The importance of being diligent graphic booklet (n.6 wg trading)
Graphic BookletN.6 WG Trading The Importance of Being Diligent
Trust, but Verify• We know the importance of being diligent, but there usually no clear guidance as to how to be diligent.• Even the professional lie-detectors – lawyers – can do no better than “just look for something unusual.”• However, detecting something as “unusual” requires experience, which is more often than not subjective and not easily transportable.• Therefore, these case studies are my attempt at systematizing my experience based on the following principles.• As President Reagan said: Trust, but Verify.
Profile• Paul Greenwood and Stephen Walsh established WG Trading/Westridge in 1996• Enhanced Equity Index Strategy• Managed over $1.3 billion for large endowments and pension funds• Survived SEC’s examination in 2005, but was shut down by NFA/CFTC in 2009
Fraud Schemes• Fake Performance• Misrepresentation of Strategy• Misappropriation of investors’ capital
Enhanced Index StrategySource: Submission by the CBS Master Trust Regarding Plan of Distribution,SEC v. WG Trading, et al (2009), United States District Court Southern District of New York
Various Ways to Invest The WG Trading/Westgate scheme was indeed very complex as it offered at least three different ways to participate in the investment programSource: the author, created based on publicly available information
Very Successful Business According to the last Form ADV filing in January 2009, Westridge, the registered investment advisor, managed $1.8 billion for 20 different accountsSource: Diamond Magazin, Bloomberg
“Solid” Enhancement… WESTRIDGE CAPITAL MANAGEMENT, INC Enhanced S&P 500 Composite ANNUAL DISCLOSURE PRESENTATION Composite Total Firm Assets Number % of S&P 500 Annual Performance Assets (USD) of Non-Fee Total Results Composite Composite Year End (millions) (millions) Accounts Paying Return Gross Net Dispersion 2008 YTD 2530 1795 11 0% -11.91% -11.09% -11.46% N.A. 2007 3087 2101 12 0% 5.49% 6.52% 6.01% 0.06% 2006 2754 1675 11 0% 15.79% 16.47% 16.13% 0.04% 2005 3168 1419 11 0% 4.91% 5.41% 5.16% 0.03% 2004 3109 1376 12 0% 10.88% 11.42% 11.15% 0.06% 2003 2871 1503 14 0% 28.68% 29.30% 28.99% 0.12% 2002 2363 1548 16 0% -22.10% -21.55% -21.82% 0.14% 2001 2664 1517 14 0% -11.89% -10.62% -11.25% 0.16% 2000 2031 963 11 <1% -9.10% -7.89% -8.48% 0.05% 1999 1355 364 6 <1% 21.04% 24.39% 23.03% N.A. 1998 888 10 3 21% 28.58% 31.85% 30.59% N.A. 1997 612 4 2 59% 33.36% 37.19% 35.79% N.A. 1996 363 1 1 0% N.A. N.A. N.A. N.A. - Information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year YT D 2008 values are for the period ending 6/30/08Source: Kern County Employees’ Retirement Association Declaration of Noel C. Cohen in Support Thereof,SEC v. WG Trading, et al (2009), United States District Court Southern District of New YorkThe above table and chart were reproduced by the author
“Solid” Enhancement…Source: Kern County Employees’ Retirement Association Declaration of Noel C. Cohen in Support Thereof,SEC v. WG Trading, et al (2009), United States District Court Southern District of New YorkThe above table and chart were reproduced by the author
Loans to Themselves Walsh and Greenwood made inappropriate loans (approximately $718 million) to themselves through WGTISource: SESC, the author’s calculation
