Category: Hedge Funds

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Fundamental Global Investors: Everyone Loses

Illustration: Edel Rodriguez

Running a hedge fund requires a starkly different skill set from what’s required to manage a publicly traded company.

Yet hedge fund managers Kyle Cerminara and Lewis Johnson, the co-founders and co-managers of Charlotte, North Carolina–based Fundamental Global Investors, have been doing both.

In 2015, Cerminara and Johnson began to closely direct the operations of three publicly traded companies in Fundamental Global Investors’ now $127.3 million-in-assets portfolio: Ballantyne Strong Inc. of Charlotte, North Carolina, BK Technologies Corp. of West Melbourne, Florida, and 1347 Property Insurance Holdings Inc. of St. Petersburg, Florida.

But after five years of Fundamental Global Investors’ oversight, all three of these public companies have weakened financially and their share prices have collapsed. Many minority investors in these three public companies, as well as the hedge fund’s limited partners, have absorbed steep losses.

A just-completed in-depth Foundation for Financial Journalism investigation has uncovered how, despite Cerminara and Johnson’s apparent mismanagement of these public companies, the two money managers are doing quite well for themselves.

Cerminara and Johnson have received a combined $6 million in fees and compensation from the companies they control since 2015, according to Securities and Exchange Commission filings.

This is unusual: Despite the hedge fund industry’s legacy of excesses, most fund managers typically keep their interests at least broadly aligned to their limited partners. Nearly every hedge fund has a so called high-water-mark provision, prohibiting a manager from taking performance fees (and thereby sharing in the profits) until limited partners’ losses are fully recovered.

Cerminara and Johnson have circumvented these norms. Just as important, their decisions appear to have rarely favored all investors: Cerminara and Johnson have steered clear of buying back stock or making substantial investments to improve these public companies’ operations.

Their strategy might be best referred to as parasitic investing: Cerminara and Johnson are faring well, but Fundamental Global Investors’ limited partners are suffering along with the employees and minority shareholders of these public companies.

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Fundamental Global Investors has owned 50 percent of Capital Wealth since 2013. Staffed with 31 advisers, Capital Wealth Advisors has $1.56 billion in client assets under management, according to its most recent regulatory disclosure.

A crucial aspect to Fundamental Global Investors’ stake in Capital Wealth is its history of achieving significant profits. Since most registered investment advisers charge clients a fee of 1 percent of assets under management, Capital Wealth’s current $1.5 billion in assets is likely generating about $15 million in annual revenue.

In contrast to the thinly capitalized underpinnings of many hedge funds that operate independently of a corporate parent (and are thus unable to absorb sustained losses), Cerminara and Johnson have their Capital Wealth Advisors income stream. This gives them the financial freedom to pursue an atypical strategy for their hedge fund. Fundamental Global Investors has embraced the high-risk strategy of holding small capitalization stocks in its portfolio for years at a time.

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Cerminara and Johnson met while working at T. Rowe Price over the last decade and founded Fundamental Global Investors in 2012. The third FGI partner is Joseph Moglia, who at the time of the fund’s founding was then chairman of TD Ameritrade’s board of directors. (From 2000 to 2008 he was also TD Ameritrade’s CEO.)

While Moglia is one of Fundamental Global Investors’ three general partners he does not manage any of its portfolios. In 2013 Capital Wealth appointed Moglia as its chairman, a position he retains today along with chairing TD Ameritrade’s board. (Moglia also spent seven years as the head coach of the football team at Coastal Carolina University in Myrtle Beach, South Carolina, until January 2019.)

During Moglia’s tenure Capital Wealth has benefited substantially from its ties to TD Ameritrade: Through TD Ameritrade’s AdvisorDirect referral program, Capital Wealth has picked up about $400 million in new assets since 2014. And Capital Wealth’s assets under management have grown from $200 million in 2013 to almost $1.5 billion in 2020.

Like most registered investment advisers, Capital Wealth has a client base primarily composed of high-net-worth individuals who have diverse sources of wealth and varying levels of capital markets exposure. The firm’s co-chief investment officers regularly provide their staff advisers and clients a model portfolio, replete with recommendations for weighting assets, such as stock, bonds and cash, according to their tolerance for risk.

