IM Pleads Guilty After Bilking Institutions, Others Out of Billions

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The investment manager and principal of WG Trading Company, LP and WG Trading Investors, Stephen Walsh, pleaded guilty to two counts of securities fraud. In entering the plea Mr. Walsh agreed to forfeit $50,743,779 which represents the amount he misappropriated and by which he personally profited from the fraud. U.S. v. Greenwood, Case No. 1:09-mj-00502 (S.D.N.Y. Filed July 24, 2009).

Over a three year period beginning in early 2009 Mr. Walsh and his confederate, Paul Greenwood, are alleged to have raised about $7.6 billion from investors. Those investors were told that their funds would be placed in a “veritable money-making machine.” That machine was supposedly an investment program called “equity index arbitrage.” The program was represented to be a conservative trading strategy which had out performed the S&P 500 index for over 10 years.

The pitch was so successful that several institutional investors, pension plans and charitable and university investment funds put billions of dollars in the program. Those investors either became limited partners in WG Trading Company or received promissory notes issued by WG Trading Investors. Messrs. Walsh and Greenwood told investors the notes would pay interest at a rate equal to the investment returns earned by a limited partner of WG Trading Company.

The investment program was not nearly as successful as the investment pitch. In fact Messrs. Walsh and Greenwood misappropriated hundreds of millions of dollars of investor funds, diverting the money to their personal use. Two men executed promissory notes in favor of WG Trading Investors totaling $554 million. Of that amount $261 million were payable by Mr. Walsh to WG Trading Investors. The notes materially misstated the financial condition of WG Trading Company and misled investors. False accounting statements were also furnished to investors, documenting their fictitious returns.

Previously, Deborah Duffy, the CCO of WG Trading Company pleaded guilty to conspiracy, securities fraud and money laundering. Mr. Greenwood pleaded guilty to conspiracy, securities fraud, commodities fraud, wire fraud and money laundering charges. Dates for sentencing have not been set.

The SEC and CFTC have pending, parallel enforcement actions. SEC v. WG Trading, Investors, L.P., Civil Action No. 1:09-cv-01750 (S.D.N.Y. Filed Feb. 25, 2009); CFTC v. Walsh, Civil Action No. 1:09-cv-01749 (S.D.N.Y. Filed Feb. 25, 2009).

 

Topics:  Fraud, Investment Management, Misappropriation

Published In: Business Torts Updates, Criminal Law Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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