The $600 Million Teddy Bear: WG Trading

February 26, 2009

By Bill Singer

On February 25, 2009, the Securities and Exchange Commission issued a 22-page Complaint: Securities and Exchange Commission v. WG Trading Investors, L.P., WG Trading Company, Limited Partnership, Westridge Capital Management, Inc., Paul Greenwood And Stephen Walsh,(Defendants) And Robin Greenwood And Janet Walsh (Relief Defendants) (SDNY, 09-CV-1750). The SEC characterizes the matter as an "emergency enforcement action to halt ongoing securities fraud involving the misappropriation of hundreds of millions of dollars of investor assets.."  In reality, the WG Trading case represents yet another long-term fraud (described in the Complaint as dating back to 1996) that went undetected by our nation's many regulators and prosecutors for far too long with disastrous consequences. 


The Defendants are charged with soliciting institutional investors, including educational institutions and public pension/retirement plans, by promising to invest in a so-called "enhanced equity index strategy." Starting at Paragraph 21, the Complaint details the supposed intricacies of this scam. First off, you got "exposure." Oh, how I love that term of art! Invest with us and we will give you "exposure" to the market. The minute you start hearing such gobbledygook, head for the hills! Nonetheless, like most porn movies, the strategy here involved a lot of exposure to a stock index.  The Defendants explained that they would be making purchases of " long positions in equity index futures that provided exposure to the entire index." Now that's a very difficult market strategy. Hmmm . . . if I buy an S&P 500 index future I get exposure to the entire index. My, what a complicated concept. Sort of like, if I buy one share of Apple stock I get some kind of exposure to... a minute...don't tell me....I'm getting's exposure to an entire one-share of interest in the Apple company. Right?

If you feel that you understand the arcane exposure strategy, then read on.  We are now going to discuss the second prong of Defendants' sophisticated investment plan: the "enhanced cash management." This is a very complex spin on the prior exposure thingy. Here, instead of buying the futures index, the Defendants would sell the index short and buy the underlying index equities. You got that? You sell short the index but also buy the underlying stocks. You do that to lock in a rate of interest. Of course, as part of this super sophisticated exposure and enhanced management technique, the Defendants often took the extreme measure of doing the exact opposite of the complicated sell/buy program. Yes...indeed....they engineered the buy of  the index and a sell of the underlying stocks.  That's the famed double reverse flip with a half gainer into the index pool.


According to the SEC's Complaint, those Defendants "used client money invested in WGTI as their personal piggy-bank to furnish lavish and luxurious lifestyle which include the purchase of multi-million dollar homes, a horse farm, cars, horses, and rare collectibles such as Steiff teddy bears." See Paragraph 2.  And we're not talking chicken feed here. No, this is $667 million in investor funds, of which Greenwood and Walsh are accused of misappropriating $554 million--okay, well, sure, the SEC does allow that some of that money went to Greenwood's spouse (R. Greenwood) and to Walsh's ex-spouse (J. Walsh).  You also have to give these guys some credit for bravado.  As recently as February 5, 2009 -- in the midst of the Madoff case and the growing rumors about Stanford, and, well, add all those other lurid names as you see fit -- the Defendants raised another $21 million from the University of Pittsburgh, an existing client.

On February 5, 2009, the National Futures Association (NFA) started an audit of Defendants and those good auditors were likely astonished to discover that the balance sheet showed only $95 million had been invested in the stock arbitrage strategy. Some $573 million was largely in notes payable to WGTI from Greenwood and Walsh--notes dating back to 1996! Apparently not getting the answers and assurance the NFA regulators sought, the organization suspended Greenwood's and Walsh's NFA membership. What had NFA uncovered? Nothing more complicated than an apparent effort by Greenwood and Walsh to take investors money from the business, use it for their own personal desires, and to cover the withdrawals through the issuance of personal promissory notes. That was the third prong of their strategy. First prong was the exposure. Second prong was the enhanced cash management. Third prong was take the suckers for all their worth and we'll issue promissory notes back to the firm.

If the allegations are proven true, it's no small wonder that the SEC has beaten a hasty retreat to the courthouse and is seeking an immediate temporary restraining order and asset freezes.  Then there is also the sensible demand for disgorgement of the ill-gotten gains and for civil money penalties.  Now it's not like WG Trading Company (WGTC) was some fly-by-night pennystock promoter. Certainly not -- if that were the case I'm sure our regulatory community would have been all over such a little fraudster. No, in this case, WGTC is a New York Stock Exchange (NYSE) member firm. That always meant that you were just a cut above the riff raff.  How times have changed.


Here are some tough questions that I think the public needs to demand are answered:

  1. How many times did the NFA, NYSE, NASD, FINRA, CFTC, and SEC examine the Defendants since 1996, and what were the findings?
  2. Why are we only now learning about this (and other) multi-year frauds (many of a decade or more duration)--why did the regulators fail to detect earlier?
  3. Why did the promissory note scenario escape regulatory scrutiny for over a decade?
  4. Who was personally in charge of NFA, NYSE, FINRA, CFTC, and SEC's regulatory program during the past 13 years (as it related to the Defendants) and what explanations do those individuals offer for the apparent failures to detect the serious fraud?

Also see this 17-page Complaint issued on the same day as the WG matter. Is there no end in sight to this garbage?:

U.S. Securities And Exchange Commission v. James M. Nicholson And Westgate Capital Management, LLC (Defendants) And Westgate Absolute Return Fund, LP, Westgate Alpha Fund, LP, Westgate Equity Fund, LP, Westgate Focus Fund, LP, Westgate Growth Fund, LP Westgate Opportunity Fund, LP, Westgate Opportunity Master Fund, Ltd., Westgate Premier Growth Fund, LP, Westgate Select Fund, LP Westgate Strategic Growth Fund, LP, And Westgate Summit Fund, LP, (Relief Defendants) (SDNY 09-CIV-1748)

From at least January 2008 through the present, a period in which the value of a number of the Hedge Funds declined precipitously, the Defendants:

  1. provided prospective investors with materially false and misleading sales materials claiming an improbable track record of consistent positive monthly returns;

  2. made materially false and misleading oral statements to current and prospective investors concerning the financial health of the Hedge Funds under their management; and

  3. concealed Westgate's true financial condition by creating a fictitious accounting firm that provided fake audited financials to investors.

The Defendants engaged in this conduct at a time when many of the Hedge Funds had sustained losses of a magnitude that made it impossible to repay investors either their principal or their share ofthe purported gain. Furthermore, in order to perpetuate the fraudulent scheme the Defendants continued to solicit new investors and seek additional capital from existing investors.