Updated from 1:06 p.m. ESTFour investment managers were waiting to appear before a federal judge in Manhattan Wednesday, following their arrests on charges of securities fraud in the latest shake-out of alleged investment schemes stemming from the financial crisis. James Nicholson, who heads investment firm Westgate Capital Management, was arrested by Federal Bureau of Investigation agents on charges of alleged securities fraud stemming back to 2004. Separately, Paul Greenwood of Greenwich, Conn.-based WG Trading Co. and Stephen Walsh, of Santa Barbara, Calif.-based Westridge Capital Management, were also arrested for what could be a $550 million financial fraud. Mark Bloom, a former associate of Greenwood and Walsh, was arrested in another separate case, according to the FBI. Nicholson apparently told investors he had $600 million to $900 million in assets under management, while the actual amount was closer to $100 million, according to a complaint by the Department of Justice. While he marketed his funds as having returns that were almost always positive, the actual results were much lower, the Justice Department alleges. Nicholson's alleged scheme unraveled after the Bernard Madoff scandal came to light and several investors made redemption requests, authorities said. About two dozen received checks for a total of $5 million, but all of them bounced, the Justice Department said. Others attempted to redeem over $10 million without success. The Justice Department arrested Nicholson, 42, at his home in New Jersey on Wednesday and charged him with securities fraud and bank fraud. Greenwood, 61, of North Salem, N.Y., and Walsh, 64, of Sands Point, N.Y., were charged with conspiracy, securities fraud and wire fraud. The FBI alleges that from at least 1996, the duo ran a "fraudulent commodities trading and investment advisory scheme," which secured investor funds by marketing a "conservative trading strategy" that had outperformed the S&P 500 Index for more than a decade.
Several institutional investors, including The University of Pittsburgh and Carnegie Mellon University, invested more than $668 million through WG Trading Investors. But rather than appropriating the funds as outlined, Greenwood and Walsh used most of the money for expensive personal items, including collectibles, horses and large cash payments to Walsh's ex-wife. The two schools sued the men Feb. 20, claiming they misrepresented their trading in commodity futures contracts, leading to $114 million in investment losses. The National Futures Association (NFA) also conducted an audit this month, finding that more than $794 million of the $812 million purportedly on the books of WG Investors was booked as receivables due from Greenwood and Walsh and investments in entities that they controlled. Greenwood and Walsh are each charged with one count of conspiracy to commit securities fraud and wire fraud, one count of securities fraud, and one count of wire fraud. The charges carry maximum sentences of five years, 20 years and 20 years in prison, respectively, along with fines. The FBI separately charged Bloom, 57, a W.G. employee, with defrauding investors in what he marketed as a diversified fund of hedge funds called North Hills Fund from at least July 2001. The FBI says Bloom boasted returns of about 12% a year, but misled investors about how funds were appropriated, and spent millions of dollars on personal luxuries. The FBI has charged him with one count of securities fraud and one count of wire fraud, which each carry a maximum sentence of 20 years in prison, along with fines.
The arrests are the latest allegations of wrongdoing on Wall Street. In December, Bernard Madoff was said to have orchestrated a massive multibillion-dollar Ponzi scheme, and earlier this month R. Allen Stanford was accused of fraud. The day-to-day changes in economic outlook and the plight of major firms like Citigroup ( C), Bank of America ( BAC), AIG ( AIG) and General Motors ( GM) have sent the stock market to levels not seen in over a decade. As the crisis has accelerated, and additional fraud charges have come to pass, more and more investors have sought redemptions. Fraud investigators expect the cycle to continue -- more cases emerging with increased frequency -- as the Obama administration cracks down on fishy schemes and Ponzi managers are unable to meet investors' demands for cash. "You're going to see more and more of these and the numbers are going to be bigger and bigger," predicts Jeffrey Klink, a former federal prosecutor who launched a fraud-investigation firm called Klink & Co. "Every day you're going to see a different name, you're going to see another case and new charges."