And Capital Wealth’s co-chief investment officers just happen to be Kyle Cerminara and Lewis Johnson, Fundamental Global Investors’ leaders. They have regularly suggested that Capital Wealth’s clients assign 5 percent to 10 percent of their portfolios to so-called alternative investments (such as hedge funds or private equity). Nonetheless, Fundamental Global Investors has not had much luck in attracting many of Capital Wealth’s wealthy clients to invest in its hedge fund as limited partners.

Until 2018 a key recommendation of Cerminara and Johnson was promoted in Capital Wealth’s model portfolio: Clients should acquire their own shares of Ballantyne Strong, BK Technologies and 1347 Property Insurance Holdings.

Capital Wealth stopped this practice in 2018 for two reasons: The three companies’ poor share price performance led several Capital Wealth advisers to opt out of marketing Cerminara and Johnson’s model portfolio to clients. And the combined value of the stakes in these three companies owned by Capital Wealth and Fundamental Global was so large relative to the daily trading volume of the three stocks that concerns were raised about Capital Wealth clients’ ability to sell their stocks in an orderly fashion.

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About one-fifth of Fundamental Global’s capital has come from its three general partners: Cerminara, Johnson and Moglia. That’s $26.9 million of its $127.3 million in capital, according to Fundamental Global’s March 30 Form ADV filing.

No limited partners appear to be institutional investors: The Foundation for Financial Journalism searched hedge fund databases ― both those publicly available and private ones ― and could not find any records of a pension fund or another institution that had invested in Fundamental Global.

Institutions such as pension and sovereign wealth funds, private foundations and university endowments have traditionally been key sources of capital for hedge funds. These institutions (or their advisers) often conduct rigorous due diligence before investing in hedge funds. And even after making an investment, such institutions require extensive communication from a fund’s general partners about the results.

Lacking such oversight, Cerminara and Johnson have proceeded to run their hedge fund in a rather unique fashion.

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Consider the actions Fundamental Global has taken with Ballantyne Strong, a maker of both digital movie equipment and taxicab signage.

Fundamental Global has spent almost $26.9 million to buy 5,994,857 shares of Ballantyne Strong, according to Ballantyne Strong’s Schedule 13D filings from Sept. 3, 2014, to March 16, 2020. With Ballantyne Strong’s stock priced at just $1.50 a share as of May 4, Fundamental Global Investors’ shares are now worth about $8.85 million, meaning the fund has lost slightly more than $18 million from these purchases.

Of course, virtually every professional money manager has made investments that have not panned out, and most limited partners recognize that.

Nonetheless, since November 2015 when Cerminara became Ballantyne Strong’s CEO, Ballantyne Strong’s revenue has declined and its losses have mounted. (In 2015 Ballantyne Strong took a $11.2 million charge against its earnings to reduce expenses and reorganize its operations; this helped it report a profit in 2016, the only time it did during Cerminara’s tenure.) On April 15 Ballantyne Strong announced that Cerminara is no longer its CEO; he is now the non-executive chairman of the board.

Sharp market observers would be unsurprised that no pension or sovereign wealth fund has opted to become a limited partner of Fundamental Global as it has continually added capital to a losing bet (Ballantyne Strong) for more than half a decade.

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The first instance of Fundamental Global’s unusual use of its related public companies’ capital cropped up nearly five years ago. On Nov. 16, 2015, Fundamental Global disclosed that it had used Ballantyne Strong’s cash to purchase a block of shares of 1347 Property Insurance Holdings, a residential property insurer with operations primarily in Florida, Louisiana and Texas.

This transaction seems to have become a template of sorts that Fundamental Global has repeatedly used over the next couple of years to carry out elaborate cross-ownership stock schemes with Ballantyne Strong, BK Technologies and 1347 Property Insurance Holdings. Under Fundamental Global’s management, the balance sheets of these three public companies have rapidly expanded and contracted with one another’s shares.

From November 2015 to February 2017, Cerminara and Johnson spent $7.71 million of Ballantyne Strong’s cash to purchase a little more than 1 million shares of 1347 Property Insurance Holdings.

The primary benefit to Fundamental Global Investors from using Ballantyne Strong’s balance sheet appears to have been capital efficiency: Less of Fundamental Global Investors’ own capital had to be expended for it to attain voting control over 1347 Property Insurance Holdings. As of April 22, Fundamental Global Investors controls 50.4 percent of 1347 Property Insurance Holdings.

