Hedge Fund Due-Diligence: How to Use FINRA and its International Equivalents to Detect Fraud

Aaron Rabinowe | September 3, 2015

Just as filing a Freedom of Information Act (FOIA) Request can be quick and easy (read more on using FOIA here), regulator databases provide immediate key information:

  1. Historical disciplinary actions
  2. Historical employment details
  3. AUM/strategy/client-base details
  4. Key disclosures.


The Financial Industry Regulatory Authority (FINRA) provides a valuable tool called BrokerCheck which should be a staple of any initial hedge fund & principal due-diligence. Not only does it cover all current and historical broker/dealers and registered reps, but it also links with the SEC and covers adviser information as well. Here’s how to use the system:

Step 1.

Go to http://brokercheck.finra.org/Search/Search

Step 2.

Search for the information that is most relevant to your current due-diligence efforts; whether it be firm name or the name on an individual. For our purposes, let’s take a look at Bernie Madoff’s file.


Step 3.

Click check and you should be taken to a page that looks like this:







Step 4.

What we want is the “Detailed Report” so go ahead and give that link a click




Let’s see what we can find out about our pal Bernie from this report:

We now know that he took the Series 1 back in the ‘60s, the Series 63 back in ’97, and the Series 55 in ’00.This information doesn’t raise any red flags so far but let’s take a deeper look.

The most relevant information may be the disclosure events. A firm or firm manager may have a history of complaints and allegations made against them directly or the entity they manage. In many cases it may be a minor rule violation or a customer complaint. In some instances substantial red flags will appear such as (a) previous employers being barred or sanctioned by the industry (b) allegations of fraud, high-pressure sales tactics, or repeated client complaints, or (c) straight-up fraud, embezzlement, or criminal activity reports.

Bernie’s disclosures:


(In his case he was only discovered after the fact, but in many cases regulators document a trail of gun-powder that can help you get out before the inevitable ka-boom.)

Aside from disclosures, FINRA also provides a detailed employment record, which often includes outside business activities or past employment:


Employment history is often left out of an individual’s written biography. In most cases it’s because the history wasn’t relevant to their current position, but in some cases it can be indicative of a problem with the previous employer. In cases of fraud or fund blow-ups this information can be purposely excluded from official bios to mislead investors.

The official fund bio may leave information out, but generally everything is included in the regulatory disclosures.

Now that we know a primary tool to use for firms and fund staff in the United States, let’s take a look at the equivalent tools for the United Kingdom and Hong Kong.

uk flagThe United Kingdom – The Financial Conduct Authority

After 2008, the Financial Services Authority was disbanded and two new regulatory bodies were created: the Financial Conduct Authority (FCA) and the Prudential Regulation Authority. We’re going to take a look at the tool provided by the FCA called the Financial Services Register.

Step 1.

Go to https://www.fsa.gov.uk/register/home.do.

Step 2.

From here, we’re going to navigate to either the “Financial Services Firm Search” or the “Individuals Search.”

For example purposes, let’s take a look at Magnus Peterson, the founder of one of London’s oldest hedge funds which collapsed during the financial crisis. He was found guilty on 8 counts, one of which was fraud: http://www.ft.com/intl/cms/s/0/8705c75e-9ff4-11e4-aa89-00144feab7de.html#axzz3hlprfQs3

After clicking Individual Search, we can scroll down to see the following box:
hedge fund FCA individuals search

Let’s search for Magnus and see what we can find.

name box

If we take a look at the history page, we can see his involvement in his fund.

hedge fund compliance fraud due-diligence box

Let’s take a look at Weavering Capital Limited. For starters, we can see that they are no longer authorized by the Financial Conduct Authority.

weavering capital

We can also see, by clicking the link for individuals, who was involved in the fund.

hedge fund compliance due-diligence link for individuals FCA

hedge fund due-diligence employee firm previous involvement

hedge fund employee list

By taking a look at individuals that were once involved in this case, we may infer that doing business with them in the future may be a risky decision. Let’s do a quick google search on one of the inactive indviduals: Charanpreet Dabhia

google hedge fund people search

One of the first articles to come up shows that courts rejected Mr. Dabhia’s appeal and that he was held responsible for the fund’s losses associated with fraud.


hedge fund weavering headline

There are countless ways to use these tools as shown above. Their power and scope make them worthy tools for the arsenal of any hedge fund due-diligence process.

Flag-HongKongHong Kong – The Securities and Futures Commission

Now that you see how powerful these tools are for research, I’ll quickly introduce you to the last one covered: the Public Register of Licensed Persons and Registered Institutions.

Step 1.

Navigate to http://www.sfc.hk/publicregWeb/searchByName?locale=en

Step 2.

Search the individual or firm in question.

hong kong hedge fund search

We’ve looked at a couple cases of fraud, so for this example, let’s look at one of Asia’s largest hedge fund and see what it looks like when there’s no history of disciplinary action. Value Partners is a long/short equity fund with $8.6 billion of assets under management.

Step 3.

Look through all relevant information provided.

hong kong value partners limited hedge fund info
hong kong hedge fund action

In Conclusion

It is important to note that all relevant information may not be present, but these tools provide a quick, easy, and powerful way to put the pieces together and learn information about prospective funds that is likely excluded from their marketing documentation.

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Aaron Rabinowe

Aaron is a research analyst at ClaritySpring, acting as a generalist and engaging in the due-diligence process

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