Fraud, Fraud, Fraud

Every boom market has fraudulent schemes that are only uncovered when the markets reverse.  Today the SEC was busy announcing 3 new fraud cases.  Certainly these are not of the magnitude of Madoff or Sandford, but they are significant.  First up was Westgate Capital Management LLC and its principal James Nicholson, who were charged with using an unregistered hedge fund to fraudulently take other people's money.  The SEC Press Release stated that Nicholson and Westgate defrauded current and prospective investors in 11 hedge funds they managed by misrepresenting the value of the hedge funds to investors, and soliciting new investors with sales materials that claimed a nearly impossible record of investment success.  Apparently, Nicholson created a fictitious accounting firm and produced bogus financial statements.

Action was also taken against Paul Greenwood and Stephen Walsh for defrauding investors out of $500 Million Dollars.  According to the SEC, these folks and their companies convinced institutional investors (public pensions, educational institutions,  retirement funds) to invest in a stock index arbitrage strategy.  Instead of making investments, Greenwood and Walsh purchased multi-million dollar homes, horse farms, exotic vehicles, etc.  The fraud was going on since 1996!

Rounding out the trio of fraud cases  is the one launched against Mark Bloom and his firm North Hills Management LLC.  This relatively small case - involving a mere $30 Million defrauded from about 40-50 investors since 2001 - seems like a common case of fraud.  Apparently, according to the SEC, Bloom obtained the funds to be invested in diverse hedge funds.  Instead, he used about $13 Million to buy homes, boats, cars and support a lavish lifestyle.  The balance of the money was put into a fund that was fraudulent itself.  

It seems that the amount of fraud going on this time was extreme.  But going after a few headline cases this time may not be enough.  In ordinary times ferreting out the fraud is necessary to maintain confidence in the system.  This time the level of fraud occurred at every stage.  The government needs to get serious about prosecuting the fraud to restore confidence in the markets.  The cases need to be filed not only against those involved in garden variety fraud, but cases need to be filed against the rating agencies that deliberately over-rated securities, from the banks that put mortgages in collateralized securities knowing the mortgages were no good, to the borrowers that lied on their applications.  Purging the system is what is needed.  Having the government fulfill its fundemental obligation of pursuing these crimes is needed on a large scale.  If the government cant do it, then consider authorizing private attorneys general to hold those responsible for the fraud accountable.