Shhh… US Still At Loss on Cyber Espionage War

In the increasingly pugnacious cyber espionage war, the US is not only admittedly losing out to countries like China and Russia but the real headline news is, the US is still at a loss on how to protect itself against the massive intellectual property threats on its very turf.

The chairman of the House Intelligence Committee Rep. Mike Rogers told audience at the Intelligence and National Security Alliance (INSA) cyber conference, held on 26 September in Washington DC, that the US is “running out of time” – US government officials have stated that no country engages in cyber espionage as systematically, thoroughly and broadly as China and the theft of critical intellectual property is billing up to US$1 trillion.

The Rogers-Ruppersberger Bill designed to stem the tide is facing resistance at the Senate.

This Bill proposed to offer business liability insurance cover to the business community. In return, the victimized companies would have to share their threat information with the government, who will in turn share that experience with the business world.

(What? Are you kidding me?! Okay, I hear you at the back row).

Need I say more? Find out more about it here.

Shhh… "Shhh-crets & Craft"

Many Big Thank You to all for the very kind comments and support.

Fyi, I am planning to set up a new section to cover topics like spy gadgets, spy craft, etc – probably under the caption “Shhh-crets & Craft“. The main objective is to help readers identify (new) risks and ways to protect themselves – and not exactly about How To’s for any spy wannabes.

I’m still trying to figure out how to separate these new postings from the rest (ie. my Column and other Musings & Commentaries), given the choice of widgets… Any suggestion will be deeply appreciated. Thanks again.

Shhh… “Shhh-crets & Craft”

Many Big Thank You to all for the very kind comments and support.

Fyi, I am planning to set up a new section to cover topics like spy gadgets, spy craft, etc – probably under the caption “Shhh-crets & Craft“. The main objective is to help readers identify (new) risks and ways to protect themselves – and not exactly about How To’s for any spy wannabes.

I’m still trying to figure out how to separate these new postings from the rest (ie. my Column and other Musings & Commentaries), given the choice of widgets… Any suggestion will be deeply appreciated. Thanks again.

Shhh… Spying on Journalists

The Pentagon’s recent sworn: They won’t spy on journalists.

(Yeah right…. Yes, I hear you at the back.)

The US Defense Secretary Leon Panetta gave an order July 19 to clampdown on classified leaks from the Pentagon and “monitor all major, national level reporting”.

This raised immediate concerns amongst the press as journalists wondered: is the Pentagon planning to spy on their very act of reporting or simply to conduct wide-sweeping news scans for supposedly leaked information? The former, left to one’s imagination, could include wiretapping, surveillance and various forms of intrusive acts.

The Pentagon press secretary George Little reportedly replied in writing:

“The secretary and the chairman both believe strongly in freedom of the press and encourage good relations between the department and the press corps.” (Read this).

Meanwhile, a true story, I know a journalist who was spied upon by a Chinese intelligence agent.

The agent apparently tried to recruit the reporter by offering “huge rewards” if he cooperates and collects information about certain individuals under the pretense of combing background data for potential stories.

This journo friend declined outright but not long after, he suspected his phones were bugged and asked for help.

My advice?

Quite simply though cumbersome: buy and replace regularly several low-value, use-and-dispose SIM cards, several used cellular phones (the pre-smartphone days type like those good old Nokia, Ericsson, Motorola, etc) and used laptops.

In short, change your phone and cyber lifestyle – at least for the time being (Refer to my earlier commentary: Shhh… How to Beat the CIA and Protect Your Data).

Shhh… Spies Boundary

I just picked up 2 interesting reports on surveillance matters.

It was reported that the FBI claimed its surveillance on those involved in the Occupy movement is within legal boundaries and did not cause “unnecessary intrusions into the lives of law-abiding people.”

This came after the American Civil Liberties Union used the Freedom of Information Act to secure FBI surveillance documents on the movement in a lawsuit and asked why the agency withheld two-thirds of its records and subsequently cited national security as a reason for the nondisclosure (Read this).

