Hedge Funds and Due Diligence Errors
"Scott Fine and Kevin Boyle, former stockbrokers at Track Securities in Boca Raton, Florida, sent out monthly e-mails boasting of 200% returns in three years at their Condor II fund. Word of mouth lured $10 million into two funds from over 100 investors, some as far away as Saudi Arabia. By the time the SEC sued them in February, Fine and Boyle were down to $2.2 million."
Today the SEC announced that Scott Fine and Kevin Boylewere ordered:
"to pay over $3 million in disgorgement, prejudgment interest and civil penalties. The Final Judgment ordered Fine to pay within thirty days $1,180,262.00 in disgorgement, plus prejudgment interest of $69,439.00, and a $1,180,262.00 civil penalty. The Final Judgment also ordered Boyle to pay within thirty days $638,742.00 in disgorgement, plus prejudgment interest of $37,579.00, and a $638,742.00 civil penalty."
What is wrong with the penalty? What due diligence did those 100 investors do? Why would they have been better off it this hedge fund had been a business opportunity?
The law of due diligence generally operates by reversing the usual "buyer beware". Purchasers are given disclosure about material facts; but there are exceptions. In securities law, private placements and hedge funds are generally not required to give prospectus level disclosure on the theory that if the investor has sufficient wealth, they can hire their own advisors to review the opportunity.
This is a silly fiction. Repeat after me, this is a silly fiction. Wealth does not come with a fraud radar. Wealthy investors who have been scammed are treated even less sympathetically than the ordinary victim of a white collar criminal. But it gets better.
Fine and Boylewere, after negotiations, were able to pay the SEC without admitting guilt or wrongdoing: hafl of that was in the nature of a fine. Not restitution, a fine going to the government coffers. Very nice work.
At least if this had been a business opportunity or franchise, there would have been no "wealthy" investor excemption from the disclosure obligation.
