The Importance

of Being Diligent

Graphic Booklet N.6 WG Trading

Trust, but Verify

• We know the importance of being diligent, but there usually no clear guidance as to how to be diligent.

• Even the professional lie-detectors – lawyers – can do no better than “just look for something unusual.”

• However, detecting something as “unusual” requires experience, which is more often than not subjective and not easily transportable.

• Therefore, these case studies are my attempt at systematizing my experience based on the following principles.

• As President Reagan said: Trust, but Verify.

N. 6: WG Trading

Profile

• Paul Greenwood and Stephen Walsh established WG Trading/Westridge in 1996

• Enhanced Equity Index Strategy

• Managed over $1.3 billion for large endowments and pension funds

• Survived SEC’s examination in 2005, but was shut down by NFA/CFTC in 2009

Fraud Schemes

• Fake Performance

• Misrepresentation of Strategy

• Misappropriation of investors’ capital

Enhanced Index Strategy

Source: Submission by the CBS Master Trust Regarding Plan of Distribution,

SEC v. WG Trading, et al (2009), United States District Court Southern District of New York

Various Ways to Invest

Source: the author, created based on publicly available information

The WG Trading/Westgate scheme was indeed very complex as

it offered at least three different ways to participate in the

investment program

Very Successful Business

Source: Diamond Magazin, Bloomberg

According to the last Form ADV filing in January 2009, Westridge,

the registered investment advisor, managed $1.8 billion for 20

different accounts

“Solid” Enhancement…

Source: Kern County Employees’ Retirement Association Declaration of Noel C. Cohen in Support Thereof,

SEC v. WG Trading, et al (2009), United States District Court Southern District of New York

The above table and chart were reproduced by the author

Year End Gross Net

2008 YTD 2530 1795 11 0% -11.91% -11.09% -11.46% N.A.

2007 3087 2101 12 0% 5.49% 6.52% 6.01% 0.06%

2006 2754 1675 11 0% 15.79% 16.47% 16.13% 0.04%

2005 3168 1419 11 0% 4.91% 5.41% 5.16% 0.03%

2004 3109 1376 12 0% 10.88% 11.42% 11.15% 0.06%

2003 2871 1503 14 0% 28.68% 29.30% 28.99% 0.12%

2002 2363 1548 16 0% -22.10% -21.55% -21.82% 0.14%

2001 2664 1517 14 0% -11.89% -10.62% -11.25% 0.16%

2000 2031 963 11 <1% -9.10% -7.89% -8.48% 0.05%

1999 1355 364 6 <1% 21.04% 24.39% 23.03% N.A.

1998 888 10 3 21% 28.58% 31.85% 30.59% N.A.

1997 612 4 2 59% 33.36% 37.19% 35.79% N.A.

1996 363 1 1 0% N.A. N.A. N.A.

N.A. - Information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year

YTD 2008 values are for the period ending 6/30/08

Composite

Dispersion

WESTRIDGE CAPITAL MANAGEMENT, INC

ANNUAL DISCLOSURE PRESENTATION

Enhanced S&P 500 Composite

Total Firm

Assets

(millions)

Composite

Assets

(USD)

(millions)

Number

of

Accounts

% of

Non-Fee

Paying

S&P 500

Total

Return

Annual Performance

Results Composite

“Solid” Enhancement…

Source: Kern County Employees’ Retirement Association Declaration of Noel C. Cohen in Support Thereof,

SEC v. WG Trading, et al (2009), United States District Court Southern District of New York

The above table and chart were reproduced by the author

Loans to Themselves

Source: SESC, the author’s calculation

Walsh and Greenwood made inappropriate loans

(approximately $718 million) to themselves through WGTI

Total Losses and Victims

Source: Author, the above table was created based on Notice of Motion and Motion for

Order Approving Second Distribution on Allowed Investor Claims: Memorandum of Points and Authorities in

Support Thereof; and Declaration of Brick Kane in Support Thereof, March 8, 2012, CFTC v. Westridge Capital

Management, et al. (2009) and SEC v. WG Trading Investors, L.P., et al.

