CFEM Lecturer Tells Congressional Committee How To Reduce Risk and Hedge Fund Fraud

Leon Metzger, former Vice Chairman of hedge fund Paloma Partners and a Cornell lecturer, addressed members of the United States House Financial Services Committee on January 5, 2009. In written testimony he argued for a series of steps to reduce risk and the occurrence of frauds such as the alleged Ponzi scheme perpetrated by Bernard Madoff. He summarized his testimony in a recent article in the Cornell Chronicle.

Metzger teaches a course called Hedge Fund Management to third semester Masters of Engineering Financial Engineering students at Cornell Financial Engineering Manhattan (CFEM). The students spend the entire third semester at CFEM, taking courses and completing their Master of Engineering projects. Metzger's course, which he also teaches at other institutions, was recently featured in a New York Times article for its coverage of practical skills relating to the management of hedge funds, an area in which he has more than 18 years of experience. The CFEM course is one of two version of Metzger's course that is given to engineering students rather than MBA students. In the Times article, Metzger is quoted emphasizing a basic tenet of the course: “if the firm lacks sound risk management, best valuation practices and top-notch operational controls, it is a candidate for failure.”  

In his Congressional testimony, Metzger stated that “Regulatory reform in the financial services authority is a high priority.” His written testimony supports his recommendations for:

• Separate regulators for market integrity and market stability.
• Full disclosure of market positions by financial institutions.
• Development of a model "Due Diligence Questionnaire" particularly for use in evaluating non-financial aspects of investments.
• Education of investors on measures of investment risk beyond volatility.
• Changes to financial accounting standards relating to fair value measurements that would encourage prudence in the use of discounts on large blocks of securities.
• Disclosure of means by which both financial and operational risk are diversified by financial intermediaries.
• Increased transparency by investment funds of policies relating to valuation of securities, including derivatives, and of the performance attributes, exposures and risk measurements for the investment positions they hold.
• Use of independent third party custodians by investment advisers.
• Use of peer review by firms that audit broker-dealers.
• Congressional investigation of so-called "soft dollar" arrangements that can result in the purchase of research results in exchange for transactions.

Earlier on January 5 Metzger was interviewed on Bloomberg News about his testimony and other aspects of the Madoff affair.