The SEC and the Justice Department launched civil and criminal proceedings against a fund firm’s founder and principal for engaging in a $60 Million Ponzi-like scheme that involved inflating asset values and misleading investors. The SEC alleges that, over a multi-year period, the firm lied about securities valuations, borrowed assets from affiliated funds to meet redemptions, and created fake loans to fund the ongoing scheme. The SEC asserts that the defendant provided confirmations of fake debts to the auditors to further conceal the scheme.
How does this kind of fraud continue over many years without detection? Much of the auditor attestation work relies on documentation provided by the fraudster. Similar to the Madoff debacle, a truly committed miscreant who is willing to baldly falsify documents and records can often go undetected by auditors, investors, and regulators for many years. Our solution is to require every registered investment adviser to undergo a periodic independent compliance review that involves on-site forensic testing and reporting to the SEC.