On the other side of the Atlantic Ocean, the civil rights group Liberty used the UK Data Protection Act to represent a disabled woman in a legal action against a commercial security firm and its undercover surveillance “usual practice” which, as part of their investigative works for insurance companies, send agents disguised as delivery men to spy on the sick and disabled in their homes (Read this).

These are just going to lead to endless debates. Watch this space, I might post a column on this topic.


Shhh… Counting Spies

Interesting spy updates over the past few days.

Question: where do you think is the spy capital of the world?

Hint: Starts with letter B.

Did someone say Bei….?

Answer: Brussels.

Say what, Brussels?! Well, that’s according to Belgian intelligence chief Alain Winants, who added that spies usually pretend to be diplomats, journalists, lobbyists, businessmen or students (Read this – and please see my previous columns about spies pretending to be businessmen in China and students in US campus in Spy vs Spy and Espionage on Campus, respectively).

Now speaking of diplomats, the well known intelligence historian and collector of spy gadgets H. Keith Millon reportedly claimed “there are more spies at the United Nations than diplomats” (Read this).

The latter piece is not surprising but much depends on one’s definition of spy. But then again, given Million’s reputation in the intelligence trade…

Spies and the Airport Screening Machine

The US works out a free ride for its spooks

I have always fancied having a smorgasbord of passports, each bearing a different name, country of citizenship and photo — just like the spies as we know them, or at least as we understand them from spy fiction and movies like James Bond and CIA agent Jason Bourne in the Bourne Trilogy movies.

However, airport security checks and immigration clearance must be a nightmare for real spies, undercover agents and intelligence officials these days as governments, increasingly wary of the growing sophistication of terrorists, have invented new technologies to try to detect them. Hence the increased tight security measures at airports over the world have created lots of inconvenience for the intelligence community. And the pseudo passports probably don’t even work, given the facial recognition checks on top of the fingerprint hassles that have become commonplace at immigration checkpoints across the globe.

The spymasters know and they care, and they set out to do something about it.

So in late July, the US Transportation Security Administration (TSA) – the agency within the US Department of Homeland Security that exercises authority over the security of the traveling public in America – reportedly put procedures in place to allow the employees of three US intelligence agencies to pass un-scrutinized through airport security checks with convenience… (Read the entire column here and there).

Shhh… The Safest Place to Hide Your Data

… is possibly in your mouth?!

I’m glad I have not gone that far yet but nevertheless happy to read this piece of news article. I always advised my friends not to leave their computers and phones in their hotel room, or unattended for that matter, as spies will not only break into their room but also their devices. In fact, in certain countries, these agents are tasked to target certain individuals and business travelers the moment they left the airport. And they will wait patiently for the opportunity to penetrate their data. As a rule of thumb, the bigger the city and the hotel, the bigger the risks… because Ahem, I know only too well from… never mind.

Anyway, no one seems to believe or take it seriously. So I’m glad this story printed not only what I always wanted to say but also gave insights on some interesting counter-measures. Kind of paranoid for the men on the streets but… I hope you don’t have to go so far as planting the SD card in your mouth.

Shhh… New Phones for Spies

Christmas comes early for spies this year.

The National Security Agency and Defense Information Systems Agency (the unit that manages all communications hardware needs for the Pentagon) are reportedly going to issue in December their newly developed smart phones and tablets based on commercially designed devices. Only a selected number of “customers” would get such a device as an early Christmas present, including spies and some high-level military and government officials.

These new phones and tablets are modified from commercial designs  – for good operational reasons – and thus mark a departure from the current use of special phones that stand out from the crowd and cost thousands of dollars. These ordinary looking devices will use some special Apps to optimize use of cloud computing and thus ease the risks of losing them and having sensitive data easily compromised.

And by the way, these modified devices run on Google’s Android operating system. Apple’s loyal worshippers will be left disappointed…

Shhh… New iPhone Spy App to Log the World

It’s the App, Stupid!

Sounds familiar? Yes, it’s often the software that matters more than the hardware.

