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This is a graphic booklet created from WG Trading's case study. Visit www.being-diligent.com for more detail.
Citation preview
The Importance
of Being Diligent
Graphic Booklet N.6 WG Trading
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.
N. 6: WG Trading
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 Strategy
Source: 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
Source: the author, created based on publicly available information
The WG Trading/Westgate scheme was indeed very complex as
it offered at least three different ways to participate in the
investment program
Very Successful Business
Source: Diamond Magazin, Bloomberg
According to the last Form ADV filing in January 2009, Westridge,
the registered investment advisor, managed $1.8 billion for 20
different accounts
“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 York
The above table and chart were reproduced by the author
Year End Gross Net
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
YTD 2008 values are for the period ending 6/30/08
Composite
Dispersion
WESTRIDGE CAPITAL MANAGEMENT, INC
ANNUAL DISCLOSURE PRESENTATION
Enhanced S&P 500 Composite
Total Firm
Assets
(millions)
Composite
Assets
(USD)
(millions)
Number
of
Accounts
% of
Non-Fee
Paying
S&P 500
Total
Return
Annual Performance
Results Composite
“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 York
The above table and chart were reproduced by the author
Loans to Themselves
Source: SESC, the author’s calculation
Walsh and Greenwood made inappropriate loans
(approximately $718 million) to themselves through WGTI
Total Losses and Victims
Source: Author, the above table was created based on Notice of Motion and Motion for
Order Approving Second Distribution on Allowed Investor Claims: Memorandum of Points and Authorities in
Support Thereof; and Declaration of Brick Kane in Support Thereof, March 8, 2012, CFTC v. Westridge Capital
Management, et al. (2009) and SEC v. WG Trading Investors, L.P., et al.
Total
Contribution
Total
Withdrawals
Net
Investments
First
Distribution
Proposed
Second
Distribution
Cumulative
Distributions Total Return
WGTC Investors 1,561,872 (1,042,183) 519,689 441,400 21,664 463,064 -15.06%
WGTI Invvestors 1,958,308 (1,518,444) 439,864 373,600 18,336 391,936 -15.06%
Total 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 Trust
Promissory Note
Source: University of Pittsburgh’s Investor Proposal For Distribution, Oct 22, 2010, CFTC v. Westridge Capital
Management, et al. (2009) and SEC v. WG Trading Investors, L.P., et al.
WGTC’s High Leverage
Source: the author, the above chart was created based on WGTC’s financial statements filed with the SEC
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)
Greenwood’s Collection
Source: Robb Evans & Associates LLC, Report of Temporary Receiver’s Activities February 25, 2009 Through
May 22, 2009
Greenwood used the investors’ money to
expand his luxurious collections, including an
over mantel mirror made by a famous English
craft shop Mallett & Son in 1780 ($685,000) and
the original edition of Adam Smith’s Wealth of
Nation ($60,000).
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.”
Antique Cost
Jewelry 58,658
Furniture 3,933,801
Rugs 794,900
Books 426,866
Sculpture 199,630
Paintings 35,575
Teddy-bear 3,081,735
Total 8,531,165
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 Information
The Importance of Being Diligent is a blog of hedge fund case studies managed by Sus Volans. Please visit our website and sign up for an e-mail subscription.
http://www.being-diligent.com