Karen The Super Trader?

Discussion in 'General Discussion' started by will, Jun 2, 2016.

  1. Paul Demers

    Paul Demers Well-Known Member

    I think the TastyTrade response was appropriate. I have discounted all the blogs about Karen Bruton and have just focused on the SEC statements and complaint.
    Scott I think you are right with regards to management fees probably would have led to a better decision making process by the fund and regarding the performance fee I think the SEC agrees with you.

    From the complaint:
    94. If those unrealized losses had been factored in, as required by the operating agreement, Hope would have been entitled to no fees.
  2. Jonathan

    Jonathan Active Member

    I agree that it's appropriate. Sounds like she's just down to the one client. Bottom line...she's a CPA and should have known better. Still have a hard time believing she was gaming her investor on purpose though. Seem like a sweet lady.
  3. AKJ

    AKJ Well-Known Member

    I guess I'm a much bigger cynic than you. If this fund was collecting incentive fees but was not actually generating new HWM (in terms of NAV), I don't see how this could have been done accidentally. Someone doing this almost certainly knew exactly how they were gaming their incentive structure.
  4. Jay Hattler

    Jay Hattler Well-Known Member

    An earlier post in this thread used the term "front running deltas." I know about front-running orders (broker makes his own buy first, knowing he has received a large buy order from client), but I don't know what "front running deltas" means. Can anyone explain?
  5. Scott Slivnik

    Scott Slivnik Well-Known Member

    I believe front running deltas was the poster stating that Karen must have been directionally correct quite often in order to achieve the stated returns.

    I doubt delta had much impact on her returns. I know I could report insane returns if I took full advantage of portfolio margining and ignored all losses.

  6. Gabor Maly

    Gabor Maly Well-Known Member

  7. Jonathan

    Jonathan Active Member

    thanks Gabor...good commentary
    us271782 likes this.
  8. Peavey

    Peavey Member

    Tom Sosnoff had an opportunity to disassociate himself some here, but it seems like he's doubling down. Not sure how wise that is. As far as I can tell reading that SEC doc (assuming the facts are correct), this was plainly fraud. He is blaming the SEC and the media for picking on Karen, when it seems like she very clearly defrauded her clients.
    Tim R likes this.
  9. Scott Slivnik

    Scott Slivnik Well-Known Member

    I actually thought Sosnoff's commentary was quite good. He stated she was naive multiple times. He firmly believes she did not intend to defraud investors. I prefer the word stupid over naive. It is certainly possible she was stupid in regards to managing hedge funds.


  10. MikeOW

    MikeOW Guest

    Well guys, it's an interesting state of affairs.

    Trades come and go, it's the nature of the markets. I believe she found an extremely lucrative trade that worked for a few years but had since evaporated. Maybe she caved under the extreme pressure to perform. I would hate the pressure of being known as a 'super trader'. I'm sure if she could, she would just have made money for the investors and everything would have been fine. However, in the real world, when faced with a problematic situation she chose a different route. Perhaps it points to her lack of experience. Once her great trade stopped working (The alpha dried up) she was left floundering and had to resort to other methods.

    Regarding Mr Sonsonoff, we have to admit, that she was a great advertisement for Tasty Trade. As a person who tries to promote software, I would have loved to use her as a marketing vehicle. But again, by doing so, it heaped the pressure on her, and now we have seen the unfortunate results. It just goes to show you guys, the markets always have opportunities, but they always change, too.

    Just my opinion!
    Andrei likes this.
  11. Boomer34

    Boomer34 Well-Known Member

    Well said MikeOW
  12. Andrei

    Andrei Well-Known Member

    I am very familiar with how well-structured hedge funds are managed. And Karen's funds are actually invited fraud (even it it was not her intension at the outset).

    1. performance is calculated on NAV (net asset value) for each period, with all positions Marked to Market. Calculating it on realized gains is an invitation to fraud.
    2. NAV is calculated by an independent administrator, not the fund
    3. All calculations are audited by a CPA firm on annual basis.

    As somebody mentioned, management fee is essential, this is what keeps the business going. Relying exclusively on incentive fees to run the business is another incentive to fudge the numbers.

    I do not believe she meant to defraud, but it is hard to avoid under the management/incentive arrangement she put in place for her funds.

