Karen The Super Trader?

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.
 
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.
 
Jonathan said:
Still have a hard time believing she was gaming her investor on purpose though. Seem like a sweet lady.
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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.
 
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?
 
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.

JayH said:
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?
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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.

Posted by Peavey
 
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.

Scott

tom said:
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.
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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!

Posted by MikeOW
 
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.
 
Andrei said:
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.
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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.
 
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?

Posted by Nick H
 
tom said:
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?
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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.
 
You may be correct. There usually is a "standard" though. I suggest reading post #32 from Andrei (point #1 to be specific).

Tax reporting is one thing and reporting to investors is another (except possibly for tax purposes at year end).

I doubt tax reporting is the normal standard for disclosure to investors.

I believe some approved accounting methods do not include open option positions, at least, in "mark to market". My own broker does not. (They are included in liquidation value which is reported separately). I think this may vary in some accounting treatments (some of which are are arcane and far from rational for these purposes) for short and long positions.

I am not sure if this would explain the situation or not but just wanted to mention that there are various accounting treatments, and that tax treatment is not necessarily used for disclosure purposes.

It is quite normal to maintain different sets of books for business operational purposes and for tax purposes.

Of course it is completely inappropriate from a full disclosure point of view to publish valuation reports that exclude open losses of any kind, without footnotes at the very least, but I suspect it is not uncommon.
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Scott Slivnik said:
You may be correct. There usually is a "standard" though. I suggest reading post #32 from Andrei (point #1 to be specific).
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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.
 
Don Brady said:
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.
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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.
 
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.

Posted by Nick H
 
I stumbled across a recent interview with Karen
She is trading a little safer now with a defined risk
She also explains a little about what happened to her with the SEC complaint

 
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