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Another clear demonstration of how Cerminara and Johnson have used Ballantyne Strong’s cash to further Fundamental Global Investors’ goals surfaced on Dec. 21, 2015, when Ballantyne Strong disclosed its nearly $4.3 million purchase of 1.14 million shares of BK Technologies (then known as RELM Wireless). On Sept. 9, 2018, Fundamental Global Investors bought these very shares for $4.53 million, generating a $200,000 profit for Ballantyne Strong. (In addition, during this period, BK Technologies paid $600,000 in dividends to Ballantyne Strong.)

On the surface, Fundamental Global Investors’ use of Ballantyne Strong’s cash to buy and hold a BK Technologies stake for almost three years might appear to have paid off for Ballantyne Strong’s shareholders, by generating a modest 6.7 percent annual return on investment.

But a closer look at Ballantyne Strong’s filings reveals a very different picture.

While Fundamental Global Investors was directing Ballantyne Strong to spend more than $12 million to build its stock positions in both BK Technologies and 1347 Property Insurance Holdings, one of Ballantyne Strong’s key subsidiaries was strapped for cash: In April 2017 it borrowed money against its headquarters building. A year later, Ballantyne Strong orchestrated a sale-leaseback transaction for this property. (A sale-leaseback deal, allowing a company to sell an asset and lease it back for a period of time, can indicate that the business is under acute financial stress.)

The sale-leaseback filing, attached as an exhibit to Ballantyne Strong’s 2018 annual report, lays out the deal’s fine points: the $7 million price tag for the Alpharetta, Georgia, facility and the $612,000 annual charge for leasing it back. After closing the deal, Ballantyne Strong immediately paid down a $2.94 million debt to BlueHarbor Bank from a term loan and a lien against the headquarters.

Until late 2019 Cerminara served on this bank’s board; Ballantyne Strong disclosed in 2018 that Fundamental Global Investors held “less than five percent” of BlueHarbor Bank equity.

Jim Marshall, BlueHarbor Bank’s CEO, recently explained Cerminara’s departure from the board of Blue Harbor Bank to the Foundation for Financial Journalism in this way: “He wanted to leave quietly and we saw no problem with that,” said Marshall, adding, “He is a busy man, with a lot of irons in the fire.” (Cerminara retains a BlueHarbor Bank tie since Capital Wealth still operates an investment advisory joint venture with BlueHarbor Bank that it initiated in 2014 under the name BlueHarbor Wealth Advisors.)

Marshall declined to discuss the specifics of BlueHarbor’s loan to Ballantyne Strong other than declaring, “Everything [about the loan] was above board and beyond reproach.”

All told, Ballantyne Strong has become a weaker, less healthy company in terms of revenue, net income and cash generation since Cerminara took the helm as CEO in November 2015.

Shareholders have borne the brunt of the company’s decline: On Sept. 3, 2014, the date that Fundamental Global Investors disclosed its initial equity stake in Ballantyne Strong, the company’s market capitalization was $63.24 million. On May 4, 2020, it was only $22.26 million.

Yet despite this destruction of the company’s value, from 2015 to 2019 Ballantyne Strong paid slightly more than $2.6 million to Cerminara and Johnson in compensation and director’s fees, with almost $2.33 million of that going to Cerminara.

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A misalignment similar to the one between the interests of Ballantyne Strong’s majority shareholders and those of its minority investors has also occurred at BK Technologies.

Established more than 70 years ago, BK Technologies has a mission, according to its website, “to remain deeply rooted in the critical communications industry for all military, first responders, and public safety heroes.” And 45.1 percent of its shares are owned by Fundamental Global Investors.

On March 17, 2017, when Cerminara became BK Technologies’ chairman of the board, its share price was $5.10, and the company had just announced it had $2.68 million in net income for 2016. Three years later, BK Technologies reported a cumulative $6.45 million in losses. Now its share price is just $2.30.

It is likely cold comfort to BK Technologies’ minority investors that they have fared somewhat better from this arrangement than Fundamental Global Investors’ limited partners. Fundamental Global Investors purchased a cumulative total of 4.97 million BK Technologies shares for $20.09 million, according to filings from Sept. 3, 2014, to March 17, 2020. The limited partners’ stake in BK Technologies is now worth only $13.47 million, representing a loss of $6.61 million for all the limited partners.

Yet, from 2015 to 2018, BK Technologies paid a total of $763,265 to Cerminara and Johnson, or $405,215 and $358,050, respectively, for their serving as chairman and co-chairman of its board of directors. (Cerminara and Johnson did not respond to an April 8 question from the Foundation for Financial Journalism about whether Fundamental Global Investors’ limited partners had been directly told about these payments.)