Total Losses and Victims Proposed T otal T otal Net First Second Cumulative Contribution Withdrawals Investments Distribution Distribution Distributions T otal Return WGT C Investors 1,561,872 (1,042,183) 519,689 441,400 21,664 463,064 -15.06% WGT I Invvestors 1,958,308 (1,518,444) 439,864 373,600 18,336 391,936 -15.06% T otal 3,520,180 (2,560,627) 959,554 815,000 40,000 855,000 -15.06% (Unit: $1,000) 3M Employee Welfare Benefit Association trusts North Dakota State Investment Board Acument Global Technologies, Inc. Ohio Northern University Alexander Dawson Foundation & Alexander Dawson Inc. Oklahoma State University Foundation Blue Cross and Blue Shield Association National Retirement Trust Qwest Asset Management Co. and Qwest Pension Trusts Bowling Green State University Sacramento Country (Calif.) Employees Retirement System Cabora Investments PTE Ltd. San Diego County Employees Retirement Association Carnegie Mellon University The CBS Master Trust Cooper Industries, Inc. Master Trust for Defined Benefit Plans The Frist Foundation H-E-B Brand Savings and Retirement Plan Trust The HCA Foundation Houston Municipal Employees Pension System The McCatchy Company Retirement Plan Trust Houston Municipal Employees Pension System The Timken Company Collective Investment Trust Iowa Public Employees Retirement System The University of Tennessee Kaiser Aluminum and Chemical Corp Asbestos Personal Injury Trust University of Pittsburgh Kern County Employees Retirement Association Vulcan Material Company The Theodore R. Johnson Charitable Remainder Unitrust Wells Fargo & Co. Master Pension Trust McClatchy Co. Retirement Plan TrustSource: Author, the above table was created based on Notice of Motion and Motion forOrder Approving Second Distribution on Allowed Investor Claims: Memorandum of Points and Authorities inSupport Thereof; and Declaration of Brick Kane in Support Thereof, March 8, 2012, CFTC v. Westridge CapitalManagement, et al. (2009) and SEC v. WG Trading Investors, L.P., et al.
Promissory NoteSource: University of Pittsburgh’s Investor Proposal For Distribution, Oct 22, 2010, CFTC v. Westridge CapitalManagement, et al. (2009) and SEC v. WG Trading Investors, L.P., et al.
WGTC’s High Leverage WG Trading , a broker-dealer, possibly violated the Regulation T, which restricts the degree of leverage the brokerage firm can extend up to 50% (SEC examiner later pointed out this issue)Source: the author, the above chart was created based on WGTC’s financial statements filed with the SEC
Greenwood’s Collection Antique Cost Greenwood used the investors’ money to Jewelry 58,658 expand his luxurious collections, including an Furniture 3,933,801 over mantel mirror made by a famous English Rugs 794,900 craft shop Mallett & Son in 1780 ($685,000) and Books 426,866 Sculpture 199,630 the original edition of Adam Smith’s Wealth of Paintings 35,575 Nation ($60,000). Teddy-bear 3,081,735 Total 8,531,165 But, the highlight of his collection is 1,348 teddy bears. The collection included a Steiff “Harlequin” bear, dating from about 1925, featuring alternating halves of red and blue plush, with the estimated cost in excess of $100,000. According to Jasper Pearson, partner in the U.K.- based antique teddy-bear dealers Sue Pearson, said “Greenwood’s collection is of extraordinary quality. He only bought museum-grade pieces in mint condition.”Source: Robb Evans & Associates LLC, Report of Temporary Receiver’s Activities February 25, 2009 ThroughMay 22, 2009
Recommendations• Stringent review of valuation process is required especially if the investment strategy is involved with a promissory note.• Avoid investing in a scheme not monitored by a third- party agent• Always confirm that an annual audit by a reputable audit firm has been conducted on the entity in which you are invested To read the case study: http://www.being-diligent.com/case-n-6-wg-trading/
Summary• There are many similarities among hedge fund fraud cases (very stable and too good track records, promissory notes, fake service providers, etc.)• No matter how clever they are, fraudsters are still human beings and prone to leave traces of their misconducts• However, you really need to be diligent to find those traces and make informed judgment
For More InformationThe Importance of Being Diligent is a blog ofhedge fund case studies managed by Sus Volans.Please visit our website and sign up for an e-mailsubscription. http://www.being-diligent.com