of confirming basic counterparty trading relationships investors can also attempt to conduct independent asset verifications of a fund manager’s asset levels with counterparties. In this case, investors may have learned that the purported asset levels that Vishnevetsky was supposed to maintain at these funds did not comport with what he had told investors. It is also worth nothing that if an investor had conducted a cursory review of the trading procedures in place at Vishnevetsky’s firms, assuming there was actually a description of the trading procedures, they might not have noticed any red flag items. A simple description of a trading procedure may be fraudulent or inaccurate on its face. This scenario is a good example of the need to going beyond simply taking the manager’s word for certain procedures, and attempting to both observe and independently verify the implementation of procedures with counterparties. The combination of each of these operational risks might have made investors leery of investing capital with Vishnevetsky. As outlined above, these risk factors allegedly included a fund that is alleged to have had questionable counterparty relationships, false documentation, and supposedly did not actually conduct trades in certain instances. A thorough, consistent multi-disciplinary operational due diligence review can help investors raise flags concerning questionable practices and increase the likelihood that investors can avoid exposure to frauds. Without such due diligence, investors may be left attempting to reclaim lost capital from alleged Ponzi schemers such as Vishnevetsky. For more Information: Email: info@corgentum.com Tel: 201.360.2430
© 2012 Corgentum Consulting, LLC