Wednesday, September 20, 2006
The revelation by the large hedge fund Amaranth Advisors that a series of risky bets by a natural gas trader have resulted in losses estimated at anywhere from $2 billion to $5 billion -- the "b" is correct -- in only a few weeks raises a question whether there has been any criminal conduct. A decline in value of that magnitude in a short a period of time, less than a month based on the reported value of the fund at the end of August at $9.5 billion and its current value of about $5 billion, triggers the natural response to leap immediately to the conclusion that someone acted illegally. Think back to the collapse of Barings Bank in 1995 caused by trader Nick Leeson's rogue trading that caused over a billion dollars in losses (see here), and he subsequently ended up in jail. Amaranth has a similar young (32) star trader, Brian Hunter, who appears to have triggered the losses through a series of highly leveraged transactions in natural gas futures that did not pan out when the price continued to decline.
But large losses are not necessarily a sign of criminal conduct, although a Hartford Courant story (here) notes that Connecticut Attorney General Richard Blumenthal's office has opened an investigation of the Greenwich-based hedge fund. There may be disclosure issues for the hedge fund, but these investment vehicles are marketed as high-risk/high-reward, and investors must be "sophisticated" in order to put money into them. Investors may cry out about their losses as being "unexpected" or even "improper," but the criminal law is not designed to punish those who are hired to take risks that may (and do) turn out to cause losses. While investors might claim not to have understood the risk of investing in Amaranth, and no one invests money in order to lose it, when you play in the big time there are going to be large disappointments. (ph)