Hedge Fund Oversight and Lack of Due Diligence FINRA Arbitration and Litigation Attorney, Russell L. Forkey, Esq.
Credit Suisse Securities (USA) LLC (CRD #816, New York, New York) submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured and fined $350,000. Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that it maintained a Private Banking USA unit (PBUSA) that offered and sold alternative investments, including hedge funds and funds of hedge funds, to customers. Funds of hedge funds are investment companies that may be registered closed-end funds or unregistered funds that contain largely unregistered hedge funds as underlying investments. The firm marketed these products primarily to high net-worth individuals and institutions that met the accredited investor standard as defined by the Securities Act of 1933 and/or the qualified purchaser standard under the Investment Company Act of 1940. The findings stated that PBUSA relationship managers used a marketing pitch book to market the firm’s alternative investment products, including hedge funds and funds of hedge funds, to customers and prospective customers. The pitch book’s purpose was to introduce qualified, high net-worth customers and prospective customers to, among other things, the various types of hedge funds and funds of hedge funds the firm offered. The pitch book described in general terms the benefits of the various product categories for PBUSA customers, contained a discussion of hedge funds as part of an overall investment portfolio, provided brief overview information about certain representative offerings, described the general due diligence process at the firm and contained a summary description of alternative investment offerings at the firm. PBUSA registered representatives often used the pitch book to guide their discussions at introductory presentations with prospective or existing customers, and to describe the firm’s offerings of and capabilities with respect to alternative investments. The findings also stated that the pitch book contained a number of statements regarding the firm’s due diligence efforts; it represented that the firm would conduct continuous and ongoing due diligence of the funds. The findings also included that the statements were not accurate because for certain funds, the firm performed little ongoing due diligence, and when it was performed, it was done on a sporadic and irregular basis. In the case of at least one fund, the firm did not perform any ongoing due diligence. FINRA found that the firm failed to have sufficient procedures and systems to ensure that the due diligence efforts it promised in the materials were occurring. In fact, the firm did not maintain any written procedures detailing specific steps and requirements for either initial or ongoing due diligence. (FINRA Case #2009016627501).