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Chinese Affinity Fraud (Variation on the Madoff Theme)
Written: April 6, 2009

By Bill Singer

http://BrokeAndBroker.com

SUMMARY: Weizhen Tang, the self-described "Chinese Warren Buffet" recently admitted to investors that since at least 2006 his Toronto-based hedge fund, Oversea Chinese Fund Limited Partnership (the "Hedge Fund"), operated as a Ponzi scheme. In February 2009, Tang told investors that he and the Hedge Fund posted false profits on investors' account statements for the purpose of concealing substantial trading losses, and, more insidiously, to attract new investors to his fund. Tang further admitted that he used funds from new investors to return principal and payout purported profits to other investors. Tang admitted to investors that the Hedge Fund paid out at least $8 million in purported profits in 2006, 2007, and 2008 - despite significant trading losses incurred during that time. Since at least as early as 2004, more than 200 investors have collectively invested between $50 and $75 million in the Hedge Fund.


EMERGENCY ACTION

On April 3, 2009, the Commission filed an emergency action in the United States District Court for the Northern District of Texas to halt an on-going multi-million dollar Ponzi scheme and affinity fraud involving investments in Oversea Chinese Fund Limited Partnership, a hedge fund based in Toronto, Ontario, Canada. Securities and Exchange Commission v. Oversea Chinese Fund Limited Partnership, et al., ( Litigation Release No. 20988 / April 6, 2009), Civ. Action No. 3-09CV0614-B (United States District Court for the Northern District of Texas). The Complaint alleges that Defendant Weizhen Tang, 50, of Toronto orchestrated the fraud scheme through entities he controls, including Oversea Chinese Fund Limited Partnership (“Hedge Fund”), and WinWin Capital Management, LLC, a Plano, Texas-based investment adviser (“Investment Adviser”). 

The Complaint names as Defendants: 

  • Oversea Chinese Fund Limited Partnership, 
  • Weizhen Tang & Associates, Inc., 
  • Weizhen Tang Corp., 
  • WinWin Capital Management, LLC, 
  • WinWin Capital Limited Partnership,
  • J.O.R. & Associates, LLC, and 
  • Weizhen Tang, 

and as Relief Defendants:

  • WinWin Capital Partners, LP, and 
  • Bluejay Investment, LLC, d/b/a Vintage International Investment, LLC.

U.S. District Judge Jane Boyle granted a temporary restraining order, asset freeze, and other emergency relief against the Defendants, including the appointment of a receiver to take control of assets belonging to the Investment Adviser and the two Relief Defendants.

According to the Commission’s complaint, Tang specifically targeted members of the Chinese-American community as part of an Affinity fraud, and solicited U.S. investors to directly and indirectly invest in the Hedge Fund. The Commission alleges that since at least November 2007, Tang raised capital for the Hedge Fund from U.S. investors by offering and selling limited partnership interests in WinWin Capital Limited Partnership. The Commission alleges that WinWin Partners’ sole business is investing partnership capital in the Hedge Fund. As detailed in the complaint, WinWin Partners had raised, as of March 10, 2009, almost $17.3 million in principal investments from approximately 75 investors, most of which are located in the Dallas area, but also include investors in California. According to the complaint, the U.S. investors have withdrawn approximately $8.4 million from the Hedge Fund, of which at least $700,000 was paid out as purported profits; leaving nearly $9.6 million in investor principal unaccounted for. The Commission further alleges that, consistent with Tang’s recent confession to investors, funds invested with WinWin Partners were used to pay other investors in a Ponzi fashion. Chinese-American Affinity Fraud

$9.6 Million Principal Funds Missing

The complaint alleges that the Defendants Oversea Chinese Fund, Limited Partnership, Weizhen Tang & Associates, Inc., Weizhen Tang Corp., WinWin Capital Management, LLC, WinWin Capital Limited Partnership, J.O.R & Associates, LLC, and Weizhen Tang violated the anti-fraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and the offering registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933. 

The complaint also alleges that Tang, Weizhen Tang & Associates, Inc., J.O.R & Associates, LLC, and WinWin Capital Management, LLC violated Sections 206(1) and (2) of the Investment Advisers Act of 1940, and Tang, Weizhen Tang & Associates, Inc., and J.O.R & Associates, LLC violated Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. In addition to the emergency relief granted by the Court, the Commission seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and civil money penalties against the Defendants. 

Also, The Complaint alleges that the Defendants funneled some investor funds to associated persons and entities: WinWin Capital Partners LP and Bluejay Investment LLC d/b/a Vintage International Investment LLC. The Commission’s complaint names them as relief defendants, and requests orders requiring them to disgorge any funds or benefits they received that are traceable to the Hedge Fund or any affiliated entities or individuals.

BACKGROUND

 In December 2001, Weizhen Tang, a Chinese Canadian living in the Greater Toronto Area and a prominent figure in the Chinese community in North America, created the Hedge Fund under the laws of the province of Ontario. The Hedge Fund has been active since 2004 with Tang as its the trading manager and WTA its the general partner.Offering documents claimed that  "[b]ased on past performance ... the system the Trading Manager will utilize has produced an average return of 32% per year for index and currencies."

According to http://www.tang.com , during the four years since the Hedge Fund was established, it achieved an "average annual return rate [of] over 40%" by: 

  • integrating stock indexes, foreign exchanges, and futures into reliable short-term speculations; 
  • seeking "consistent returns with minimum risk: 1% weekly profit;" and 
  • keeping "99% of the total investment pool outside the market for safekeeping, while amplifying the remaining 1% with certain leverage. 