On April 24 BK Technologies announced that Cerminara and Johnson had resigned their roles as co-chairmen of its board of directors, in a move that became effective immediately. They retain positions as directors of the board.

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Much like what Ballantyne Strong and BK Technologies shareholders have experienced, Fundamental Global Investors’ involvement with 1347 Property Insurance Holdings has done no favors for its investors.

On June 15, 2015, the date Fundamental Global Investors reported that it had begun building a stake in 1347 Property Insurance Holdings, the company’s market capitalization was $50.64 million. By May, it had plummeted to $27.68 million.

In addition, the limited partners of Fundamental Global Investors are hardly benefiting from its investment in 1347 Property Insurance Holdings. The 3.05 million shares of 1347 Property Insurance Holdings that Fundamental Global Investors purchased for almost $22 million are now worth just $13.94 million, leaving Fundamental Global Investors’ limited partners and Capital Wealth’s clients with an $8 million loss from this investment.

Cerminara and Johnson became chairman and co-chairman, respectively, of 1347 Property Insurance Holdings’ board of directors in May 2018. In 2019 Cerminara and Johnson each earned $165,000 in director fees, and since 2017 have earned a combined total of $750,772 from these duties.

But a recent corporate restructuring at 1347 Property Insurance Holdings makes its situation very different from the dynamics at play at Ballantyne Strong and BK Technologies. Cerminara and Johnson, as the general partners of the hedge fund that owns 50.4 percent of 1347 Property Insurance Holdings’ stock, are carefully remaking the public company from the bottom up and taking care to ensure they have numerous opportunities for profit at every turn.

On Feb. 25, 2019, the management of 1347 Property Insurance Holdings agreed to sell its property insurance operations to FedNat Holding Company for $51 million. By Dec. 31, 2019, the sale was completed and all these operations were transferred to FedNat. Thus, 1347 Property Insurance Holdings began this year without any specified business operations.

But what apparently makes 1347 Property Insurance Holdings so attractive to Cerminara and Johnson is that the company has no debt and nearly $6 a share’s worth of liquid assets: cash, FedNat stock and other investments. And with 1347 Property Insurance Holdings’ current share price of $4.56, the company is trading at a discount to its book value, a rare occurrence for a publicly traded company.

Typically when a company’s stock is trading at a discount to its book value, investors will take advantage of the pricing inefficiency by buying the stock, sending the share price back into line with its book value. Alternatively, investors could decide to liquidate the company and distribute the assets on a pro rata basis and obtain roughly the same level of risk-free return.

What Cerminara and Johnson have in mind is apparently something different.
On March 30, 2020, the management of 1347 Property Insurance Holdings issued a press release announcing a June name change for the company to Fundamental Global Financial Corporation, along with plans to launch a reinsurance company, invest in real estate and provide asset management services.

But by April 6, the managers of 1347 Property Insurance Holdings disclosed a “shared services agreement” with a newly created entity, Fundamental Global Management LLC. This agreement requires 1347 Property Insurance Holdings to pay Fundamental Global Management’s owners $1.82 million a year for management and advisory work. While the agreement stated that it was between 1347 Property Insurance Holdings and “affiliates” of Fundamental Global Investors, the “owners” of Fundamental Global Management were not named. One logical guess is that the “owners” are none other than Cerminara, Johnson and Moglia.

A tiny clause in this agreement also assigned 1347 Property Insurance Holdings responsibility for reimbursing Fundamental Global Management for its operating expenses.

The April 6 agreement also announced the formation of a joint venture between 1347 Property Insurance Holdings and Fundamental Global Investors called Fundamental Global Asset Management. This new entity is charged with identifying investment management funds; it will offer to provide them seed capital in exchange for taking equity stakes. Fundamental Global Investors is also granted the right to offer the opportunity to invest in these funds to a “third party” if the amount of capital required is greater than $5 million.

There is a catch: According to a 2018 hedge fund industry study by the Seward & Kissel law firm, even seeding deals for smaller funds can require commitments of $20 million or more. While the April 6 agreement does not explicitly state it, Cerminara and Johnson will likely use Fundamental Global Asset Management to identify and finance smaller investment management firms and tap Capital Wealth’s wealthy clients to fund larger deals.

