FINANCIAL CRIME NEWS
HEDGE FUND CLIPPINGS
The Misadventures of Large Investment Funds
By Stephanie Ayres
July 2005
San Diego, California
Part I: Operators of Global Money Management Fund Indicted For $100 Million Fraud
A criminal indictment unsealed June 15 in San Diego federal court accuses two former principals and an office administrator for hedge fund Global Money Management LP (GMM) of conspiracy, mail fraud, wire fraud, money laundering, making false statements to a government agency, and tax fraud.
According to a June 16 statement from the US Attorney’s office in San Diego, GMM operators Marvin Irwin Friedman and Paul Henrie Levy and their office administrator, Alice Mae Swiderski, were responsible for raising over $100 million from investors for the Global Money Management hedge fund with false and misleading claims and also for misappropriating investor money.
Information about the GMM fund provided to investors reportedly showed a profitable investing record since the fund’s creation in 1993, but the indictment claims that the profits and the fund’s assets were overstated in both reports given to investors and on partnership tax returns. The defendants were also accused of taking millions of dollars of investor money for personal use.
What the receiver found
The criminal action against Friedman and Levy follows an SEC civil case initiated in 2004 resulting in the appointment of a receiver on March 11 of that year. In addition to Friedman and Levy, the SEC case named two other officers of GMM, Milton Lohr and Kenneth Widder, along with the investment advisory entity for GMM, LF Global Investments LLC. Friedman reportedly controlled both GMM and LF Global, along with three related funds called GMM Individual Qualified Investor Fund LP, GMM IF LP, FL Global Holdings LLC, and MCM Systems LLC.
Upon taking control of GMM’s suite of offices in San Diego’s Carmel Valley, court-appointed receiver Charles LaBella reported that most of the fund’s computers and files had already been removed, along with possibly valuable art works that had lined the office walls. GMM had shared the block of offices with dozens of other entities which had already packed up and moved out by the time the receiver arrived.
La Bella noted that he had recovered twelve boxes of documents which Friedman had tried to remove for copying, but computer hard disks containing information related to the fund’s activities before 2004 were believed to have dumped in a trash bin behind a restaurant.
Having recruited forensic accountants to help him piece together what Friedman and Levy had done with investor money, La Bella filed an interim report with the court in January 2005 estimating that between 1994 and 2004 some 267 investors had placed about $118 million into GMM. Of this money about $60.3 million was believed to have been returned to investors as ponzi payments disguised as trading profits. Investor losses were estimated at about $57.8 million based on information compiled from bank records and tax reports.
The feel of the trade
The receiver also described what had been learned of Friedman’s unconventional trading practices. Friedman apparently did not maintain an office at LF Global, the fund’s nerve center, but simply kept his checkbook and bank reports locked in a file cabinet near the station where he reportedly viewed market activity and “barked” instructions to his traders based on instinctive “feel” rather than research into the prospective investments. LF Global sometimes made between 100 and 150 trades per day on this basis, accordingto La Bella’s report.
Most of this trading resulted in losses, notes the receiver, but only about $33 million of funds received were deposited into the trading accounts at all. These trading accounts ended up with a balance of $17 million, having incurred about a 50% decline due to trading losses.
GMM fund marketing materials reportedly described Friedman as an “experienced stock trader,” but La Bella’s report notes four disciplinary actions taken against him by the National Association of Securities Dealers (NASD) between 1989 and 1996, culminating in a ban in July 1996 from association with NASD member firms in any capacity. At the same time Friedman was fined $120,000 by NASD and ordered to reimburse his broker-dealer employer $815,635 for losses relating to Friedman’s actions in forming a limited liability partnership relationship with a customer so that the customer could evade paying trading commissions to Friedman’s employer firm.
In addition to the trading, almost $10 million of GMM investor money was found to have gone to several identifiable investments. These included Santarus Inc., a San Diego pharmaceutical company for which GMM principal Widder was also a registered agent. GMM reportedly invested about $2.7 million in Santarus through a front company called Windamere Capital Ventures LP, controlled by Lohr, Widder, and an associate.
