On January 28, 2011, the SEC obtained a court order freezing the assets of Stamford, Connecticut-based, unregistered hedge fund manager Michael Kenwood Capital Management, LLC (MK Capital Management) and Francisco Illarramendi, who indirectly owns and controls MK Capital Management.  On January 14, 2011, the SEC had filed a complaint in the United States District Court for the District of Connecticut generally alleging that Illarramendi caused hedge funds managed by MK Capital Management to invest in private companies, with the shares of those private companies registered to advisory or investment entities indirectly owned and controlled by Illarramendi.  That is, the SEC essentially alleges that Illarramendi used fund assets to make personal private equity investments.  Moreover, the SEC alleges that a non-U.S. corporate pension fund was the source of approximately 90 percent of the assets in the two hedge funds involved in the matter.  The SEC’s allegations regarding misuse of fund assets shed light on the variety of things that can go wrong in a hedge fund investment, and how some of those wrong turns can be avoided.  Working from the allegations in the SEC’s complaint, we derive eight distinct due diligence lessons that investors can apply directly to their evaluation and monitoring of hedge fund managers.  This article details the eight lessons.  Before proceeding, a caveat is in order.  We have published a number of articles that analyze SEC complaints against hedge fund managers and extract due diligence lessons from the allegations in those complaints.  See “Thirteen Important Due Diligence Lessons for Hedge Fund Investors Arising Out Of the SEC’s Recent Action against a Fund of Funds Manager Alleging Misuse of Fund Assets,” Hedge Fund Law Report, Vol. 4, No. 3 (Jan. 21, 2011); “Ten Due Diligence Questions that Might Have Helped Uncover the Fraud Described in the SEC's Recent Administrative Proceeding against Subprime Automobile Loan Hedge Fund Manager and Its Principals,” Hedge Fund Law Report, Vol. 3, No. 50 (Dec. 29, 2010).  But it is important to note that our articles of this type do not and are not intended to endorse or support SEC’s allegations or positions in the various matters.  For purposes of these articles, we do not undertake an independent investigation into the veracity of the SEC’s allegations.  Rather, we assume for analytical purposes that the SEC’s allegations are true, and we aim to be explicit about the procedural posture of covered matters.  We do not believe that this approach undermines the relevance or applicability of the due diligence lessons we describe.  Quite the contrary: we believe that our due diligence lessons are based on expressed concerns of the SEC, and thus are valid, generalizable and useful.  At best, these lessons can help our subscribers avoid investment and operational missteps.  However, in fairness to the defendants in these matters, we consider it important to emphasize that our analysis is based on allegations that remain to be proven or disproven.