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Alternative Market Briefing

Other Voices: Regulatory cases - Accident analysis of three regulatory complaints

Thursday, February 21, 2013

This analysis was provided by Zurich-based due diligence service provider SwissAnalytics Ltd.

Regulatory Complaints are informative, but often too late

  • Regulatory complaints can usually only serve as an inspection after the "house has already been burnt to the ground" rather than a timely fire detector or an effective firefighter. This caused the SEC to look into its own proceedings, e.g. in the Madoff case as well as in the Westridge case.
  • Regulatory complaints’ inability to timely prevent damage is caused by:

    • Limited resources versus the large universe of managers and strategies
    • Limited specialization and expertise for detailed understanding of the underlying operations
    • Predominantly legal backgrounds of examiners and enforcement staff
    • Lack of verification of information provided by investment managers as well as insufficient follow up on hints and red flags.

    This means that:

    • An investment advisor’s registration with a regulator is no substitute for proper, pro-active due diligence.
    • Regulatory complaints and investigations of failure provide important insights into what structures and circumstances have facilitated fraud and misconduct as well as into typical cover ups employed by the culprits.
    • By carrying out thorough due diligence warning signs can be identified, which should be investigated further while seeking to address areas of......................

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