The GMM affiliate LF Holdings contributed about $5 million to obtain a 35% interest in Highcrest Partners LP, an entity reportedly created in 1999 to invest in “asset-management firms.” Its general partner was identified in La Bella’s reports as Lovell Minnick Partners, said to be an affiliate entity of National Bank of Canada.
One of LF Global’s stranger investment choices involved a relationship with Santa Rosa, California-based Zenith Capital, another investment advisory firm. According to the receiver’s first report dated April 29, 2004, GMM had invested about $350,000 in June 2000 to obtain a 10% interest in Zenith’s predecessor company, called Tasker Cooper Smith/Zenith Group. The Santa Rosa company became Zenith Capital LLC after a merger in 2001. La Bella reported that Zenith received some $2.2 million of “incentive fees” from GMM or LF Global in exchange for recruiting 117 of its own clients to invest about $39 million in GMM.
GMM’s travel bonuses
Meanwhile Friedman and Levy took about $10 million from LF Global for personal spending, according to the receiver’s second report to the court filed on June 30, 2004. Some of this spending was detailed in the April 2004 report, such as two houses for Friedman, including one in upscale La Jolla listed at about $2.5 million at the time the SEC case was filed.
Friedman and Levy charged large amounts of luxury travel expenses to LF Global. Friedman’s junkets reportedly included $3,267 for one night in Prescott, Arizona; $3,950 for one night in Pebble Beach; $6,985 for time at the Enchantment Resort in Sedona, Arizona; $9,751 for a trip to Washington D.C.; $15,939 for a chartered jet, hotel and golf in Las Vegas.
In addition to a bill of $8,720 for the “Wine Connection,” Levy spent $9,804 of GMM investor funds with a La Costa limousine service, $8,000 for trips to Mexico, $6,710 for a trip to Hawaii, $3,148 for a trip to Colorado, and $7,000 for a New York City hotel. Coming in a distant third was GMM principal Lohr who was found to have charged about $6,000 to the fund for trips to Hawaii.
With court approval GMM filed Chapter 11 bankruptcy in March 2004. On June 1, 2005 La Bella reported on his website that Paul Levy had agreed to settle the SEC charges and pay a $14.1 million judgment and turn over assets to the receivership in addition to the $2.3 million he had already surrendered. The civil case against Friedman and the other defendants is still pending.
Part II: Conservator’s Report Delves Into Dubious Deals of Arizona’s Mathon Management
A report filed on May 20 with the Maricopa County (Arizona) Superior Court details some of the activities examined so far by investigators working with James Sells, a court-appointed conservator for Mathon Management Company LLC. Mathon Management was an Arizona investment advisory company which reportedly raised about $150 million from investors before being sued for fraud by the Arizona Corporation Commission (ACC) in April 2005.
The ACC’s complaint alleged that Mathon Management was being run as a ponzi scheme by its two control figures, Duane Slade and Guy Andrew Williams. Several related entities were used by Slade and Williams in Mathon fundraising– Mathon Fund, Mathon Fund I, Integrity 101 (also Integrities 201, 301, 401, 501, 601, 701, 801, and 901), Round Valley Capital LLC, and World Sports Fans LLC.
The group of nine “Integrity” funds were named in the ACC complaint as relief defendants who allegedly received investor money but were not accused of wrongdoing, along with a collection of other limited liability companies, including Mill Creek LLC, Bellevue Holdings LLC, Oak Harbor Financial LLC, SW Strategic Wealth Advisors LLC, Everett Capital LLC, CRE Capital LLC, Mezzanine Management LLC, Mezzanine Fund I LLC, Jonas Fund I LLC, Templar Fund LLC, Mercer Island LLC, Connecticut Properties LLC, First Atlanta Investments LLC, MM Colonial Fund LLC, and Slade Construction LLC. Some of these entities were believed to be controlled or owned by Slade and/or Williams.
