Feds Reportedly Probing Canarsie Capital Collapse

Mar 27 2015 | 6:00pm ET

The near-total implosion of Canarsie Capital earlier this year has reportedly come under the scrutiny of federal regulators.

Both the Department of Justice and the SEC are probing how the hedge fund, managed by 28-year-old Owen Li, lost nearly all of the $60 million hedge fund's capital in just three weeks of trading, according to media reports that cite a letter sent to the fund's investors.

The letter, sent in early February, apparently informed the fund's investors about the investigations. It was reportedly sent by Ken deRegt, a Canarsie partner, through law firm Skadden Arps.

The SEC has since declined to comment, while the DOJ cited their standard policy of neither confirming nor denying whether a matter is under investigation, according to the reports.

New York-based Carnarsie, which at one point managed nearly $100 million, made headlines in late January after Li wrote an apology letter to his investors. In the letter, Li alluded to a “series of series of aggressive transactions" during the first three weeks of the new year that resulted in losses totally all but $200,000 of the fund's capital. 

The letter quickly gained notoriety for its contrite manners and repeated apologies. In one passage, Li wrote "Words cannot express how sorry I feel for causing this loss to you, and to the entire Fund.” Another stated, “No doubt you will be angry about this--and I am truly sorry."

The specific nature of the trades is unclear, but what is not disputed is that Li made the bets in an attempt to compensate for poor returns in December. This included a number of options positions that were speculating heavily on a broad rise in the markets. When the markets turned down, Li’s losses were instead compounded.

Li previously worked at Galleon Group, a now defunct shop run by convicted insider trader Raj Rajaratnam. He formed Canarsie in January 2013 along with his roommate from Stanford University, Eric deRegt. Upon retiring from his position at Morgan Stanley, Ken deRegt, Eric’s father, joined the fund as well. 

Canarsie did business with some of Wall Street’s biggest names, including Goldman Sachs and Morgan Stanley on the prime brokerage side and SS&C Technologies as administrator, according to media reports.

The February letter from Ken deRegt reportedly informed investors that Li had been so far been unwilling to relinquish control of Canarsie, as previously promised in an earlier communication. The letter also suggests Li may have been providing false information about his trading in daily reports.

Brokerage and administrative records allegedly show that the fund had $56-$58 million at the end of 2014 and that it had suffered losses of about 10% during the month. However, the letter continues, daily reports provided by Li suggested a 5% loss for the period.

The disparities become worse in the New Year. According to deRegt’s letter, the daily internal report he received on January 16th apparently indicated a total portfolio value of around $60 million, while the assets actually on deposit with Goldman Sachs on that date were only $220,000.

Counsel for Li has declined to comment on the matter, according to the reports. 


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