Whilst the countdown to the new iPhone 5 release is grabbing headlines, there is reportedly a new Spy App for iPhone that should deserve even more attention. This is unlike any other past so called iPhone Spy software: imagine you can log all incoming and outgoing phone calls and SMS of a chosen target’s phone?!

Yes, I know. The potential for this new iPhone Spy App, if it’s true, will simply blow your socks off…

Shhh… How to Beat the CIA and Protect Your Data

Business travel is a nightmare these days, especially when one visits a country known for high espionage/ corporate espionage activities or active government eavesdropping and wiretapping.

So what if you need to transmit confidential data, sensitive business information and trade secrets via emails or the cloud? Or simply access your online banking account?

Public wifi pose significant risks. The Internet connection in your hotel room is not any better. And you can forget the Internet cafe.

No worries, there’s a solution and I will soon be posting a column on this matter. Watch this space.

Shhh… Privileged Spies and Frequent Travelers

Airport security checks and immigration clearance must be a nightmare for spies, undercover agents and intelligence officials these days. The increased tight security measures at airports over the world have created lots of inconvenience for the intelligence community. And the pseudo passports probably don’t work, given the facial recognition checks on top of those fingerprint hassles that have become commonplace at immigration checkpoints across the globe…..

I will soon be posting my next column on this topic. Please visit again, thanks.

Pay Packages Are Not Licensed to Thrill

Kudos to the London Organizing Committee of the Olympic and Paralympic Games.

What better way to celebrate true British culture and identity (and yes, humor) than to have James Bond (actor Daniel Craig) escorting the Queen to the opening ceremony of the London Olympics in true 007 fashion?

A brilliant idea, but I have three immediate wishes.

I wish other English spy characters like Austin Powers and Johnny English had also featured in this truly comedic, quintessentially British moment.

I also wish all the past screen Bond actors were on hand to usher Her Majesty to her seat.

And I wish, ahem, US presidential hopeful Mitt Romney would play the role of party pooper and jump out of nowhere to spoil the event in his very own disconcerting way.

Well, no worries, all the real Bonds and security staff would jump forward to salvage the moment.

Fat chance.

The real Bonds are clearly stirred, shaken and not at all prepared to take extra risks, given their low morale and jaw-dropping poor compensation package. And the general public would probably not count on the outsourced security and protection industry as well (Read the entire column here and there).

When the Boss is Always Right

No fingerprints in rigging the Libor rate?

Let me start with a familiar scene. Suppose the boss says “I don’t like his face.” His sidekicks exchange quick looks and leave the room without a word. They clearly understand what their boss means and promptly kill the guy in cool mafia fashion.
You probably relate this scene to classic Hollywood mafia movies, in which the sidekicks usually flee the scene right after the murder. When the police show up to find whodunit, nobody including the boss remembers what happened.Unconventional corporate governance combined with plausible deniability.
That is exactly what seems to have happened at the British banking giant Barclays
(Read the entire column here).

Spy Vs. Spy

Spies multiply like coathangers in China and the US

How many intelligence — okay honestly, spy — agencies does a country really need?
Anywhere between eight and 17 and possibly more if you’re referring to China and the United States. The US, in fact, recently established its newest spy agency, which is specifically targeted at China, among others (Read the entire column here, here and there).

Espionage on Campus

It’s not all kegger parties – Spies may be watching

I received many nice pens as gifts from my folks when I embarked on my university studies. I reckon pens would be inappropriate in this modern digital age. What about a book, say on how to guard against spies in campus?
And why not? The parents may appreciate it given recent reports about foreign spies in American universities – and my personal encounters (Read the entire column here).

Could You Get Away with Corporate Espionage?

Electronic gadgets are often fun but there is rarely one as useful as this: a new type of flash memory stick that can self- destruct by remote control.

I was immediately speculating the immense possibilities. James Bond or Ethan Hunt, anyone?

But the real implication is even more profound, given a recent US court ruling that dealt a blow to the fight against corporate espionage in saying the download of proprietary data does not amount to a criminal offense after all (Read the entire column here and there).

