They Just Keep Coming: Three New Fraudulent Investment Schemes
The current market crisis and credit crunch continues. New fraudulent investment schemes surface. They seem to go hand in hand.
On Wednesday, three more investment schemes became the basis for criminal and civil securities fraud charges. First, James M. Nicholson, President and general partner of Westgate Capital Management, LLC was arrested, charged with securities fraud and named in a suit by the SEC along with Westgate Capital and Westgate Absolute Return Fund, LP. SEC v. Nicholson, Case No. 09-civ-1748 (S.D.N.Y. Filed Feb. 25, 2009).
Since at least 20004, investors have invested at least $100 million with Westgate Funds.
Investors were lured to the fund by representations that Westgate Capital had from $600 to $900 million under management when in fact it had far less. In brochures, Westgate told prospective investors of extraordinary returns. One of its funds supposedly had positive returns for each month from January 2004 through August 2008. Another claimed to have positive returns for every month from October 1999 through December 2007 (with the sole exception of October 1999). In fact, the funds had suffered large losses.
Investors were also told that the funds were audited by an independent accounting firm at a specified address. In fact, the audit firm was fictitious and had only a “virtual office” at the specified address where Mr. Nicholson had arranged for an answering service to take calls.
When investors sought to redeem their shares beginning in December 2008 in the wake of the Madoff scandal, they were paid with checks totaling about $5 million. All of the checks were returned for insufficient funds. Other investors seeking the payment of about $10 million in total have not been able to redeem their shares. The SEC is seeking a freeze order in its case.
Second, Mark Bloom, the operator of North Hills Management LLC, was arrested on securities fraud charges and named as a defendant in an SEC enforcement action along with North Hills. SEC v. North Hills Management LLC, Civil Action No. 09-1746 (S.D.N.Y. Filed Feb. 25, 2009). Mr. Bloom is alleged to have raised about $30 million from 40 to 50 investors between 2001 and 2007. Investors were told that the money would be placed in a diverse group of hedge funds. In fact, Mr. Bloom misappropriated over $13 million. Over half of the funds were put into a commodities trading pool known as Philadelphia Alternative Asset Fund without telling investors. Mr. Bloom also did not tell investors he had had a “referral agreement” with the pool which paid him about $1.6 million. The pool ended in June 2005 with charges it was fraudulent.
The claimed fraud surfaced when one of the Fund’s largest investors, a charitable trust that funds children’s schools, began making redemption requests which were not honored. Mr. Bloom claimed he did not have the means to repay the $9.5 million owed to the trust. The SEC obtained an emergency asset freeze in its case.
Finally, Paul Greenwood and Stephen Walsh were charged with conspiracy and securities and wire fraud and named as defendants in an SEC enforcement action along with their fund, WG Trading Investors. SEC v. WG Trading Investors, LP, Case No. 09-1750 (S.D.N.Y. Filed Feb. 25, 2009).
Beginning in 1996, and continuing through February 2009, Messrs. Greenwood and Walsh solicited funds from investors, including charitable and university foundations, retirement and pension plans and other institutional investors. During that period, they raised more than $668 million from investors. They solicited the funds using claims that the money would be invested in an “enhanced equity index” strategy which would purchase and sell equity index futures and engage in equity index arbitrage trading.
In fact, Messrs. Greenwood and Walsh misappropriated most of the money according to the USAO and the SEC. The conduct was discovered when the National Futures Association conducted an audit of WG Investors and its related entity. The audit demonstrated that $794 million of the $812 million carried on the books was in fact receivables from Messrs. Greenwood and Walsh and investments in entities they controlled. The SEC obtained an emergency asset freeze in its case.