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Cerminara and Johnson’s side deals for Fundamental Global Investors achieved by their dipping into these three public companies’ assets are not the full extent of their quirky dealings with publicly traded enterprises.

The filings of little-known Itasca Capital of Vancouver may demonstrate the purest expression of Fundamental Global Investors’ use of a public company for private gain. Itasca Capital’s board of directors includes Cerminara and Johnson, and the company has no operations.

Itasca Capital’s structure is similar to that of a Russian nesting doll: Its only asset is 1347 Investors LLC, a holding company that is jointly managed by Cerminara and Larry Swets Jr. (This second executive, Swets, founded Kingsway Financial Services, a predecessor of 1347 Property Insurance Holdings.) And until very recently, 1347 Investors LLC itself had just a single asset: a $10 million investment in redeemable preferred stock issued by Limbach Holdings, an unprofitable commercial contractor. That investment was redeemed on Nov. 19, 2019, and 1347 Investors LLC netted a respectable 10.79 percent annualized return on the investment for Swets, Cerminara and others.

Under Cerminara and Johnson’s direction, Ballantyne Strong in 2016 spent $3.7 million to purchase shares of Itasca Capital; today Ballantyne Strong owns 32.3 percent of Itasca Capital.

Over roughly three years Ballantyne Strong has received $2.9 million in dividends from Itasca Capital, but that sum must be weighed against $1.2 million in write-downs.

Cerminara and Johnson receive modest annual payments for being members of Itasca Capital’s board of directors. In 2018, the last year for which information is available, Cerminara received $10,000 for being Itasca Capital’s board chairman, and in 2017 he made $10,833. Johnson, who joined the board in 2018, was paid $5,833.

Ballantyne Strong’s investors would be well served to ask why their company still owns Itasca Capital. And Fundamental Global Investors’ limited partners should be curious to know why Fundamental Global Investors did not participate in the profitable 1347 Investors LLC transaction with Limbach Holdings.

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In addition to all their other engagements, Cerminara and Johnson serve as co-general partners of yet another similarly named entity, FGI 1347 Holdings LP. This fund’s sole investor is BK Technologies. Yet FGI 1347 Holdings LP’s only asset, apart from $197,000 in cash, is 477,282 shares of 1347 Property Insurance Holdings. These shares had had been previously purchased by BK Technologies in March and May 2018 for $3.74 million. (BK Technologies disclosed on April 28 that Fundamental Global Investors does not charge any fees for its management of FGI 1347 Holdings LP.)

Tying up almost $4 million in cash, this investment in FGI 1347 Holdings LP must be documented on BK Technologies’ income statement. Thus the swings in FGI 1347 Holdings LP’s value significantly affect BK Technologies’ profits. In 2019, as the share price of 1347 Property Insurance Holdings dropped, the value of BK Technologies’ stake in FGI 1347 Holdings LP declined by $1.1 million, and in 2018 it dipped by more than $1.8 million.

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For all Cerminara and Johnson’s other activities and maneuvers, their main claim to fame as financiers – running their nearly 8-year-old hedge fund – has been a dramatic failure from the perspective of its limited partners. Fundamental Global Investors’ filings show the hedge fund, the three main public companies it controls and Capital Wealth’s clients spent $72.67 million on the shares of Ballantyne Strong, BK Technologies and 1347 Property Insurance Holdings. The part of Fundamental Global Investors’ portfolio invested in these three public companies and Itasca is now worth just $37.55 million.

While the Foundation for Fina’ncial Journalism could not obtain Fundamental Global Investors’ exact performance results, Securities and Exchange Commission filings paint an ugly picture of the fortunes of the fund’s limited partners. A comparison of Fundamental Global Investors’ SEC Form D filings since 2012, which list each time it has raised capital, with its most recent Form ADV filing, containing each of its funds’ current value, indicates that the hedge fund’s amount of capital has sharply fallen.

Because most limited partners are content to leave a profitable investment alone, a hedge fund’s capital would typically decline only if realized losses occur or redemptions are made.

From Sept. 6, 2012, to May 21, 2019, Fundamental Global raised a total of $236.75 million for 14 different funds. The fund’s March 30, 2020, Form ADV lists $127.39 million in capital from all these funds.

The Fundamental Global fund that has experienced the most profound decline in assets under management is the Fundamental Global Partners Master Fund LP.