No Ordinary CSI: Mobile Phone Forensics

If it falls into the wrong hands, it could cause you plenty of trouble

I love my iPhone but I always look at it with deep suspicion. It probably knows more about me than my puffy pillows. But unlike them, it could easily betray me one day.

Blame it on Steve Jobs but I assume I’m not alone. Most of us have fallen prey to the modern digital world.

We take for granted the unlimited things we can do with our smartphones.

But, by using the devices, we are increasingly exposing ourselves to bottomless risks (Read the entire column here and there).

The Complicated World of Corporate Espionage

It isn’t as straightforward as it looks
Corporate espionage used to be rather straightforward – as the typical Coke-Pepsi textbook example illustrates, in which each tries to steal the other’s recipe for sugared water. It is a crime when someone steals company data/trade secrets and passes it to a business rival.
Well, yes — but not quite, in the case a series of court decisions in the United States that complicate the issue considerably (Read the entire column here and there).

Inspecting the Inspectors

I love my MacBook, as well as my iPhone and iPod. But I now wonder if I will have the same personal struggle I had with Nike more than a decade ago.

Despite all the recent frenzy in the papers about the upcoming public listing of Facebook, Jeffrey Lin and “Lin- sanity” at the New York Knicks, Apple has continued to grab the headlines.

This is not only because its stock topped a record US$500 or chaos at Apple Stores in China when the iPhone4s first went on sale, but also due to the disclosure last week that working conditions at mainland plants making Apple products would be audited and the findings will be made public by an outside independent party.

Wait a minute, did I say independent? (Read the entire column here and there).

Confidence and Con Men

It’s been said that you can’t cheat an honest man. But you can, if he’s naïve enough
The term “confidence man” first came into general use about 160 years ago during the trial in New York of a crook named William Thompson, who accosted strangers and talked them into loaning him their watches, then simply walked off with the timepieces.
Thompson has been followed by a long parade of con men, as they are now known. And what makes a great con artist? I have had extensive hands-on experience investigating hundreds of fraud cases and commercial crimes over the years in my profession and I was wondering which one tops my chart for the greatest one I have run into.
What makes the great con artists, the men who sell the Brooklyn Bridge, who practice the schemes perfected by the famous Carlo Ponzi anyway? They have to be sly but unsuspecting; extraordinary yet ordinary; and very clever at finding simplicity out of complexity and to employ all these traits with their calculated moves, just to get the most out of their innocent victims, or we wouldn’t label them con men.
I have another criterion: their tricks have to be very simple and elegant in design. And to top it off, they should never get caught. By this set of criteria, I have a winner – an insurance fraudster I once investigated in Hong Kong some years ago (Read the entire column here and there).

When Hong Kong Tops the World…

…But falls down telling the story

Hong Kong has emerged top in the World Economic Forum’s index of financial market development, surpassing the United States and United Kingdom from the highest rankings for the first time, making it the first Asian financial center to lead the 60-country index, according to the Forum’s fourth annual Financial Development Report released last week.

So that’s great news for Hong Kong, the most developed financial market in the world. And implicitly, the most competitive? But Hong Kong should know better than to be complacent. No doubt the territory has benefited from the Big Brother in the north but I am, as usual, concerned. Here’s one recent example (Read the entire column here, here and there)

Terrorists and Rogue Traders

Banks haven’t learned anything about risk management

Who would have thought that someone would actually be crying “terrorist attack” from of all places, Switzerland? Well, hardly. In Asia, we know about these “terrorist attacks.” The first one occurred in Singapore in 1995 when a 27-year-old former derivatives broker named Nick Leeson caused the collapse of Barings, the United Kingdom’s oldest investment bank.

What Leeson did to Barings bears considerable resemblance to what a senior UBS management executive called, with considerable hyperbole, the “terrorist attack” that sank the bank’s former CEO Oswald Grubel in early September after the discovery of a US$2.3 billion trading scandal (Read the entire column here and there).

Job Cuts and Parties

Are Banks Serious About Cutting Costs?

It may appear that the banking sector is once again vigilantly exercising prudence and going all out with their cost-cutting measures in case another global economic and financial crisis is on the horizon.

