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A third-party fund administrator to a hedge fund was recently charged by the SEC for failing in its gatekeeper responsibilities. The hedge fund was previously charged for misappropriation and misuse of investors’ funds when it incurred significant losses. During the fraudulent activity, the fund admin calculated the hedge fund’s net asset value and sent account statements to investors that did not recognize the losses. With the story’s lead comments, Amy Lynch, FrontLine’s Founder and President, describes it as an atypical case but one that may become more frequent with many smaller fund admins now catering to private funds. She states that the case shows the downside of a third-party relationship where the outside party fails to follow their own internal practices, policies, procedures and the responsibilities described in their agreement. Ms. Lynch notes that in this case there were cracks that occurred in the relationship and that ended up being fraud. She also expects that during its exams, when the SEC finds fraudulent activity at the manager level, it will look harder to determine whether the fund admin is complicit. See FundFire (subscription required), “‘Missing Red Flags’: SEC Targets Fund Admin for Hedge Fund Fraud”