With three different feeder funds that investors have contributed to since September 2012, the Fundamental Global Partners Master Fund LP has taken in $105.18 million. These feeder funds had only a total of $17.92 million in capital left by March 30, 2020. Given the fact that Fundamental Global Partners Master Fund LP has been operating for almost eight years, much of the decline in assets has likely resulted from wealthy investors redeeming their investments.

One fund alone among Fundamental Global Investors’ 14 offerings was a bright spot in 2019: The CWA FGI Special Opportunities Fund LP posted about a 12 percent return. Orchard Global Asset Management manages its portfolio through its Taiga fund, and Cerminara and Johnson have no investment responsibilities for this account. The fund’s $20.3 million in assets were raised in November 2018 primarily from 37 Capital Wealth clients.

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The Foundation for Financial Journalism made extensive efforts to obtain comment from the three general partners of Fundamental Global Investors. After an exchange of text messages with Kyle Cerminara, an April 8 email to Cerminara, Johnson and Moglia requested a response to 13 questions. A follow-up email went out on April 20, and Cerminara gave a brief reply. On April 24 another set of 13 questions was sent. On May 3, a last request for comment was made. There was no response.

Corrections:  An earlier version of this story erroneously stated that Kyle Cerminara and Lewis Johnson had received a combined $6 million in fees and compensation from Fundamental Global Investors since 2015. But the source of that $6 million was the three public companies they control.

In addition, this article originally stated Cerminara and Johnson had resigned BK Technologies’ board of directors. In fact, they resigned as the board’s co-chairmen but remain directors.

The original version also erred in stating Fundamental Global Investors spent $72.67 million on shares of Ballantyne Strong, BK Technologies and 1347 Property Insurance Holdings. Fundamental Global Investors, the three main public companies it controls and Capital Wealth’s clients purchased this amount. These corrections were made in May 2020.

The piece was also corrected and updated on Dec. 2, 2021, to change the article’s title to reflect the fact that losses to the limited partners of Fundamental Global Investors resulted from its unsuccessful asset allocation strategy, as opposed to abusive conduct by the general partners. 

Three paragraphs in the original article incorrectly noted that Capital Wealth Advisors owned a 50 percent stake in Fundamental Global Investors and that a real estate fund FGI Metrolina, then managed by Cerminara and Johnson, had purchased the mortgage of a Ballantyne Strong facility in Alpharetta, Georgia. These paragraphs were deleted. 

Update: This article was updated with share prices of May 6, 2020.

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Q3 I LP: The Cryptic Doctors of Persuasion

Until late last year Dr. Quan Tran, a St. Petersburg, Florida, surgeon had an unusual side hustle. He served as one of three general partners of Q3 I LP, a cryptocurrency hedge fund that he helped launch in August 2017.

Q3 I LP has had few rivals in recent capital markets history: It has claimed monthly returns of 13 percent to 15 percent — and annual returns of 180 percent or more for its first two years of operation. The fund’s managers promoted its investment strategy as a model of prudent risk management: avoidance of margin loans and 70 percent of assets kept in cash at all times.

Dr. Tran, 44, heartily embraced his self-appointed role as Q3 I LP’s chief marketer, persuading other physicians to invest at least $50,000 apiece to become limited partners of the fund. He did this by tapping into several loose, informal doctor networks that coalesced around a Facebook group named Physician Dads’ Group. By October, according to an email Dr. Tran wrote to a prospective limited partner, Q3 I LP had supposedly raised $236 million.

But on Feb. 11, Dr. Tran’s efforts to help build Q3 I LP’s assets under management devolved into a horror show when federal prosecutors from the Southern District of New York unsealed an indictment, charging wire fraud and money laundering against his ex-partner Michael Ackerman, the fund’s former head of trading.

Concurrently, the U.S. Securities and Exchange Commission and the Commodity and Futures Trading Commission on Feb. 11 filed their own complaints against Ackerman. The CFTC complaint also named Q3 Holdings LLC and Q3 I LP as defendants but did not cite Dr. Tran or the fund’s third general partner, James A. Seijas. (In the SEC complaint, Dr. Tran and Seijas are identified as “Founding Partner 1” and “Founding Partner 2,” respectively. Ackerman, Dr. Tran and Seijas each owned one-third of Q3 Holdings LLC, the holding company for Q3 I LP.)

