Fresh start for old Charles Schmitt team

Ex-CSA executives Jennifer Carver and Brian MacDougall, who discovered and reported an alleged scam to defraud investors by their former CEO, Charles Schmitt, have established a new company from which they plan to re-launch their fund of hedge funds business.

Oria Capital is fully licensed with the Securities and Futures Commission in Hong Kong as an investment advisor. The investment management company, Oria Capital Management, is registered in the Cayman Islands.

Carver, who is CEO of the new company, says that Oria is set to take over the management of the two CSA funds that were untainted by the alleged fraudulent activity. This includes the Dublin-listed Absolute Return Fund and the CSA Absolute Return Plus Fund. The two funds have a combined size of $114 million.

"Most of our clients in these funds stuck with us, and very few of them asked for redemptions," says Carver. "Now that the funds are cleared of any problems, many of the clients who initially placed redemption requests have cancelled them."

Carver says that the Dublin fund, which has been renamed the Oria Market Neutral Fund, has been given a clean bill of health by third-party auditor Grant Thornton. Oria has already been officially appointed as the manager and advisor, and Carver expects a similar procedure to be completed with the Plus fund shortly. Moore Stephens is doing the audit of the Plus Fund and it will be renamed the Oria Plus Fund.

Just prior to the outbreak of the scandal, CSA was on the verge of launching an Asian fund of hedge funds. Carver says that Oria will soon launch this fund once all the documentation is in place.

Carver and MacDougall are supported by four other members from the ex-CSA team, and are bringing in two non-executive directors to participate in the fund's investment committee and bring further weight and experience to the firm's investment process.

"David Gong, director for the Plus Fund, has 25 years of asset management experience, 10 of which has been focused on hedge funds. He is a former litigator with the SFC," says Carver. "The other non-executive director of Oria, Robert Jones, is a former auditor and has nine years of experience doing risk management and due diligence. He currently does a lot of work in this area for family offices."

Carver says that the hardest part of building the new enterprise has been assuring investors of her ability and experience with making investment decisions. "Despite my official title as COO at CSA, I was actively involved in research, diligence, investment decisions and portfolio allocations. I've been managing money for 17 years, the last three with CSA," says Carver.

She notes that the biggest lesson for her, and for the industry as a whole, from the Schmitt scandal is the importance of verifying as much information as possible directly with independent third parties.

"If the money transfers that Charles was supposed to have made were verified with the third parties that should have been receiving them, he would have been caught much sooner," she says. "This event is sure to change the shape of the industry. It shows that adequate checks and balances are not in place."

Neither Bank of Bermuda, CSA's fund administrator, nor Ernst & Young, the fund's auditor, managed to spot Schmitt's alleged shady activities, although whether any of these firms will be held responsible still remains unclear.

For her part, Carver says that she will implement more internal cross checks in the new business. "Internally any trades placed by one person will be verified by another team member who is not part of the investment process, such as the research or the due diligence analyst who is most familiar with the underlying fund."

Carver also notes that this is a lesson she will apply when conducting due diligence on underlying hedge fund managers in her portfolio.

"For example, we will not just talk to the hedge fund manager and find out who the prime broker is, but rather go one step further and talk directly to the prime broker to confirm the relationship," she explains.

Having learnt a bitter lesson from her experience with Schmitt, Carver says she intends to leave no stone unturned to implement the highest standards of best practises in her new company.

"We will probably be the safest place on the street for anyone to put their money." Schmitt, who was arrested by the Hong Kong authorities and has currently been released on bail, is due to go to trial in September. The government accuses him of transferring investor money to dummy companies with bank accounts linked to him name, rather than to the legitimate underlying funds. Authorities have reportedly located 70% of the $200 million invested with the CSA Absolute Return Fund.