Here's a story of hedge fund of fund guys doing hedge fund of fund guy things -- onshore fund, offshore fund, master fund, an investment advisor, along with a couple other affiliated companies -- and not being very good at some of the finer points:
An SEC investigation found that Alpha Titans LLC, its principal Timothy P. McCormack, and general counsel Kelly D. Kaeser used assets of two affiliated private funds to pay more than $450,000 in office rent, employee salaries and benefits, and similar expenses without clear authorization from fund clients and without accurate and complete disclosures that fund assets were being used for these purposes.
Usually, when these sorts of things are overlooked and/or circumvented and/or ignored, an auditor picks up on it and goes, "Hey guys, this kinda doesn't line up with what you've said you'd do in this private placement memo over here."
The firm’s outside auditor Simon Lesser was aware of how Alpha Titans used fund assets but still gave his final approval of audit reports containing unqualified opinions that the funds’ financial statements were presented fairly.
Lesser, a partner at McGladrey, oversaw the audits in question from 2009 to 2012. Funny thing, it doesn't seem like he did much auditing during those engagements. Here are some of the details from the SEC Order's summary:
In particular, the investment adviser to the private funds used fund assets to pay its own adviser-related operating expenses, transferring $3,452,353 from the funds over the course of four years. These material related party transactions involved related party relationships that GAAP requires be disclosed in financial statements. Despite that requirement, the relationships and transactions were not disclosed in the private funds’ financial statements. Lesser knew about the related party relationships and transactions, but nevertheless gave his final approval for McGladrey to issue audit reports containing unqualified opinions that the private funds’ financial statements were presented fairly in conformity with GAAP. [...] Further, in conducting his audit work, Lesser failed to conduct the audits in accordance with many Generally Accepted Auditing Standards (“GAAS”), including failing to have adequate professional skepticism, failing to supervise the audit and failing to adequately document McGladrey’s audit work.
Admittedly, these fund structures, the assorted rules about disclosures of related parties and whatnot can be tedious, but we are talking about auditing here. Cutting corners is typically frowned upon.
SEC Charges Santa Barbara-Based Hedge Fund Firm, Executives, and Auditor for Improper Expense Allocations [Press Release]
SEC order - Alpha Titans, Timothy McCormack and Kelly Kaeser
SEC order - Simon Lesser