Everyone has become so numb to investment frauds these days that no one even cared, but one of the three alleged yesterday was actually the largest hedge-fund fraud to date.
Westridge Capital, one of the several firms run by two of yesterday’s fraudsters manages $1.8 billion–which used to be considered a large sum of money. It also had some high-profile, sophisticated, and sympathetic victims.
WSJ: Paul Greenwood, 61 years old, of North Salem, N.Y., and Stephen Walsh, 64, of Sands Point, N.Y., were arrested by Federal Bureau of Investigation agents and face criminal charges of conspiracy, securities fraud and wire fraud by the U.S. Attorney for the Southern District of New York.
Alleged victims include Carnegie Mellon University, which had invested more than $49 million, and the University of Pittsburgh, which put in more than $65 million, court records show. The Iowa Public Employees Retirement System said it had invested about $339 million, or 2% of its portfolio. The Sacramento County Employees’ Retirement System in California said on its Web site that it had invested $89.9 million, or 1.6% of its total fund.
What did Messrs. Greenwood and Walsh spend the money on? The usual stuff:
In its civil complaint, the SEC alleges that Messrs. Walsh and Greenwood used client funds from WG Trading Investors as “their personal piggy-bank to furnish lavish and luxurious lifestyles, which include the purchase of multimillion-dollar homes, a horse farm, cars, horses, and rare collectibles such as Steiff teddy bears.”
The CFTC said more than $160 million was used for their personal expenses, including rare books and a $3 million home for Mr. Walsh’s ex-wife.
An article about Mr. Greenwood on the North Salem Bridle Trails Association Web site describes him as a former economics professor who wrote a dissertation on stock-portfolio theory. The article said he had bought Old Salem Farm from the actor Paul Newman, and later sold his interest in it. A New York Times article in 1989 described the farm, then owned by Mr. Greenwood, as “the grandest stable for show horses” in Westchester County.
The SEC described the alleged fraud as “ongoing.” As recently as Feb. 6, the defendants obtained a $21 million investment from a large state educational institution that was a client, the SEC’s complaint said.
And how were investors conned? Steady returns and a sophisticated-sounding investment strategy–a play right out of Bernie Madoff’s book:
Federal prosecutors allege that since 1996, Messrs. Greenwood and Walsh ran a fraudulent investment-advisory scheme, involving several companies, in which they promised to invest funds in a program called “enhanced stock indexing.” It was represented as a conservative trading strategy that had outperformed the Standard & Poor’s 500 Index for more than 10 years. Prosecutors allege the men raised more than $668 million from institutional clients, and misappropriated most of the money…
WG Trading Co. reported consistently positive returns, according to hedgefund.net, a provider of fund data to investors. From January 1995 to September 2008, WG Trading never reported a negative month. Typically it gained from to 0.10% to 1% a month during that time, as part of a low-risk strategy designed to outperform major market indexes. The firm charged a management fee of 0.25% of assets it managed plus 30% of any trading profits, a higher percentage than the 20% typical of most hedge funds.
More details in the WSJ here >
Once all the frauds are finally taken into account, it will be interesting to see what happens to the vaunted hedge-fund “asset class” returns that drew so many into paying much higher fees over the past 10 years. Probably nothing–because the frauds won’t be taken into account. They’ll just be stripped out of the numbers, as if investors would have obviously seen them ahead of time and because they’ll never happen again.