The sector is shedding thousands of jobs – 5,000 alone in 2011 from Hong Kong’s HSBC with another 25,000 reported to be cut by the end of the year. Across the sector, as many as 60,000 jobs are set to disappear globally, according to news reports. The job cuts, as the banks’ press releases usually say, are the last resort in order to cut costs and boost profitability during the challenging times that are coming.

I doubt they have used up their cost-cutting algorithms, however. Let’s take a closer look (Read the entire column here and there).

Do We Need an Online Lie Detector?

Beware of “personal testimonies” on the Internet

“I’ve been browsing online more than three hours today, yet I never found any interesting article like yours. It is pretty value-sufficient for me. If all website owners and bloggers made such good content material available, the net will be a lot more helpful.”

That is the sort of message from which you might take comfort, but it also shows how people depend increasingly on the internet – perhaps sometimes when they shouldn’t. People selling goods and services look to online reviews as essential sales tools and integral elements of marketing campaigns as consumers turn to online services to shop around for a gadget, book into a hotel or a restaurant or to deal in shares.

Yet it doesn’t take long for newcomers to some websites to notice that everything they hit upon is supposedly just perfect for them: any gadget is a gem that must be had, every hotel seems better than the Ritz, every restaurant serves table-slamming good dishes, and every new stock tip is a market beater. Yet online shoppers often lack reliable tools to gauge untried or new goods and, lacking them, have to depend on reviews.

So how can we trust some of the overhyped product postings that have become commonplace in the online review system? Well, help appears to be on the way (Read the entire column here and there).

Downgrading the World's Rating Agencies

Why bother to rate at all?

Standard & Poor’s downgrading of US government debts from its AAA rating may have turned the world upside down, but I suspect credit rating agencies rarely turn firms inside out. Either way, investors can still lose their pants.

Right after the downgrade, US Treasuries actually rallied after yields fell to their lowest point since early 2009. The market actually deemed treasuries a safer bet after S&P’s gaffe, according to New York Times columnist Andrew Ross Sorkin. So much for S&P’s credibility.

Oddly enough S&P wasn’t the first to downgrade the US credit rating… (Read the entire article here and there).

Downgrading the World’s Rating Agencies

Why bother to rate at all?

Standard & Poor’s downgrading of US government debts from its AAA rating may have turned the world upside down, but I suspect credit rating agencies rarely turn firms inside out. Either way, investors can still lose their pants.

Right after the downgrade, US Treasuries actually rallied after yields fell to their lowest point since early 2009. The market actually deemed treasuries a safer bet after S&P’s gaffe, according to New York Times columnist Andrew Ross Sorkin. So much for S&P’s credibility.

Oddly enough S&P wasn’t the first to downgrade the US credit rating… (Read the entire article here and there).

A Seemingly Legitimate… Fraud?

Beware of Chinese executives bearing large contracts
Your big break has finally come. A new Chinese client has just placed a sales order so huge, with terms so favorable, that it leaves your boss envious, the lawyers numbed and you breathless about how to spend your obscene year-end bonus. What are you waiting for?
Welcome to the new world of fraud, Chinese style. You may be a victim and you are not alone.
So what went wrong?
A new kind of commercial fraud has recently evolved and become commonplace in China… (Read the entire column here).

The Threat to Free Flow of Information

Looking back at 2010: A Very Social World
The world has changed. More than ever before, it is dominated by two opposing forces: the compulsion to share information and the need to control it. The year 2010 can claim to have a pivotal spot in the technological history of mankind, though not evidently for the better.
On the eve of the New Year, I began to wonder what some of the most significant world events were and which of these stood out. How could they further have an impact on a world already paranoid about privacy and national security on one hand, and obsessed with the advancement of techno-devices on the other?
The WikiLeaks headlines obviously top the list on a global scale, followed by the Google pullout from China, which left its mark on the world of corporate espionage. Third is the pressure exerted on the Canadian company Research In Motion (RIM) to hand over its Blackberry encryption to several governments.
These three events signify a paradigm shift in the gathering and sharing of information… (Read the entire column here and there).

