Mini-Madoffs

They say there’s never only one cockroach. Or rat. Or Madoff. Especially when you start looking for them. The SEC has been looking and they have been filing complaints consistently so far this year. Some are calling it Ponzimonium. Or maybe it’s just a return to reality (or a return to “reality in returns”).

Here are a few from the SEC’s recent (three month) “Hall of Shame”

Joseph Forte of Philadelphia: ran a Ponzi scheme since 1995 trading S&P Futures contracts with reported annual gains of between 18% and 38%. Apparently Mr Forte actually traded; it just wasn’t his “Forte” (sorry, I had to). His only winning year was 2002, when he made $21,000. When his scheme was busted, investors had statements with $154 million on them, but there was only $146,814 in the account. Mr. Forte, of course, paid himself performance fees which supposedly were in the order of $10-12 million over the course of the scam. (The good old 2/20). He actually accrued $23 million in fees, so he didn’t even pay himself fully for his “false” profits. Scammed himself, if you will, along with 80 investors.
Forte’s company was a limited partnership and never registered with the SEC. Forté gave himself up, but only after he ran out of money and had even hit some friends up for personal loans to cover redemptions. Presumably he won’t be eating cheesesteak for a while.

James Ossie of Atlanta (CRE Capital), was promising 10% a month trading Yen futures. He actually traded those futures, losing about $12 million of the $25 million raised. CRE would get investors to “recruit” new ones, in classic pyramid style. 120 investors involved in this one, some of course, actually got to see that 10% a month.

Arthur Nadel was running six hedge funds in Sarasota, FL worth almost $500 million, when he mysteriously disappeared January 14th, leaving his fifth wife “Peg” with a note stating “withdraw as much cash as can” and “sell the Subaru if you need money”. He turned himself in two weeks later, attorneys at hand. The funds had only about $506,000 worth of assets in them, according to the SEC.
Nadel reportedly owned an aviation company, which had trained one of the 9/11 terrorists (not purposely of course). Also a shady past: he was allegedly disbarred in 1982 after defrauding clients to pay off debts to a loan shark. The rest…you guessed it…the one man show, the friendly CPA (unregistered since 1990). The green Subaru turned up at the Airport. Wonder if Peg will list it on eBay.

Gordon Grigg of Nashville took advantage of the “flight to safety”, by telling investors they were buying investments in the US government’s TARP program. The Program Relieved investors of their Assets, alright, but not their Trouble. $6.2 million was the reported “take” from 25 investors. The government-backed 12.5% notes offered only existed in Mr. Grigg’s fertile imagination. The pitch: this was a “private placement” the deal couldn’t be had anywhere else (right about that). Grigg had already been served with a “cease-and-desist” order in North Dakota for selling non-existent securities to a client in 2006. Maybe Grigg should be commended for actually finding SOMEONE with money in North Dakota.

Scott Ross of Gilbert Ill, was allegedly engaging investors to put their money in “life settlement contracts”. This is basically buying life insurance policies from people who expected to die soon (and really don’t need the money then, do they?). Mr. Ross who sold himself as a “sought-after expert on financial topics and strategies” (CNBC, anyone?) was using the money instead to “live it up” in a skybox in the new Colts stadium in Indianapolis and pay salaries and redemptions of his other funds. This scheme, which reportedly began in 2007, was tragically “short-lived” as the $2 million fund "expired".

Marvin Cooper (Billion Coupons, Inc.) of Hawaii was allegedly operating a Ponzi scheme among the deaf community on the islands. The complaint states that Cooper raised $4.4 million by holding investment seminars, offering 10-25% monthly returns trading Forex. Only $800,000 was actually invested, of which $750,000 was lost trading. Cooper allegedly spent $1.4 million, including buying a house and putting money down on real estate in Panama. In an email, Cooper wrote that down there he could “resume the OPM (Other People's Money) business without nasty headaches from those bastards from Wall Street and their cronies." Yeah, those bastards! Cooper, who is himself deaf, is still maintaining his innocence after the March 2nd “hearing”.

