NEW YORK (Reuters) - Public pension plans and universities are trying to track down their money after the arrests of two highflying fund managers for allegedly stealing up to $550 million from clients, the latest big fraud case to rock the investment world.
New York money managers Paul Greenwood and Stephen Walsh, whose fund operation catered to large investors, are accused of looting client accounts to buy expensive homes, horses, rare books and collectibles including an $80,000 teddy bear, according to court documents.
The two were arrested in New York on Wednesday and charged with criminal conspiracy and fraud. They have not yet formally responded to the charges in court, and are free on bail.
Their lawyers have declined to comment.
Authorities say that in a scheme that lasted more than a decade, the men misused the bulk of the $667 million that clients had thought was invested in an “enhanced equity index” strategy.
A court-ordered freeze has been imposed on their personal assets and those of their affiliated companies, which include the WG Trading broker-dealer with offices in Connecticut, New York and New Jersey, and the Westridge Capital Management investment adviser in Santa Barbara, California.
The Sacramento County Employees’ Retirement System in California, which had a portion of its portfolio managed by Westridge and WG Trading, said it was “cautiously optimistic that we will be able to recover a meaningful amount of our investment.”
“Based on preliminary information, it appears that there may be a substantial amount of assets available in the WG Trading fund to repay investors, but without further information it has been impossible to determine if that is in fact the case,” Richard Stensrud, the pension plan’s chief executive, said in a letter to fund participants.
The pension fund said it recovered about $5 million of its Westridge investment following news on February 12 that Greenwood and Walsh had been suspended by the self-regulating National Futures Association for not cooperating with an audit.
The status of about $52 million of fund assets held by WG Trading is not clear, Stensrud wrote. Even in a worse case scenario, he said, the pension fund’s potential losses are minimal given its overall $4.5 billion portfolio of assets.
Greenwood and Walsh have been charged with fraud by criminal prosecutors, as well as in civil complaints by the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission.
Other investors include the Iowa Public Employees’ Retirement System, which said on its website that it was demanding the return of its assets — worth an estimated $339 million as of the end of January — from Westridge Capital.
The pension plan said it had terminated its contract with the investment manager earlier this month. It had hired Westridge in March 2007.
The retirement system’s board was set to meet in closed session on Thursday to discuss legal strategies including potential court action, said spokeswoman Julie Economaki.
Also seeking the return of funds are the University of Pittsburgh and Carnegie Mellon University, which jointly sued Greenwood and Walsh and their companies in U.S. District Court in Pennsylvania last week.
The University of Pittsburgh had more than $65 million invested, while Carnegie Mellon had at least $49 million. The SEC said in court papers that as recently as February 6, Greenwood and Walsh had received a $21 million investment from the University of Pittsburgh, a Westridge client since 2002.
Editing by Phil Berlowitz