Charles Schmitt, 59, a United States citizen living in Hong Kong, was charged by Hong Kong police in June with stealing nearly US$1 million (HK$7.8 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 and today appeared at Eastern Magistrates' Court but the case was adjourned until September 2 after prosecutors said they would need several more months to collect evidence against Schmitt, including investigations in the United States and Switzerland. Schmitt, a US citizen, is free on US$1 million bail and two US$200,000 secureties.
The Absolute Return Fund 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 the Absolute Return Fund's money. The approximately 1,300 investors in the CSA Absolute Return Fund are anxiously awaiting Schmitt's trial and the liquidation of the fund.
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 alleged that the hedge funds in Schmitt's ``fund of funds'' were fakes. He is said to have been involved in setting up bogus funds and bank accounts to siphon off money.
It is one more cautionary tale about hedge funds, those virtually unregulated, deliberately opaque, high-risk, high-reward vehicles 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. Investors are planning to take action against third parties, which include the auditors of the fund, Ernst & Young, and its custodian bank, Bermuda Trust, which was acquired by HSBC along with its parent Bank of Bermuda last year.
Like many a protagonist in previous financial scandals, Schmitt had hardly anyone looking over his shoulder.