The Southern Investigative Reporting Foundation (now called the Foundation for Financial Journalism) first got wind of Q3 I LP’s problems in December when a medical professional whom Dr. Tran had pitched reached out to express reservations about the purported astronomical returns. While Dr. Tran’s claim of having doubled the size of investments annually would be suspect enough on its own, especially at a time when the cryptocurrency market was especially volatile, the tip included unusual elements: The limited partners’ actual losses were possibly quite large. Based on the emails and documents the prospective investor provided, the fund bears all the signs of an affinity fraud — not the type plotted in a high-pressure boiler room but something brought to life through a few Facebook groups, email lists and group texts.

Since December one theme has emerged from all the interviews conducted for this investigation: The shared educational and professional experiences among a diverse group of physicians engendered a level of trust among them so deep that it took only a few Facebook posts and screen captures to lead them, Pied Piper like, into financial disaster.

Below is an account, based on six weeks of interviews and federal court filings, of how one person with an incredible story used two other people who were willing to shout it from the digital rooftops to allegedly steal about $34 million from some very well-educated people.

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It’s not clear how Dr. Tran, Michael Ackerman and James Seijas first met. Perhaps Ackerman and Seijas became acquainted on the floor of the New York Stock Exchange, where both had worked for more than 15 years in the 1990s and early 2000s as a broker and specialist, respectively.

With an initial $15,000 investment, the three formed the Q3 Trading Club in June 2017 to speculate in cryptocurrencies, according to the Feb. 11 SEC complaint. Rather than trying to pick individual winners and losers from varied cryptocurrency offerings in the market, they used a trading algorithm that Ackerman has said he developed in 2010 to trade stocks but found effective for the trading of currencies.

(Cryptocurrencies are privately constructed units of digital payment that have gained prominence over the past decade. While having no established intrinsic value like a nation’s currency, several well-known cryptocurrencies like Bitcoin and Ether have become popular assets that are used for investing as well as peer-to-peer payments. Yet in addition to the regulatory and technological hurdles that cryptocurrencies face before their widespread adoption, they have attracted no shortage of hucksters and scams.)

Within a month of the Q3 Trading Club’s June 2017 launch, the three founders were seeking out investors. Dr. Tran’s position in the Facebook Physician Dads’ Group proved to be valuable for attracting interest, according to interviews of former Q3 I LP limited partners and the SEC and CFTC complaints.

Previously in June 2017, Dr. Tran had registered an entity called Q3 Crypto LLC at his home address, with Tran, Ackerman and James Seijas’ wife, Donna, listed as board members. (By January 2019, after Q3 Crypto LLC had stopped making the required state filings, Florida’s secretary of state classified it as “inactive.”)

But in August 2017 just as the Q3 Trading Club’s coffers had about $1 million, Ackerman’s trading strategy failed. This resulted in what the CFTC later called “substantial trading losses.” Ackerman announced to his two partners that he would completely redesign his algorithm. 

One former Q3 Trading Club investor informed the Southern Investigative Reporting Foundation that Dr. Tran had told him that after Ackerman adjusted the trading strategy in the fall of 2017, the monthly returns would be 13 percent to 15 percent.

And that is exactly what happened.

Even though the cryptocurrency markets collapsed in 2018, Ackerman’s new trading system delivered monthly returns of 14 percent to 16 percent — what market observers would consider a breathtaking performance. (One index that tracks the monthly performance of 26 cryptocurrency trading hedge funds showed an almost 72 percent  decline in 2018 as compared with the prior year.) 

At this point Ackerman, Tran and Seijas probably reckoned that if this new strategy could deliver more than 180 percent on the initial million dollars, then a hedge fund (with possibly a much larger capital base) might bring almost limitless rewards.

Thus in November 2018 the three Q3 Trading Club founders launched a new fund, Q3 I LP, with the goal of raising $15 million from limited partners. Their fee arrangement was unusual; the fund documents said the general and limited partners would split the profits 50-50, after paying what was described as “minor expenses.” (Most hedge funds charge a management fee of 1 percent to 2 percent of the assets and a performance fee of 20 percent to 25 percent.)

For investors, the fee structure did not appear to be a sticking point, however. From November 2018 to December 2019, Q3 I LP raised more than $33 million from 150 limited partners.

