June 23, 2024

Two More Massive Investment Frauds Reported

Capital Vaporized By Hedge Fund Fraud

How many more frauds are lurking out there?   Two more large cases of investment fraud by hedge fund managers were reported today by The Wall Street Journal.

In the latest round of financial-fraud allegations to erupt, two money managers have been accused of misappropriating at least $553 million, and using it to fund a lifestyle of lavish homes, horses and even an $80,000 collectible teddy bear.

The two men, 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.

Court documents list several companies as being controlled by the two men, including WG Trading Co. and WG Trading Investors LP in Greenwich, Conn., and Westridge Capital Management Inc., based in Santa Barbara, Calif. They owned Westridge with another individual, prosecutors say.

Westridge Capital managed $1.8 billion in assets, the firm told the SEC in an adviser-registration filing in January. It oversaw a total of 20 accounts primarily for institutions including pension funds, charitable foundations and hedge funds, according to the filing. It lists Messrs. Walsh and Greenwood as principals since 1999.

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.

The case marks the latest in a series of scandals, topped by Bernard Madoff, who authorities say admitted in December to masterminding a $50 billion Ponzi scheme. Other cases include R. Allen Stanford, a Texas financier who has been accused by the Securities and Exchange Commission of an $8 billion fraud involving certificates of deposit, and Marc Dreier, a prominent New York lawyer charged in an alleged $400 million hedge-fund scam.

If proved, the latest case “will be the biggest direct hedge-fund fraud we’ve seen,” according to Chris Addy of Montreal-based Castle Hall Alternatives, which provides risk-assessment services for investors in hedge funds.

Separately, another alleged fraud began unfolding Wednesday when the U.S. attorney charged hedge-fund manager James Nicholson with securities and bank fraud in U.S. District Court in Manhattan. Prosecutors don’t have a clear idea of the size of the alleged loss, saying only that as much as $900 million could have been invested with his firm.

Is Anything Safe?

Investors have to be wondering if there is any safe place left to invest their capital.  Stocks are down 50% and there seems to be another major investment fraud reported almost daily with total losses well over $100 billion and counting.

Large investment losses, loss of confidence and a weak economy restrict investment and risk taking which further impede economic recovery.  It looks like it’s time to take Will Rogers advice and be more concerned with return of capital rather than return on capital.