Tang's purported investment strategy is to invest 99 percent of the total investment pool in conservative, out-of-the market investments like bonds and certificates of deposit and 1 percent of the investment pool in speculative short-term investments

Since at least November 2007, Tang has directly and indirectly solicited U.S. investors to invest in the Hedge Fund. At least two U.S. investors have directly invested in Oversea Chinese Fund through Tang's website solicitation. Tang has further indirectly solicited U.S. investors by causing the creation of WinWin Capital Limited Partners ("WinWin Partners") and by offering and selling limited partnership interests in the entity. WinWin Partners' sole business is investing partnership capital in the Hedge Fund. The WinWin Partners' partnership agreement provides that the general partner (created in 2006: JOR)  does not charge a fee on the first 6 percent of profit, but charges a 25 percent fee on any additional profit, mirroring the fee arrangement described on the Hedge Fund's website. 

SCAM UNRAVELS

On January 26 through January 30, 2009, Tang conducted a public, real-time demonstration of his trading operations and strategy at his office in Toronto. Tang invited prospective investors, existing investors, and the media to attend. Individuals who could not attend the demo live in Toronto were able to watch it online. After watching Tang's public demonstration, many investors became very concerned about their investments, because Tang was unable to duplicate the percentage returns that the Hedge Fund had purported to achieve - as reflected on the investors' account statements on the Hedge Fund website.

On February 7, 2009, Tang sent an e-mail to all Hedge Fund investors, acknowledging that the public demonstration had failed. Although Tang claimed not to have lost money during the demo, he conceded that the results were far from his stated goal of one percent per week. As an apparent result of the demonstration's failure, many investors lost confidence in his trading abilities and closed their accounts or attempted to withdraw large amounts of money from the Hedge Fund. Tang informed investors that the Hedge Fund had insufficient assets from which to pay the withdrawal requests. And, Tang vowed to return all principal to investors within six months and noted that it would not affect the Hedge Fund's normal operation. 

On February 27,2009, approximately 200 Hedge Fund investors met with Tang in Toronto. Tang admitted to them that 

  1. the Hedge Fund had no more money;
  2. deposits into the Hedge Fund by new investors had been used to pay withdrawals and purported profits to earlier investors, and 
  3. the information posted on the Hedge Fund website, showing the daily value of each investor's account, was false

Tang further admitted to fraudulently operating the Hedge Fund in two March 6, 2009, telephone calls between Tang and investors. During these phone calls, Tang admitted that: 

  • he and the Hedge Fund sustained trading losses of$15 million in 2006 and 2007
  • he and the Hedge Fund posted fake profits on the Hedge Fund's website in order to conceal losses and to attract more investors and more money;
  • because of the huge trading losses in 2006 and 2007, he was not able to follow his Trading Strategy and he conducted very little trading in 2008
  • he used deposits from newer investors (which included most of the Dallas-area investors) to pay earlier investors (which included mostly Toronto-area investors) when they sought to withdraw funds (principal and fake profits) from their accounts; 
  • investor deposits were pooled together and commingled in a Hedge Fund account at Bank of Montreal; and 
  • he was unable to access his bank statements online because a group of Toronto-area investors convinced him to sign over authority in the accounts.

CHUTZPAH

On March 8, 2009, Tang sent an e-mail to Hedge Fund investors, acknowledging that the purported profits he and the Hedge Fund listed in each investor's account statement on the Hedge Fund's website were false. Tang also claimed that, during the last three years, he and the Hedge Fund distributed over $30 million in principal and $8 million of purported profits to investors. Further, Tang implored investors to give him a year to repay each investor's debt. 

To persuade investors to afford him some time to repay investor losses, Tang claimed to have borrowed money from a friend, traded in her account, made $2 million in 12 days of trading, and used $1 million to repay some investors. 

On March 19,2009, Tang sent another e-mail to Hedge Fund investors, revealing, among other things, that "

[e]ven if I have to go to jail, I still hope that I can go after I have repaid all of you. Now finally I have a chance to trade again.

[u]nder the close monitoring of the client committee, I will be able to give you convincing results using my trading skill. By then, a lot of investors will be willing to let me trade for them under such a transparent system. As a result, this will be no problem to repay all of your money. Please gave me some time and please give me this last chance.

Tang and Tang-related entities have opened and attempted to open new brokerage accounts within the last several weeks for the purpose of trading, and have recently lost more than $500,000 in trading in U.S. accounts. In response to his fraudulent conduct, the Ontario Securities Commission ("OSC") instituted a Temporary Order that ordered all trading by Tang, WTC, WTA, and the Hedge Fund to cease. The Temporary Order is limited to Tang's Canadian entities and has no apparent effect on U.S.. assets, entities or trading activities.

A Whopping 32%  Return

 

and a 40% annual return

 ---if you believe it (and too many foolishly did)

 

 

 

How generous! No charge on the first 6% profit, but we'll take 25% thereafter.

OOPS. UH OH. Ummmm

 

 

 

How could you not believe him?

 

No more as in really no more?

Wow, never saw that coming.

 

 

 

 

 

 

 

 

 

Of course you trust me. Give me a second chance. Then maybe a third?

 

Let me see if I can put a Madoff-spin on this.

VISIT WALL STREET'S LEADING ONLINE COMMUNITY
BrokeAndBroker.com

 


 
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