Financial Crimes

Hedge Fund Fraud

Hedge funds are a type of investment that involves equities bonds, commodities, options and futures. Traditionally they have only been available to very wealthy individuals, but they have recently become available to smaller investors as well. The hedge fund industry has received a minimal amount of regulation from government agencies and this has led to the spread of frauds and scams that take advantage of those who invest in hedge funds.

Advanced fees

This is a scam which involves a hedge fund manager claiming that they have a valuable investment available which will allegedly become extremely profitable. The manager then requests potential investors pay large fees in advance in order to be allowed to participate in the deal. Since most genuine hedge funds only allow for a small number of investors, these claims may cause individuals to act quickly and provide the money to secure the opportunity to be involved. Once the fund manager receives the capital, it is utilized for their own personal benefit. The money may be used to build homes, make expensive purchases or to otherwise support the person who has collected it. The investors will later be told that the hedge fund was not successful and that their money was lost.

Insider trading

When a person receives a tip or financial secret that is not available to the general public, then acts on that tip for their own financial gain, it is referred to as insider trading. One example of this would be an individual who receives privileged information from a friend or relative about an upcoming merger that will greatly increase the stock of a particular company. If the individual invests in that company's stock, they have committed insider trading.

Hidden losses

Investors are sometimes tricked or lied to about the financial status of a hedge fund so that they will not pull out of the investment or refuse to provide more money for a hedge fund deal. For instance, a particular investment may be losing money, and yet the sponsors of the hedge fund will advise their investors that it is still profitable. They will create falsified reports to make it appear as if the funds are not suffering from a loss.

Since hedge funds had not been regulated by governmental agencies, fraudulent cases became common in the industry. The agency that monitors investments and trading policies is the Securities and Exchange Commission, and until 2006 they had no authority over any hedge fund case. However, due to the rising number of scams, a new policy created in 2006 declared that any hedge fund which involved investments of more than 25 million dollars will fall under their jurisdiction so that they may monitor and investigate potential fraud cases.