Goalkeeping and Game Theory

(NOTE: This is a literary journalism piece I did for my Master of Journalism program at the Journalism and Media Studies Center, HKU. It is reprinted in a book titled “Global Studies – Literary Journalism: The Best of Class”. Edited by Gene Mustain.)

Sometimes all that theory goes out the window.

In my sweaty, seasoned blue jersey and black shorts, with my palms in white gloves close to my hips and my football boots shoulder-width apart in a ready stance, I stood motionless and focused on the eyes of the man behind the ball planted on the white-rounded spot.
The man to take the penalty, lanky and tanned in a yellow jersey, stood motionless three yards behind the ball. His eyes focused on me for any sign of my tendency to lean to one side or another. It was a dreaded moment for both of us. For a while, neither of us moved.

Neither did his teammates, the men in yellow tops locked in a straight line another few yards out, nor mine. Spectators writhed in their seats, their eyes moving left and right like the dial of a grandfather’s clock between the man behind the ball and the goalkeeper on the line.

Goalkeeping is the only role that lured and kept me in the game since my first taste of football at the tender age of 8, when I discovered the thrills of denying shots and frustrating even the most prolific strikers. Casual fans have this gross misconception that goalkeeping is for the fat, slow and lazy. On the contrary, the modern game requires goalkeepers to have agility and lightning-fast reflexes, explosive speed over short distances, and the mental and physical toughness to charge at unforgiving blades-laden boots and execute acrobatic moves above the rest for the ball that may lead to awkward, body-twisting landings. Goalkeeping, in the last line of defence and first line of attack, is not for the faint-hearted.

For goalkeepers, facing a penalty is another way to prove themselves – and to be a hero (Read the entire piece here).

Absolute Disaster

(NOTE: This is one of my many investigative exposés on commercial crimes during my newsroom days. It involved the first hedge fund manager sent to prison in Asia.)

Absolute Disaster

Daniel Hilken and Vanson Soo

Saturday, February 19, 2005

“This is by far the most difficult e-mail that I have ever had to write.”

So began the message that Brian MacDougall, then marketing chief of Charles Schmitt & Associates, sent to more than 1,000 of the company’s investors on June 16.

“Last week my colleague, Jennifer Carver, and I came across some internal documents that led us to suspect irregularities in the CSA Absolute Return Fund,” MacDougall continued.

After sharing some of the depressing details, he concluded: “There is nothing I can possibly say to express how sorry we are.”

A scenario like this is every investor’s worst nightmare: your trusted adviser has been accused of fraud and you may not be getting your money back.

For some 1,300 investors in the hedge fund, managed by a collapsed Hong Kong advisory firm, the nightmare has become a reality that doesn’t end when the sun comes up.

The founder and owner of the firm, Charles Schmitt, 59, a United States citizen residing in Discovery Bay, was charged by Hong Kong police in June with stealing US$930,000 (HK$7.25 million) from the CSA Absolute Return Fund.

Nearly US$200 million was invested in the fund, but up to US$50 million may never be recovered, partly because of losses related to the need to close out positions early.

Schmitt, who is free on bail, could face further charges. His next scheduled court appearance is March 1.

To recover what remains of their money, the investors face a trawl through the murky world of offshore funds and a tedious legal wrangle in Hong Kong.

It is one more cautionary tale about hedge funds, those virtually unregulated, deliberately opaque, high-risk, high-reward vehicles that are considered even by financial sophisticates as being for “consenting adults” only.

Regulators tend to give hedge funds a wide berth, not only because their investment strategies are generally byzantine, but because the products are seen as intended for rich people with money to lose, in the case of the CSA Absolute Return Fund, up to US$100,000, the minimum investment.

The CSA product was a “fund of funds” that ostensibly invested in other hedge funds. But these, it is alleged, were fakes.

Schmitt was alledgedly involved in setting up bogus funds and bogus bank accounts to siphon off money from the fund.

Like many a protagonist in previous financial scandals, Schmitt had hardly anyone looking over his shoulder.

