How we uncovered a fraudulent fund
Elena Chirkova
Oct 29, 2024Recently, our attention was drawn to the bankruptcy of the Crawford Ventures fund. It had only $16 million and 45 investors, but it deserves very close attention because, in our opinion, the bankruptcy was fraudulent from the very beginning, and it serves as a lesson in recognizing fraudsters.
The fund was established in 2016 and was "earning" from 50 to 90% annually, mainly trading currencies. We discovered it in the fall of 2022 and immediately realized that it was most likely a fraud because such returns cannot be consistently made from currency trading. However, we spoke with the fund's team — as a training exercise for our fraud detection skills. During the conversation, our confidence that it was run by unscrupulous people was reinforced. We expected to hear a story about how the fund trades the most exotic currency pairs, as high returns are easier to achieve with high volatility. (And we still wouldn't have believed it.) But no, they said they trade the "dollar/euro" pair, on which, of course, one can systematically earn only less than 10% per year.
In September 2024, it became known that the fund was showing potential investors falsified audit reports. The managers even created a fake address for the auditing company and wrote to investors on its behalf. The auditor was Australian. Evan H. Katz, one of the partners of the company managing the fund, was fined approximately $200,000 by the U.S. Securities and Exchange Commission. Why such a laughable amount? Because he maintained that he was misled by the company's other two founders, brothers Akshay and Dev Kamboj, who ran the entire business, and his involvement in the fraud was not proven. The activities of the other two co-founders are under investigation, the commission has filed a lawsuit, but a decision has not yet been made. We believe that the fraud will be proven.
The U.S. Securities and Exchange Commission's conclusion states that the profit shown on paper by the fund did not exist in reality. In fact, it lost about $4 million, or about 25% of its capital. Information surfaced that Evan Katz was already associated with funds engaged in fraud. In 2009, he invested in the NIR Group, which suspended payments to investors in 2011. The Securities and Exchange Commission found fraud in the actions of the managers when investing in private (non-public) companies and discovered the use of fund investors' money for personal purposes. (It's always easier to commit fraud with non-public companies because there are no quotes serving as a basis for valuation.) The fund was very large, with its assets peaking at $867 million.
We ourselves did not delve into Katz's biography; we considered the managers unscrupulous without it. However, in our practice, there have been several cases where we studied the biographies of managers of seemingly normal funds and rejected the funds due to dark spots in the managers' biographies. I recall three such cases, in one of which the fund went bankrupt shortly after we rejected it.
The investment community noted that Katz continued to advertise his latest fund even in September 2024, when the investigation against him was nearing completion. In particular, he urged investments in the fund through his 17,000 contacts on LinkedIn.
What is encouraging in this situation? Yes, there is something to be encouraged about! It is the size of the second fund compared to the first. It had only $16 million and 45 investors, meaning each had $355,000. This indicates that the fund was bought by individuals — professionals avoided it. By American standards, very little money was raised.
What lessons can be learned from this story? Obviously, professionals are better at identifying potential fraud threats. A manager who has already been involved in non-transparent activities should not pass selection, no matter how much they repent, pretend to be uninvolved, or show high returns in a new fund.
Any super-high returns should be alarming. Returns can be very high, but there must be an explanation. The highest return we've seen is around 35% annually, but that's with investing in biotech stocks and specializing in predicting clinical trial results. Unsuccessful trials can completely crash stock prices, and conversely, in case of success, the stock can soar by hundreds of percent. A super-complex model that predicts results correctly at least 55% of the time can yield such returns. The source of income here is understandable. Moreover, high returns can be an anomaly. We've seen many funds that earned 50%, 60%, and even 100% in certain years, but these are, firstly, special years (like the crisis year of 2008), and secondly, they cannot repeat it. Consistently high results are a danger signal!
To achieve returns, some risks must be taken. Not all risks are rewarded, and taking on significant risk is not a guarantee of high returns, but if you take minimal risk, like the risk of investing in U.S. Treasury securities, you can only earn returns expressed in single digits.
Finally, funds investing in non-public companies should be subjected to especially thorough scrutiny. There, the manager's reputation plays a key role. There's nothing wrong with such investments themselves; they can increase fund returns, but we, particularly in our GEIST fund, still avoid investing in funds where the share of investments in non-public companies exceeds 2-3%. Just in case.
Awards do not always indicate the quality of a fund. Crawford Ventures collected a lot of awards from respected institutions. But these awards can only be considered in conjunction with other characteristics of the fund.
Why know this
If all cases of fraud were similar to the above-described case, the investment services sector would be significantly safer and more prosperous. Usually, identifying unscrupulous behavior is much more challenging. Products promising fabulous returns, with low risks, only in the highest quality instruments, and with high liquidity, are almost certainly fraudulent and most often do not raise much money, limiting themselves to a narrow target audience of non-professional investors.
Greater danger is posed by products whose results and parameters are high enough to attract attention and truthful enough not to raise serious suspicions. They can exist for a very long time, raise hundreds of millions of dollars, and also "collapse" in one day when either the scheme is revealed, the inflow of new money ends, or events occur (such as a sharp market downturn) that can serve as an excuse for losing money. Without sufficient experience, knowledge, and resources, both financial and temporal, it is incredibly difficult to protect against such risks. Knowing this, fraudsters most often target private investors.