    Also, just a personal observation: traders love to talk about trading, in her interviews she really wanted to talk about her charity work. To me this sounded suspicious.
    N N likes this.
  13. Trader G

    Trader G Well-Known Member

    Adding to that, 50% of the profits went to a non-taxable charity (hers) which reinvested a large portion of it's money back in to the fund. I am all for avoiding taxes but when you add that on top of the fee structure and how she manipulated monthly returns to get the mgmt fee it really looks like an ex-CPA trying to game the system.
    N N likes this.
  14. Nick H

    Nick H New Member

    In his webinar last week, Charles Cottle mentioned Karen. It prompted me to do some googling to look for updates on her case, but I could only find information from last summer. I read this thread and most of the links and am left with something I still don't understand. How was Karen able to treat the premium from an assigned option as a realized profit prior to closing out the underlying futures? I have had many written options assigned to me over the years, and for tax purposes the premium always became part of the basis, not a realized gain or loss, until I closed the assigned position. Why wouldn't this also be the case with the assigned futures position she ended up with when she sold the ITM calls? In other words when she sold 7000 ITM calls (leg 1) and got assigned, why wasn't the $39 million premium added to the strike price to determine the basis of her short futures position and then realized (as a loss) the following month when she closed the position by exercising her long 7000 ITM calls (leg 2)? Can someone explain this to me?
  15. Scott Slivnik

    Scott Slivnik Well-Known Member

    If I remember correctly, the scheme trades were DITM calendar spreads. The short expired on the last day of the month and the long expired a week later. The short expires at the end of the month and becomes realized profit. The long is still open (unrealized).

    Another problem I have with the accounting is she traded section 1256 contracts exclusively. My understanding is MTM accounting should have been used at month end which means any open strikes should have been treated as if they were closed. MTM accounting would have rendered the scheme trades worthless of course.

  16. Scott Slivnik

    Scott Slivnik Well-Known Member

    You may be correct. There usually is a "standard" though. I suggest reading post #32 from Andrei (point #1 to be specific).

  17. comintel

    comintel Member

    Yes, my main point there was just that the IRS accounting rules do not govern, but my post was poorly worded so I deleted it and will start over.

    Looking into the SEC Complaint at https://www.sec.gov/litigation/complaints/2016/comp-pr2016-98.pdf
    it seems her private placement memorandum simply defined the investor's capital account as being affected only by realized gains and losses. So when she reported account values to investors, it excluded unrealized losses. Fees were also based on realized gains only. You could actually withdraw your full "account value" without regard to unrealized losses (making this a true Ponzi scheme, as noted by others).

    An NFA audit told her in August 2013 that she had to report NAV's, and she began doing so then in tiny print on a later page, but she did not change the capital accounts valuations which were reported more prominently. An interesting question may be, did the NFA auditors approve this (unsatisfactory) level of disclosure as an adequate remedy?

    In summer 2015, she realized the losses and the capital accounts took the losses finally.

    I wonder if we need a regulatory change to prohibit basing account valuations or fees or withdrawals on any measure other than net asset value (being very clear that this includes liquidation value of all option positions). Looking at the SEC Complaint, it seems to be based mainly on failure to disclose material facts, a fraudulent trading scheme etc. It does not appear to allege that this method of accounting is per se illegal! Hmm, could it be that that is because (some) others are doing something similar? Also it does not sound to me that the regulators/auditors were completely on the ball here in 2013, when they could have caught and stopped this. Of course, NFA is industry self-regulation which is not always as strict as would be best.
    Last edited: Oct 10, 2017
  18. Scott Slivnik

    Scott Slivnik Well-Known Member

    The accounting method was likely acceptable legally, just uncommon.

    I gave Karen the benefit of the doubt in the past. I believe she played the system and people to some degree at least. For example, I believe funneling money through her charity was to avoid paying taxes. Donated money should have remained with the charity in my opinion.

    Also, she must have known that short-term drawdowns occur. Without an asset management fee, she needed a way to generate revenue during these periods. I believe this is why the chosen accounting method was used.

  19. Nick H

    Nick H New Member

    The premium received from selling an option is not considered a realized profit until the short option and any resulting obligations (positions resulting from assignment) are closed. It seems to me that, what Karen was doing is analogous to shorting a stock, treating the short sale proceeds as a realized profit, then carrying the short stock position forward with zero basis. I don't know of any accounting method that would allow this.

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