Whether you are watching business reports on TV, listening to investment-related radio shows or browsing the internet for financial advice, you’re almost guaranteed to hear about hedge funds. The popularity of these investment products has exploded over the past decade, despite several hedge funds having been at the center of major investment scandals, including the famous Bernie Madoff Ponzi scheme. These funds keep growing because many investors, even sophisticated ones, are led to believe that they offer a safe way to achieve outsized returns with minimal risk. In reality, hedge funds are highly volatile and uniquely susceptible to being used as vehicles for fraud by unscrupulous fund managers.
Based in California, the law firm of Girard Bengali, APC, represents clients across the nation who have fallen victim to hedge fund fraud. Our attorneys are committed to protecting the rights and interests of investors, and our aggressive yet nuanced legal approach has led to the recovery of millions of dollars on behalf of clients. If you suspect that you have been caught up in a fraudulent hedge fund operation, don’t hesitate to reach out to us for help.
What Is a Hedge Fund?
The phrase “hedge fund” describes a popular form of investment “partnership” where the general partner (the fund manager) teams up with limited partners (the investors). The investors contribute the money, which goes into a pool. The fund manager then manages that pool of money in accordance with strategies and objectives articulated in the fund’s prospectus – a prospectus that every investor should receive before investing in any hedge fund.
There is nothing inherently fraudulent about hedge funds, and in fact many operate perfectly legally, and even successfully. However, because of certain reasons we’ll discuss below, hedge fund managers can easily stray from their legal activities and become involved in fraud without being easily detected.
What Makes Hedge Funds Susceptible to Fraud?
Hedge funds can be a vehicle for fraud schemes because, compared with many other investment choices, they are subject to very little governmental oversight or regulation.
This lack of oversight is because hedge funds are supposed to be open only to so-called “accredited investors.” To qualify as “accredited,” a person must have a net worth of at least $1 million, excluding the value of the primary home. The threshold was established back when few people had that kind of wealth, and the SEC believed that these accredited investors must be sophisticated enough to assess risk largely on their own, so the agency chose to take a more hands-off approach. In fact, hedge funds are treated as private investments and do not even need to be registered with the SEC like other investment vehicles do.
As a result, hedge funds are free to take on far more risk and conduct more business “in the shadows” than other investment vehicles. This obviously makes it easier for fund managers to take advantage of unsuspecting investors.
Why Do People Invest in Hedge Funds?
Hedge funds are known for unorthodox strategies, flexibility, and their ability to invest in very risky assets with the potential for very high returns. They are also allowed to leverage themselves in ways mutual funds are not allowed to do.
Hedge fund managers use attributes like these to sell people on the idea of investing. Again, hedge funds can be very successful and legitimate. But their risk, complexity and lack of regulation makes them prime candidates for fraud.
How Hedge Funds Can Be Held Liable
Hedge fund fraud comes in many forms. Sometimes, a fund manager fails to disclose the risks of the investment. Other times, managers simply lie about losses and claim the fund is doing well. Or, the fund could be a blatant Ponzi scheme or other form of theft.
While hedge funds are exempt from many SEC regulations, wronged investors can still successfully pursue lawsuits against them.
With the assistance of a skilled securities fraud lawyer, investors can pursue various causes of action against a hedge fund or hedge fund manager, such as:
- Breach of fiduciary duty or failure to deal with investors in good faith
- Negligent misrepresentation
- Breach of contract
- Unjust enrichment
- Aiding or abetting a fraud scheme
Contact Our Attorneys If You Think You’ve Fallen Victim to Hedge Fund Fraud
Hedge funds are notoriously complex, so you need a legal team that knows what to look for. At Girard Bengali, APC, we have successfully handled major hedge fund fraud claims for clients throughout the U.S. Please call 866-778-6821 or contact us online to arrange a confidential free consultation where you can discuss your concerns with our lawyers.