According to Carver, the former chief operating officer of the advisory firm, she and Schmitt comprised the investment committee, which met monthly to discuss asset allocation. After each meeting, Schmitt would place the orders for the Absolute Return Fund while Carver did the same for the two other funds run by her boss’ companies.

“I had no influence on the Absolute Return Fund,” she said.

The fund’s custodian bank, Bermuda Trust, accepted only orders placed by Schmitt himself. Carver had no signing authority for the Absolute Return Fund, or for any bank accounts.

“The bank accounts’ part especially bothered me,” she said. “I asked him to accept me as a signatory but he just dragged the matter.

“Now I understand why.”

Carver was not the only one who missed the alleged scam. So did the custodian, the auditor of the Absolute Return Fund, Ernst & Young, and Hong Kong’s financial services regulator, the Securities and Futures Commission (SFC).

Bermuda Trust acted as overall administrator of the 10 hedge funds in which the Absolute Return Fund purported to invest. Each of the 10 in turn had its own administrator, who would supply information, including the value of the assets, to Bermuda Trust, which would then channel appropriate investment amounts to each fund.

In all, US$192.8 million of investor money was transferred from Bank of Bermuda, the trust company’s parent, according to an investigation by PricewaterhouseCoopers (PwC).

The accounting firm, which was appointed by the High Court to liquidate Charles Schmitt & Associates and the Absolute Return Fund, intially concluded that some 20 percent of this money was missing after being shifted among more than 20 banks and brokerage accounts.

Investors were told at a meeting in Hong Kong Thursday that the amount still unaccounted for could be almost twice as high as that.

At Schmitt & Associates, Carver said, the filings for fund orders went into binders. Both she and marketing head MacDougall had assumed that nothing was amiss because the orders seemed to be placed through the proper channels.

However, Carver was shaken out of her complacency on June 5 when she returned to her office on a Saturday and found some misplaced documents that aroused her suspicions. She showed them to MacDougall, who was about to leave on a business trip. “We thought we knew what was going on, but still couldn’t believe it,” she said.

MacDougall declined to be interviewed for this article.

Carver declined to reveal the details of her discovery, other than to say that among the documents figured the name of an administrator she did not recognize. That, plus an indication that the funds in which the Absolute Return Fund invested had their own bank accounts in Hong Kong, which seemed to make no sense.

She spent the next few days searching for answers. When MacDougall returned, they contacted a lawyer and reported to the SFC the same morning.

Schmitt was charged on June 15 and the Absolute Return Fund was frozen.

The allegations against Schmitt have yet to be tested at trial, but the long and complicated process of recovering and distributing the remaining assets of the fund is well under way. It’s a thankless task. At a meeting between the liquidator and investor representatives in October, PwC said it had found over 8,000 documents, 3,000 transactions and 60 accounts for the Absolute Return Fund alone. And mingled in with them, apparently, were transactions of four other hedge funds and some private client funds.

The liquidator is still coming to grips with the difficult task of demonstrating that Absolute Return Fund money was used to acquire assets through third parties, and that these assets were held in trust or beneficially for Schmitt & Associates. Both the firm and the Absolute Return Fund were ordered wound up on January 10, but investigations continue in Hong Kong and in the British Virgin Islands, where the fund was incorporated.

Assigning priority to the claims of different investors is proving to be a headache.

For example, those who subscribed for shares but never received certificates might legally be classified as creditors and therefore have a claim on the assets ahead of other investors.

To resolve the whole issue, PwC asked the court for the power to set up a “scheme of arrangement” that would allow it to share out the recovered proceeds as it saw fit. At a November court hearing into the application, some investors complained that the recovery process was opaque and inefficient.

They said PwC had not informed them of its bid to decide the reimbursement policy by itself, and both they and the government’s Official Receiver’s Office identified an overlap between PwC’s functions and those of the administrator appointed by the SFC, John Lees & Associates. The scheme of arrangement issue remains unresolved but an informal investors’ committee has been set up to facilitate communication among the parties.

