Did you hear about the hedge fund that dissolved in Malta?

December 28, 2010

On December 15, 2010, Thomas Repke, 57, of Salt Lake City, Utah and James Jeffery, 58, of Belleville, Ontario, Canada were indicted. Repke was arraigned on December 27, 2010, in federal court in Atlanta, GA on multiple counts of mail fraud, wire fraud and conspiracy, relating to his operation of the Utah-based investment company, "Coadum Capital." Jeffery has not yet been arraigned. According to the Indictment, in 2006 and 2007, Defendants Repke and Jeffery operated Coadum Capital, which at its height attracted over 100 investors and over $30 million in investments. Coadum offered shares in hedge funds and advertised monthly returns of 5 percent. In its sales pitch to investors, Coadum represented that funds would remain protected in an escrow account and would therefore not be at risk. Several investors were provided marketing materials which read:

Cash Deposit ALWAYS remains in escrow in your name

Cash Depositor's principal deposit NEVER at risk.

Monthly account statements sent to investors described their investments as "Principal Preserved Alternative Investments for Growth Oriented Clients," and these account statements reported the investors' "Ending Principal Balance in Escrow Account." The monthly account statements also stated that the monthly rate of interest earned by the fund was generally between three to five percent.

The Exotic Isle of Malta

Although investors were instructed to and did transmit funds to supposed "escrow" accounts, the money allegedly did not stay in any such account. Rather, Repke and Jeffery transferred over $20 million overseas to accounts in Switzerland and the Mediterranean island of Malta. Why Malta? Well, there was supposedly this Malta-based trader. And that trader was investing the funds in hedge funds and other investments that he operated. And, well, you know how these thing go -- it all probably seemed to make sense at the time. Or at least no one seemed to be asking the hard questions.

Show Me the Money -- PLEASE

By the end of 2007, the Indictment asserts that only a fraction of the transferred funds remainedon deposit, and, further, the investments allegedly produced no earnings. Repke and Jeffery are accused of continuing to send monthly account statements that showed the investors' funds remained intact, preserved in escrow accounts, and earning the claimed three to five percent interest. However, the Indictment alleges that the Defendants knew these statements were false because they knew that the funds were not protected in escrow accounts. Another interesting wrinkle is that the Defendants are alleged to have transferred the funds overseas to accounts over which they had no control and about which they received little or no information. Repke and Jeffery allegedly received no information from the supposed European trader to suggest that the three to five percent monthly returns were being achieved. Further, the Defendants' correspondence shows that they were frustrated in their repeated requests to obtain information about where the funds were being held, how they were being used by the trader, and whether and to what extent earnings were being generated.

In case you missed that -- On the one hand, we're told that the Defendants transferred the investors' funds overseas to accounts over which they had no control and about which they received little or no information. Hmmm, yeah...sure, that makes sense to me. Perfectly professional way to handle investors' funds.

On the other hand, we're told that the Defendants became "frustrated." Oh, poor babies -- imagine that, they were frustrated! And what exactly frustrated Repke and Jeffery? They couldn't get a handle on where the funds were, how they were being traded, and what profits were being earned. Of course, I'm not sure why the Defendants were particularly frustrated by not knowing how the dollars were being worked when they had sent the investors' funds to accounts over which they lacked control and couldn't get the time of day. But, then again, maybe I'm just overly fussy with these things?

Through 2007, Repke and Jeffery generally honored requests by investors for distributions of supposed earnings. Allegedly, these payments were merely a device that the Defendants used to give Coadum the appearance of a legitimate, profitable fund. Because Coadum had received little or no earnings from its investments during this period, Repke and Jeffery were only able to make these payments by diverting newly invested funds from other investors. The investors were not told that newly-invested monies, and not actual "earnings," were a principal source of the distributions they received. Can anyone spell P-O-N-Z-I?

Twenty-Two Counts

The Indictment alleges that investors lost approximately $30 million with Coadum. The Defendants are charged with 22 counts of mail fraud, wire fraud and conspiracy, which carry a maximum sentence of 20 years in prison and a fine of up to $250,000 each. In determining the actual sentence, courts will consider the United States Sentencing Guidelines, which are not binding but provide appropriate sentencing ranges for most offenders.

NOTE: The Indictment contains only allegations. Defendant Repke and Defendant Jeffery are presumed innocent of the charges and it will be the government's burden to prove the Defendants' guilt beyond a reasonable doubt at trial.