Total

Contribution

Total

Withdrawals

Net

Investments

First

Distribution

Proposed

Second

Distribution

Cumulative

Distributions Total Return

WGTC Investors 1,561,872 (1,042,183) 519,689 441,400 21,664 463,064 -15.06%

WGTI Invvestors 1,958,308 (1,518,444) 439,864 373,600 18,336 391,936 -15.06%

Total 3,520,180 (2,560,627) 959,554 815,000 40,000 855,000 -15.06%

(Unit: $1,000)

3M Employee Welfare Benefit Association trusts North Dakota State Investment Board

Acument Global Technologies, Inc. Ohio Northern University

Alexander Dawson Foundation & Alexander Dawson Inc. Oklahoma State University Foundation

Blue Cross and Blue Shield Association National Retirement Trust Qwest Asset Management Co. and Qwest Pension Trusts

Bowling Green State University Sacramento Country (Calif.) Employees' Retirement System

Cabora Investments PTE Ltd. San Diego County Employees' Retirement Association

Carnegie Mellon University The CBS Master Trust

Cooper Industries, Inc. Master Trust for Defined Benefit Plans The Frist Foundation

H-E-B Brand Savings and Retirement Plan Trust The HCA Foundation

Houston Municipal Employees Pension System The McCatchy Company Retirement Plan Trust

Houston Municipal Employees Pension System The Timken Company Collective Investment Trust

Iowa Public Employees' Retirement System The University of Tennessee

Kaiser Aluminum and Chemical Corp Asbestos Personal Injury Trust University of Pittsburgh

Kern County Employees' Retirement Association Vulcan Material Company

The Theodore R. Johnson Charitable Remainder Unitrust Wells Fargo & Co. Master Pension Trust

McClatchy Co. Retirement Plan Trust

Promissory Note

Source: University of Pittsburgh’s Investor Proposal For Distribution, Oct 22, 2010, CFTC v. Westridge Capital

Management, et al. (2009) and SEC v. WG Trading Investors, L.P., et al.

WGTC’s High Leverage

Source: the author, the above chart was created based on WGTC’s financial statements filed with the SEC

WG Trading , a broker-dealer, possibly violated the Regulation T, which

restricts the degree of leverage the brokerage firm can extend up to 50%

(SEC examiner later pointed out this issue)

Greenwood’s Collection

Source: Robb Evans & Associates LLC, Report of Temporary Receiver’s Activities February 25, 2009 Through

May 22, 2009

Greenwood used the investors’ money to

expand his luxurious collections, including an

over mantel mirror made by a famous English

craft shop Mallett & Son in 1780 ($685,000) and

the original edition of Adam Smith’s Wealth of

Nation ($60,000).

But, the highlight of his collection is 1,348 teddy

bears. The collection included a Steiff

“Harlequin” bear, dating from about 1925,

featuring alternating halves of red and blue

plush, with the estimated cost in excess of

$100,000.

According to Jasper Pearson, partner in the U.K.-

based antique teddy-bear dealers Sue Pearson,

said “Greenwood’s collection is of extraordinary

quality. He only bought museum-grade pieces in

mint condition.”

Antique Cost

Jewelry 58,658

Furniture 3,933,801

Rugs 794,900

Books 426,866

Sculpture 199,630

Paintings 35,575

Teddy-bear 3,081,735

Total 8,531,165

Recommendations

• Stringent review of valuation process is required especially if the investment strategy is involved with a promissory note.

• Avoid investing in a scheme not monitored by a third-party agent

• Always confirm that an annual audit by a reputable audit firm has been conducted on the entity in which you are invested

To read the case study: http://www.being-diligent.com/case-n-6-wg-trading/

Summary

• There are many similarities among hedge fund fraud cases (very stable and too good track records, promissory notes, fake service providers, etc.)

• No matter how clever they are, fraudsters are still human beings and prone to leave traces of their misconducts

• However, you really need to be diligent to find those traces and make informed judgment

For More Information

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