Hard money hedge fund
Mathon allegedly sold nine-month unsecured promissory notes carrying interest rates of 36% to 75%. Slade and Williams were said to have told investors that they could pay these high rates because they planned to loan out investor money to developers at even higher rates in the nature of a “hard money lender.” Also the notes would be secured by real or personal property of the borrowers.
According to the ACC complaint, the Mathon defendants promised investors that they would create a so-called “reserve fund” against potential loan losses and obtain $20 million of insurance coverage, but allegedly failed to follow through on either of these promises. Instead, claimed the ACC, most of the borrowers defaulted on their loans, and Slade and Williams used funds from new investors to pay interest to earlier investors.
In addition to documenting Mathon’s slide from hard-money lender into ponzi territory, the conservator’s May 20 report revealed a series of dubious transactions and irregular accounting practices.
The conservator raised questions about certain disbursements by Mathon and its affiliates, including a $1.3 million payment to Slade and Williams recorded as a loan to a borrower who told the conservator the funds were never received. A $1.9 million loan to relief defendant Mill Creek LLC (owned by Slade Williams & Associates LLC) was found to have been identified as a “bad debt,” as was a $12,000 disbursement intended for Slade’s father-in-law, one Jerry King, then serving a sentence in federal prison for a ponzi scheme called Golden Age Planning Inc./Wishbone Properties. King was ordered to pay $5.8 million restitution as part of his sentence. The conservator noted that it was not clear how King came to be represented as a Mathon investor in the fund’s records.
In his report the conservator expressed concern about a real estate transaction involving Mathon and an entity called TMC Partners, which had supposedly promised to contribute about $4 million to the deal, but seemed to have obtained these funds in the form of a “purchase price credit” on the closing statement. An individual named Richard Schwartz was found to have been involved with both the buyer and seller in the transaction.
By the end of 2003 most of the Mathon loans were in or approaching default status. In spite of this situation, Slade and Williams each took $4 million in compensation from Mathon in 2004. By the end of 2004 Mathon was charging $5 million in fees and commissions to investors, but only received about $185,000 of income in the form of payments from borrowers during the same period (November 2004 to March 2004).
A Mathon pyramid?
The conservator’s report also described a developing tendency for Mathon to try to accomodate investors who complained frequently at the expense of those who did not. Nonetheless about $22 million of investor withdrawal requests were found to have gone unhonored.
As a private placement type investment, the Mathon funds were limited in their ability to solicit investments from the general public. For private placement investments such as Mathon Fund, SEC’s Regulation D only permitted 35 so-called “non-accredited” investors (generally, accredited investors have a net worth large enough to absorb the loss of their entire investment, should that happen). The conservator’s report describes a scheme which allegedly tried to circumvent this rule.
Apparently some time in 2003 Mathon began accepting funds from certain “investor groups,” described as arrangements where an existing Mathon investor would be paid a commission for recruiting other investors into a group which the existing investor would head. Because the members of the group were not investing directly in Mathon, the desperate fund left it to the heads of the investor groups to determine whether the group members were qualified. According to the conservator’s report, many apparently were not. But it was largely their cash contributions that were keeping the hedge fund alive.
Correspondence discovered by the conservator and filed with his report suggest that Mathon managers were indeed aware of this situation and tried to discourage the investors from spreading information about it over concerns that it might be considered a type of pyramid scheme. The conservator claimed in his May 2005 report to have found at least twelve such investor sub-groups feeding money into the Mathon funds as they approached the point of collapse.
The conservator’s report estimated the net investor flow of funds into Mathon at about $80 million (this appears to be net of amounts returned to investors as ponzi payments), but noted that the company’s accounting records were not maintained using standard bookkeeping practices. Rather Mathon appeared to use what the conservator described as “management directives,” despite the employment of an “adequate well-trained accounting department that was run by two CPAs,” including CFO Brent Williams, the father of Mathon principal Guy Williams.
The ACC’s case against Mathon and its principals is still pending in Arizona court.
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© STEPHANIE AYRES 2004-2017 ALL RIGHTS RESERVED
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