“Culture of Compliance” Won’t Always Stop Fraud

March 27, 2014, 7:07 AM ET

“Culture of Compliance” Won’t Always Stop Fraud

NICHOLAS ELLIOTT

Matt Keel, chief compliance officer at investment firm Sentinel Management Group Inc., said at the trial of the firm’s chief executive Eric A. Bloom that he still believed his former boss to be “an honest person…with high integrity.” Mr. Keel, according to prosecutors, had previously lauded Sentinel’s “strong culture of compliance” in a report.

Mr. Bloom was convicted on Tuesday of defrauding customers out of $500 million via a misuse of their funds that Mr. Keel didn’t know about at the time, according to his testimony. Terry Campbell, a lawyer for Mr. Bloom, said he would ask the judge to overturn the verdict and intends to appeal. Mr. Keel isn’t the first compliance officer at an investment firm to be embarrassed by the conduct of the boss: Russell Wasendorf Sr., who is currently serving jail time for fraud, fabricated documents that misled his chief compliance officer and many others besides.

How can compliance officers catch such deception? Sen. Debbie Stabenow, in a hearing on the Wasendorf fraud held in 2012, suggested attention to internal controls might have provided early warning of that fraud. What is “the trust but verify position…from a customer standpoint, what is the verification? What is the independent verification?,” she asked Dan Roth of the National Futures Association. Mr. Roth, president of the self-regulatory body, responded by outlining additional safeguards the NFA planned to make. Otherwise, at least compliance officers at investment advisory firms can expect some backup from the government, after a first-of-a-kind case last August in which the Securities and Exchange Commission punished an adviser for deliberately misleading his CCO.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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