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SEC Registration Not an Magic Elixir.
by Laura Goldman
There is much talk about the need for more SEC regulation, registration and oversight of hedge funds. Investors, consumer advocates, and lawmakers see more regulation and oversight as a panacea to cure the ills that plague the hedge fund industry. Naturally, the hedgehogs, as hedge fund operators are affectionately called, are opposed.
I diagnose those that want to fix an industry that is not broken as suffering from Munchausen’s by proxy. They are seeing problems that do not exist. Registration certainly is not the cure for the disease and could be making the industry even sicker.
Buying a hedge fund that is registered by the SEC offers no protection to the hedge fund investor. In fact, the opposite may be true. The SEC has made it clear that registration is not an endorsement or substitute for due diligence. What is the purpose of registration?
Some investors mistakenly have thought buying a registered hedge fund affords them similar protection to SIPC (Securities Investor Protection Corporation) and FDIC (Federal Deposit Insurance Corporation). Part of this confusion stems from the federally orchestrated bailout of Long Term Capital.
The SEC likes to call itself the nation’s securities cop. The beat cop in my neighborhood once derided this description and I agree with him. They are not cops. They are tasseled loafer wearing lawyers who prefer to sit behind a desk than burn the shoe leather necessary to solve and prevent crimes.
Ironically, the recent charges that SEC brought against SEC registered Lydia Capital and its principals Evan Andersen and Glenn Manterfield are Exhibit A in the argument that registration and more oversight actually can hurt investors. It gives them a false sense of security. The SEC recently charged Lydia Capital with defrauding 60 investors. The investors mostly from Taiwan had invested 34 million dollars in the fund from July 2007 until April 2007. The assets of the fund and principals have been frozen.
Full Disclosure: Having been in the investment field for over twenty five years, I have met my share of con artists including Glenn Manterfield. It just shows that even an investment professional can be conned.
One of the principals, Glenn Manterfield, bragged to me, “Lydia Capital is the only federally registered hedge fund in the life settlements field.” Knowing about Glenn’s checkered past; SEC oversight seemed incongruous and akin to putting the wolf in charge of the chicken coop. I was incredulous that he would want to attract the attention of the SEC and asked him why. “We were just two guys with an idea. The SEC registration gave us credibility.”
But it was even more bizarre that the SEC would allow Glenn Manterfield, a felon with multiple convictions, to register. According to the SEC’s indictment, Glenn was convicted of property related crimes four times starting in 1992. In February of this year, he was arrested again for acquiring stolen property. The court ordered all his property and accounts were frozen in conjunction with this arrest. Glenn Manterfield is also wanted for questioning by the Irish police in conjunction with another fraud. Investors in Australia and India have posted complaints on the internet about him.
Applicants for SEC registration are required to fill out SEC form ADV which specifically asks about the defendants criminal history. Registrants are required to update the form in the event of new developments.
The SEC has accused Glenn of falsely answering the form. The SEC does not have the manpower and budget to check the accuracy of the statements on these forms.
Lydia Capital was originally registered by the State of Massachusetts. Even though they were registering someone from England, a staff attorney in the office of the Secretary of the Commonwealth of Massachusetts told me that international calls from the office are discouraged for budgetary reasons. A five minute call to the local police in Sheffield England would have sent up red flags about Glenn. When I made the call, Detective Martin Thatcher indicated that it would not be a good idea to trust him with my money. .
The SEC apparently relies on the honor system. They have not heard of the expression, there is no honor among thieves.
It would not have taken very long or been very hard for the SEC to discover that something was amiss with Glenn. If they had gone to the internet and typed Glenn’s name into any search engine, the first entry would have been the rip off report that I had filed against Glenn.
I had always loved the movie, “To Catch a Thief” starring Grace Kelly. I just did not realize that I would star in the real life version. When the money that I had invested with Glenn had disappeared, I tried to find him. He was more adept than the Leo Di Caprio’s character in the movie “Catch Me if you Can” at disappearing. So I resorted to looking for Glenn and warning others away from him by the internet.
No system is perfect. But Glenn Manterfield’s ability to register with the SEC despite his lengthy criminal history shows that the SEC is not ready to take on expanded regulation and needs to tinker with the existing system.
There are heroes to this story. Arlene Puliafico and Nathaniel Orenstein of Secretary Galvin’s office in Massachusetts responded immediately when I called to report my suspicions. Their quick response resulted in the SEC charges.
http://www.sec.gov/litigation/complaints/2007/comp20102.pdf
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