Report says hedge fund manager responsible for $100 million scheme
A New York hedge fund manager apparently conned three Louisiana retirement systems out of $100 million in an investment scheme that promised high returns with low risk, a court-appointed bankruptcy trustee says in a recent report.
In 2008, trustees of the pension plans — the New Orleans Firefighters’ Pension and Relief Fund and two statewide funds, the Firefighters’ Retirement System and the Municipal Employees’ Retirement System — invested the money in the flagship fund of Fletcher Asset Management, which offered a guaranteed 12 percent rate of return. If returns fell below that mark, they were told, the gap would be covered by $50 million put up by a subsidiary of the financial services firm Citco Group Ltd.
The chairman of one retirement system warned at the time that the arrangement “might be too good to be true,” and indeed it was: In a nearly 300-page report, the bankruptcy trustee, Richard Davis, alleges the hedge fund’s manager, Alphonse “Buddy” Fletcher Jr., “perpetuated a fraud” and blindly led investors “into transactions that were rife with self-dealing, without any regard” as to whether the dealings were in their best interests.
Fletcher denies the allegations.
The trustee’s report, filed Nov. 25 in U.S. Bankruptcy Court for the Southern District of New York, describes a “pattern of inadequate cash, inflated valuations, misuse of investor money, and flouting of fiduciary obligations.”
Fletcher used the money from the pension funds to pay his firm inflated fees and purchase another business, the report says, noting that “significant amounts of the investors’ money was invested in ways that were patently at odds with the strategy.”
Davis’ report details two such investments: an unsecured $27 million loan that the firm made to Fletcher so he could buy another business, and $8 million provided to his brother, Geoffrey Fletcher, for production of a movie.
“None of the cash was applied to new investments,” according to the report, which alleges that the firm used “wildly inflated valuations” of its assets.
Some of the allegations in the report are not new to the pension plans’ executives. Earlier this year, the three retirement systems filed suit in 19th Judicial District Court in Baton Rouge charging a litany of misdeeds, including negligent misrepresentation, breach of contract, unfair trade practices, unjust enrichment and violation of the Louisiana Securities Act.
Citco, one of the largest pension plan administrators in the world, Fletcher and the Chicago accounting and consulting firm Grant Thornton International Ltd. were all named as defendants.
The suit is now in U.S. District Court in Baton Rouge.
Phillip Preis, a Baton Rouge lawyer representing the three pension funds, has said he is confident the pension plans can recover much of their investment from the firms and individuals included in the suit.
From April 2008 until March 2010, the suit alleges, Citco officials provided the pension systems with statements that showed their investment was gaining value, with the initial $100 million growing to about $125 million.
“If accurate information had been provided, about the use of the funds for other redemption, or the $80 million debt,” the suit contends, pension officials “would have immediately ... exercised their right of redemption and demanded payment.”
The suit also alleges that the values of the companies in which the Fletcher firm invested were “grossly inflated, and none of them had significant earnings or reasonable prospects for such earnings, virtually rendering the guaranteed rate of return and the redemption rights of plaintiffs meaningless.”
The retirement systems attempted to redeem their holdings in March 2011 but were offered promissory notes instead of cash, according to the suit.
The trustee’s report offers a possible explanation why: “In many ways, the fraud here has many of the characteristics of a Ponzi scheme, where, absent new investor money coming in, the overall structure would collapse due to an inability to meet existing redemption and other obligations,” the report says.
Fletcher, in an affidavit filed this week in the bankruptcy proceeding, said pension officials should have known what they were getting into: “high-risk offshore investments” where “loss of the entire invested amount is possible.”
He also scoffed at the allegation he was behind a pyramid scheme. “I have never supervised anything even remotely resembling a Ponzi,” he said.
“I am not the black Madoff,” he added, referring to convicted Ponzi scheme operator Bernard Madoff.
Davis’ report says the hedge fund had less than $2 million by the time the pension funds got involved, meaning their decision likely “came as a godsend” to Fletcher.
The report alleges that about $48 million of the funds’ $100 million investment benefited Citco, including a $4.1 million payment that went to a top Citco executive.
The $100 million was gone by November 2008, when the cash balance in the system was down to $3.6 million, the report states.
Citco paid a marketing fee to the funds’ financial adviser for steering the funds to Fletcher, according to the report — a point that came as a surprise to pension officials, Preis said.
Similar “pay-to-play” arrangements are pervasive in the investing industry, according to a 2005 study by the Securities and Exchange Commission, which found that more than half of the 24 pension fund consultants it reviewed had failed to disclose significant conflicts of interest to their clients. Watchdogs warn that such conflicts can lead to biased advice that benefits consultants and negatively affects investors’ bottom line.
When the money ran out, the report says, the scheme continued for a time because Fletcher began inflating the value of its holdings. “The result has been a serious loss for the investing pension funds and other creditors,” the report states.
The Fletcher fund was designed as a multilevel “master-feeder” fund structure, with companies in the Bahamas, Bermuda, Delaware and the Cayman Islands.