2003 Report Raised Red Flags About Nadel

A study six years ago found evidence of inadequate internal controls and compliance procedures at the fund shop run by Arthur Nadel, who was arrested and charged with fraud yesterday after disappearing for two weeks.

The 16-page report, prepared by CarbonBased Consulting, was commissioned by Nadel's firm, Scoop Management of Sarasota, Fla. CarbonBased highlighted numerous operational shortcomings that it said were so obvious that they should have been apparent to sophisticated investors conducting their own due diligence of the firm.

The report, which was obtained by Hedge Fund Alert, raised questions about Scoop's trade-reconciliation procedures, accounting, investor relations and other issues. It's unclear why Scoop commissioned the report or whether it acted on the findings or disclosed them to its investors. Brian Shapiro, president CarbonBased, confirmed Scoop had been a client, but declined further comment, citing confidentiality agreements.

Among other things, the New York consulting firm found that Scoop's daily trading activity was reconciled only once a month. As a result, Scoop didn't have a clear idea of the assets it held in each fund. Neither the accounting nor the performance of the funds could be certified for accuracy, the consultant said. It recommended that Scoop hire a nationally recognized accounting firm and enter into a relationship with a prime broker.

The consultant also found that Scoop allowed unqualified investors into limited partnerships with qualified investors. CarbonBased warned that comingling investors could lead to penalties, including possible closure of the firm. Scoop also failed to verify the identity of investors or conduct credit checks. The lack of security procedures meant the firm didn't comply with provisions of the Patriot Act.

Nadel's firm also had virtually no policies controlling how it spent money. Checks needed only Nadel's signature to be cashed. Employees traded for themselves in separate accounts alongside the funds. Scoop didn't have licenses for all of the software it used, and its practice of sharing computer programs with staff opened it up to potential fines, the report said.

Nadel was charged with securities fraud and wire fraud yesterday in connection with six funds he ran through Scoop. Authorities say Nadel, 76, had been telling investors that certain funds had $300 million of assets, when in fact they had less than $1 million.

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