Some investors fear the process is taking so long that the value of the recoverable assets is being steadily depleted. The professionals appointed by the court to clear up the mess are not directly accountable to investors, yet their fees come out of the fund’s assets.

With HK$20 million in service fees already racked up, it is no wonder that already distressed investors are furious. Many have come around to the view that to avoid delays and expense, a scheme of arrangement is the best solution.

Said Jeff Stryer, a Singapore investor with US$275,000 in the fund: “I am frustrated by the pace of the proceedings and support ongoing efforts to persuade the court to avoid the expense of an extended process. It appears most of the money has been located and identified so I believe the return of funds to the investors can be expedited.”

Jan Blaauw, a partner in PwC’s business recovery services, said: “We have issued eight reports to investors since July 2004 to explain our progress and issues encountered. At investors meetings held [Thursday], our appointment as liquidators was unanimous.”

While investor lawsuits against various banks and auditors are under consideration, it appears the victims could receive a first payment out of the recovered assets in three or four months.

Meanwhile, Carver and MacDougall continue to manage other funds previously run by Schmitt’s companies. Carver said the two funds she managed herself, the CSA Plus Fund, which came under Charles Schmitt & Associates, and the CSA Dublin Fund under CSA Management, were untainted by the scandal.

The two funds, which had total assets of US$114 million, offered little opportunity for fraud, she said.

The Plus Fund deals only with Societe Generale and Royal Bank of Canada leveraged products, which are tightly monitored, while the custodian for the Dublin Fund, Citco, uses a tamper-proof electronic trading platform. After conducting a limited audit, the SFC allowed both funds to remain active.

Now most of the assets are managed by a new advisory firm set up by Carver and MacDougall, Oria Capital.

“The SFC fast-tracked our licenses so that we could continue to manage the funds that were still active, so as to stem any further damage to investors,” Carver said.

Oria Capital was appointed manager of the Dublin Fund by external directors in July, while shareholders of the Plus Fund voted it in as manager in August.

Most investors and independent financial advisers believe that Carver and MacDougall emerged from the whole affair with their honor intact.

“It is my belief that the discovery of the alleged fraud was due purely to the honesty and courage of MacDougall and Carver and not a result of the takeover [last year] of Bermuda Trust by HSBC,” investor Stryer said.

“What they did took intelligence and guts, and they deserve respect.”

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Fund Losses Spark Fury

(NOTE: This is one of my many investigative exposés on commercial crimes during my newsroom days. It bagged the Society of Publishers in Asia (SOPA) award for Excellence in Business Reporting in 2005. Somehow the link to the story is not working so I am pasting the entire script below. I also penned a follow-up piece under a different byline following the Lehman Brothers mini-bonds scandal – you can find it here.)

The Standard

By Vanson Soo 2004-11-01

Fund losses spark fury

There is never a shortage of bad investments _ or people eager to sell them to you. From Internet come-ons to “boiler rooms” in Bangkok, investors are bombarded with a steady stream of supposedly low-risk, high-return deals.

What is not so common is an investment scheme making similar claims marketed by one of the United Kingdom’s biggest financial institutions carrying what many investors took to be the implicit approval of reputable banks on three continents.

More than 7,000 Hong Kong investors, many of them affluent professionals and small businessmen, invested in one such product, the Offshore With Profits (OWP) funds sold by Clerical Medical Insurance (CMI), a subsidiary of Halifax-Bank of Scotland, one of the UK’s biggest mortgage lenders. Hong Kong was the place where a significant amount of sales for a fund that totalled about US$3.5 billion at its peak _ it is now about half that size _ took place with investors here typically investing more than US$100,000 each.

Although CMI says it does not have complete data, available information suggests that Hong Kong investors alone put more than US$700 million in the funds. Most now wish they had not. That is especially true of those who borrowed up to three times their initial investment to buy extra shares in the fund, only to see its asset value dive. At stake is whether or not they were misled by the sales pitch _ and whether Hong Kong regulators will conduct a thorough investigation into what is shaping up as one of the biggest losses in Hong Kong fund history.

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