Due Diligence Matters - August 2023 Bulletin

perfORM Due Diligence Services is an award-winning, multijurisdictional (UK, Switzerland, USA) and standalone Operational Due Diligence solutions provider with 90+ years of collective ODD experience. We will shortly be welcoming an additional two team members.

Future of Money Podcast

perfORM Co-Head James Newman joins Henri Arslanian on the Future of Money podcast to explore the nuances of ODD in the digital assets and crypto space compared to traditional finance.

During the podcast, James explains why thorough background checks and robust internal controls are crucial for crypto firms, how to uncover the red flags to watch for at crypto exchanges and custodians, and helps listeners understand why exchange proof-of-reserves may not always provide a complete picture and more.

 Missed the last bulletin? Click here for the July 2023 edition.

Fund Administrator Fined By SEC For Missing Red Flags

On 7 August 2023, Theorem Fund Services (“TFS”) was sanctioned by the SEC for its role in helping to facilitate a fraud. TFS was the fund administrator for EIA All Weather Alpha Fund I, LP (the “EIA Fund”) from approximately January 2018 through March 2019.

As fund administrator, TFS was responsible for, among other things, calculating the EIA Fund’s monthly NAV, allocating gross profit to investors, and calculating performance statistics for the EIA Fund and investors. The manager of the EIA Fund, EIA All Weather Alpha Fund I Partners LLC (“EIA”), was charged with defrauding investors out of $27m in October 2022. TFS was cited for its role in contributing to this, further details of which can be found in the SEC’s order. TFS was only fined $100,000 and required to disgorge $18,000 in administration fees, which, in our opinion, does not seem to correspond to the seriousness of the SEC’s findings, given that fund managers and their investors rely on fund administrators to serve as the official books and records of funds and provide a source of reassurance and independence from the investment manager. The relatively lenient fine may be due to remedial acts undertaken by TFS.

This case is another example of the importance of carrying out service provider/vendor due diligence prior to allocating capital to a fund. Given the significant role that an administrator plays, it is important to have a robust understanding of its procedures. We work closely with administrators, both in carrying out service provider due diligence and in independently verifying information provided to us by investment managers about funds upon which we are performing operational due diligence. Coincidentally, when the SEC issued its order against TFS, the fund administrator was indirectly under review as part of the service provider framework of a fund we were performing ODD on. We immediately alerted our client to the SEC matter and carried out further due diligence with both TFS and the fund manager to assess the potential impact on our client.

ODD Report Solution

Our ODD Report Solution is not just another tick in a box, it is a new approach to operational due diligence. A pragmatic solution for Investment Managers and Service Providers which engage us to complete an ODD review.
 
We target a 6-week turnaround, and our ODD process is significantly less onerous and time consuming compared to a data-heavy, sample-based controls audit. Clients need only allow for interviews with key staff, document provision and access to service providers for verification purposes. In addition to the below, we currently have a growing number of clients in progress.

• Virtual Asset Service Provider: Copper Technologies (Switzerland) AG – please contact Adam Groom to request access to our March 2023 dated ODD Report
• Investment Manager: Old Street Digital Limited – please contact Paul Ridley to request access to our April 2023 dated ODD Report
• Investment Manager: Hyperion Decimus, LLC – please contact Chris Sullivan to request access to our March 2023 dated ODD Report