The SEC isn’t quite sure how much money James Nicholson of Westgate Capital (New York) was “managing” in his 11 funds. They think at least $100 million of investor capital was involved, and WC at some point claimed to have $750 million “under management” and at another it was only $200 million. But when two dozen investors’ reimbursement checks for over $5 million started bouncing in February 2009, it appears that true value of the assets was “materially less” (SEC’s words). Nicholson had been barred from the industry in 2001 and didn’t bother using a small accounting firm…he just made one up: “Havener and Havener”

On the other hand, in the case of Westridge Capital Management (something about the WEST, I guess), the accounting was much, much better. Mr. Paul Greenwood and Mr. Stephen Walsh are accused of misappropriating $293 million and $261 million respectively from their $667 million hedge funds. How do they know the “exact” amounts? Well, a Westridge “employee” would make these gentlemen sign a promissory note for the amounts they had “borrowed” every year. With this money the gentlemen and their wives (who are also named in the complaint) “invested” in a lavish life-style which included “multi-million dollar homes, a horse farm, cars, horses, and rare collectibles such as Steiff teddy bears worth $80,000 each.”

The hedge funds’ strategy was “enhanced equity index management”…and they of course, achieved those sought-after “smooth” high returns. The “target” client (or should we say “mark”) was college endowment funds and pension funds. There were only a few dozen clients, but they were big ones. Carnegie-Mellon University, University of Pittsburgh, Ohio Northern University, Bowling Green University, Iowa Public Employees, Sacramento Public Employees, San Diego County Employees Retirement Fund, North Dakota State Investment Fund (more money from North Dakota!) and others. All seemingly “sophisticated” clients, many of which actually got into Westridge through other “advisors”.
In the immortal words of Led Zeppelin “I’m gonna send ya…back for schoolin”. Maybe next time run the investment past one of your own finance or statistics professors? How about it?

North Hills’ Mark Bloom (NY) didn’t even bother running a hedge fund. He had a “Fund of Funds.” That “Fund of Funds” apparently only invested part of the $30 million it received in one fund: the Philadelphia Alternative Asset Fund, which turned out to be a fraud itself, uncovered in 2005. He did manage to “Fund” loans to himself for at least $13.2 million, including the purchase of a $5.2 million townhouse, which he transferred to his wife, who sold it four years after purchase for $11.2 million. (Nice trade, unfortunately not for his client). Bloom had learned from the best, since from 1992 to 2001 he was a partner of WG Trading Co, which was none other than “Westridge” (see above). North, West…Hills, Ridge…all the same thing.

Real Estate is safe, right? Not these days, and not for the investors in SunWest, which raised $300 million from 1300 investors to be invested in retirement homes with a safe and modest 10% annual return. They were told they were buying specific properties, when the money was going into one big pot, out of which the company paid everything. SunWest put that money down to buy the homes, but they didn’t do so well, and SunWest was paying returns from new investor money and mortgage refinancings. Payments ceased with the company couldn’t refinance anymore and lenders started to foreclose.
This was an industrial-sized version of the “house as an ATM” concept.

Hundreds of investors of LA-based “Diversified Lending Group” and “Applied Equities”, many senior citizens, bought $216 million worth of “Secured Investment Notes” supposedly backed by property and mortgage lending. These notes would pay a guaranteed 9 to 12% per annum
However, there was no such backing, since the SEC alleges that CEO Bruce Friedman used the money for other unrelated investments and diverted at least $17 million of that to “support his lavish lifestyle, including purchases of a luxury home, cars, vacations, jewelry, and designer clothing for himself and an alleged girlfriend, who is named as a relief defendant.” How do you freeze a Prada purse?

Finally, we have Investment Adviser Leila Jenkins of Locke Capital Management in Rhode Island. Ms Jenkins isn’t accused of misappropriating funds, but rather “making them up”. Having “only” about $165 million under management, she apparently “invented” a billionaire Swiss client to inflate her AUM numbers when soliciting prospective new clients. She also allegedly “invented” performance records in the past, including a certain period when she had NO clients.
Who says that you can’t claim a 30% return on a ZERO dollar investment? How much is 30% of ZERO? Right?

Stealing from the elderly, deaf, the dying, the charitable the college educated and the colleges themselves, the Mini-Madoffs have been very busy the past few years. You can only hope the authorities have raided the nest and the roaches are out, but you can only wonder.

Oh...and look out for names with “West” in them.

SEC Complaints/Press Releases

Forte
Ossie
Nadel
Grigg
Ross
Cooper
Nicholson (Westgate)
Greenwood and Walsh (Westridge)
Bloom
SunWest
Friedman
Jenkins