I also don't think she's a fraud by definition. I think her investors are idiots to agree to compensation based on realized gains as opposed to net liq or NAV. I think she just gamed the agreement. Were her alleged actions counter to the spirit of the compensation mechanism? I would say yes. Were they counter to the letter of the agreement? I don't know. I haven't seen the agreement itself, but the answer could possibly be no.
According to the complaint, it would appear that, more recently, there was a $50mm loss which she tried to avoid, in addition to the regular gaming of the compensation scheme. Prior to that, the fund was more or less flat. Moreover, according to the SEC, Karen's actions were, in fact, counter to the operating agreement for the 2nd fund (HDB), which defined her compensation as a function of fund's NAV, rather than just the realized PNL.
Aren't these points one in the same? Agree the HDB fund's fee were based on NAV. Interestingly, the sole investor in HDB just transferred into the HI fund rather than liquidate.
I think there is fraud in there but doubt any prison is coming. Usually sanctions and fines and loss of ability to run a fund but most Wall Street type crimes get slaps on the wrist.
I was just responding to your suggestion that the fund could be profitable overall. Based on the complaint, it would appear that it wasn't. Yes, so there's that... Moreover, it's interesting that the investors who sought to redeem and exit HI would get paid out based solely on realized PNL. For obvious reasons, that's not very kosher.
Para 89: This would suggest realized gains of $6 / 0.2 = $30 million Para 22 and 23: Para 9: So back-of-the-envelope math suggests losses of $57 - 30 = $27 million (NAV) for the November 2014 to March 2016 period. I don't argue she suffered losses during this period, but it remains unclear what her performance was prior to this period and for the entire tenure of the fund.
Yeah, you're right... It looks like there was a loss for the period of October 2014 to present. It's not clear what performance was between 2011 and 2014.
Bobby can tell us if he doesn't want offtopic speculation in this thread, but until that.... There are a couple of separate issues with her and the HF, not necessary related to each other: 1. She suffered a loss when the Yahoo boys were doing just fine. The market didn't even moved that big, although it did whipsaw. Possible explanation for the loss is too much leverage. So plain old greed got the better of her. 2. The cover up of the loss, the rolling of the loss ad infinitum. This was probably done in the hope that she could make the loss back while still earning fees. Maybe not completely illegal, but definitely amoral. The problem was, that it tied up her capital without making profits and there was no extra capital left or incoming capital that could have generated new profits. 2/b. The HF's fees based on non-realized gains is unusual and I guess pretty rare. This should have tipped off investors as a red flag. This rule made her roll, rather than take the hit. A HF with such a fee set up after a big hit would just close doors, because they wouldn't earn fees for years... 3. "The last man standing holds the bag" rule. This one is quite hard to explain and outright fishy. I have never heard such a rule before and it gives out a Ponzi type of smell. Whoever left standing without a chair when the music stops takes the hit. This is impossible to explain (unless someone wanted to do fraud from the start) and I don't know why would anyone set up a HF with such a rule? Nor do I understand why any late comer would agree to that rule when sending in their money? A late comer is taking all the losses and nothing of the gains... But as long as it is fully disclosed, it is not illegal. So again, 3 separate issues merged in one big pile of stink...Legally they could only get her on point #2, if they can prove to the jury that the rolling of losses was against the investors' best interest. I know these because I have a legal degree from Trump University and I watched a few seasons of Boston legal... Edit: I forgot one more thing: 4. The reinvesting of the charity fund money was some sort of accounting trick to avoid taxes. Again, doesn't give out a super duper kosher vibe, but hey, she is an accountant. Trump would call her very smart.
Add in the fact that she looks like someone's grandma and runs a charity (which was an investor to the fund) and I think it won't go to trial either.