Sunday, February 19, 2006
A Wall Street Journal article (here) discusses another case of a small hedge fund operator that appears to be on the brink of collapse, and this time the investors include a group of current and former National Football League players. The players, mostly affiliated at one time with the Denver Broncos, include 8-time Pro Bowl safety Steve Atwater and running back Terrell Davis, the MVP of Super Bowl XXXII. The hedge funds, managed by International Management Associates LLC (IMA), have had their assets frozen by a Georgia state court judge, after a suit by the players alleging theft, fraud, and forgery by the principals of the firm, which reported total investments at one time of $150 million. Problems appeared in December 2005 when the firm refused redemption requests, and Kirk Wright, a founder of IMA, said that redemptions have risen since two principals left the firm recently. Among the other officers of the hedge fund are chief operating officer Nelson Bond and CFO Fitz Harper, Jr., both of whom are anesthesiologists -- it's not clear which jobs they did in their spare time. Wright stated that Bond and Harper have been been "poaching" clients after starting a rival firm, and that the results for IMA's hedge funds have not been audited in the past two years.
The firm's website (here) states that it "is an Atlanta-based private investment advisory firm formed to provide investment management services to mutual funds, hedge funds, pension plans, endowments, foundations and high net worth individuals." That same entry is on almost all the linked pages on IMA's website, although it lists offices in Las Vegas, Los Angeles, and New York in addition to its Atlanta headquarters.
Like the collapse of other, small hedge fund operations, such as Bayou Securities, this case has all the hallmarks of a possible securities fraud through the misstatement of investment returns to hide losses. Investors were supposedly offered a 10% monthly return on their funds, a sure sign of a highly risky venture, or even a fraudulent one. Hedge funds operate in an area with minimal federal regulation and almost no state oversight, so firms can sometimes stay in business without much outside scrutiny until it is too late. While the size of IMA is comparatively small, and the number of victims is unlikely to be great, the harm comes from the fact that hedge funds, unlike brokerage firms, operate without the safety net of any insurance, such as that provided by SIPC, and instead depend on the integrity of those who operate the firms. It would not be a great surprise if the NFL players and others who invested receive back little of their investment. (ph)