Dr. Tran and Seijas each further invested $250,000 or more in Q3 I LP, according to an affidavit of Homeland Security Investigations’ Special Agent John Rodriguez that prosecutors unsealed on Feb. 11. (The Tran family’s financial exposure to Q3 I LP is  significantly greater than $250,000: Dr. Tran’s brother-in-law, Seth Duhy told the Southern Investigative Reporting Foundation he had invested $1 million in the fund.)

But Q3 I LP’s general partners omitted or soft-pedaled some important details in the limited partner agreement and the subscription booklet.

Among the glossed-over matters: Q3 Holdings LLC general partners (Ackerman, Seijas and Dr. Tran) would charge limited partners capital “licensing fees” for Q3 I LP’s right to use Ackerman’s retooled algorithm. That added up to $4 million in payments to the trio from November 2018 to December 2019.

And according to the SEC’s complaint, in December 2018 the Q3 Holdings LLC general partners did not notify their limited partners that they had decided to keep for themselves any profits above the 15 percent benchmark.

Yet that was a minor detail compared to what else the federal prosecutors allege Ackerman omitted, especially about Q3 I LP’s true rate of return.

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According to federal prosecutors, as well as the SEC and CFTC, Ackerman’s reworked algorithm was nothing more than a cover story he developed in August 2017 to begin a two-year campaign of fabricating Q3 I LP’s jaw-dropping 180 percent annual return.

For regulators and investors alike, figuring out where all the money went won’t be a light task — as has been the case after the collapse of other investment funds due to fraud. 

Of Q3 I LP’s $33 million in limited partner capital, only about $10 million was invested in various cryptocurrency exchanges, according to the SEC.

So what happened to the other $23 million? Based on the federal indictment and the SEC and CFTC complaints, about half, or $11.5 million, of this amount can be traced in a straightforward fashion. Whether that can be recovered and returned to the limited partners is a different story.

To start with, Ackerman paid himself about $7.5 million in fake performance fees from the $23 million in capital. Per the federal indictment, prosecutors are seeking to compel him to forfeit five properties he bought in 2018 and 2019 with this money, including a 154-acre plot in Montana and a $3.6 million house in Delray Beach, Florida. (Property records for the Delray Beach home list James Seijas and Donna Seijas as the owners, however.

Ackerman also spent $600,000 on personal security services, $100,000 on Tiffany’s jewelry as well as an additional sum on three cars, according to the SEC.

(This does not include the $4 million in licensing fees the three Q3 Holdings LLC general partners raked in from limited partner capital to pay for the right to use Ackerman’s algorithm.)

In an attempt to explain what happened to the additional $11.5 million share, the CFTC complaint points to $3 million of it being used in a Ponzi-like fashion to meet a limited partner redemption request. Where the other capital lies is still unclear.

Figuring out how the fraud happened is not as difficult.

Ackerman told Dr. Tran and Seijas that Q3 I LP’s trading accounts had safeguards in place to prevent him from withdrawing money without a second partner’s approval. Yet, according to the SEC and CFTC complaints, Ackerman withdrew money at will.

Having total control over Q3 I LP’s finances, Ackerman could use basic software to create account balances that showed whatever he wanted them to. His favorite tactic, according to the SEC, was to modify screenshots of the fund’s account statements to inflate the portfolio’s value: On Sept. 1, 2019, Ackerman sent Dr. Tran a text message that showed Q3 I LP’s account balance as slightly less than $182 million, although in truth only $1.5 million was available. Three months later, when the account balance was $428,000, he allegedly sent Dr. Tran and Seijas a screenshot that indicated an account balance of just  under $310 million.

Given the fact that Dr. Tran and Seijas did not handle Q3 I LP’s brokerage accounts, no regulator has suggested they had anything to do with creating fake performance numbers.

Their value to Ackerman was in helping to raise new capital, especially by immediately passing on what he said — or the documents he manufactured — to current and prospective limited partners.

Just as important, they appear to have taken Ackerman’s word on everything.

That’s understandable in Dr. Tran’s case since he had no professional financial services experience. So when Ackerman fed Dr. Tran nonsensical talking points to help him explain Q3 I LP’s returns, he repeated them without raising any questions. Dr. Tran wrote to prospective limited partners that the fund’s secret is a “proprietary stratagem” that focuses on a financial ratio called “correlated capital forfeiture.”

That phrase appears to be absent from finance textbooks: Stephen Cecchetti, a professor of international finance at Brandeis University, told the Southern Investigative Reporting Foundation he had never heard of the term, and a Google search for the phrase also struck out.

Seijas’ lack of oversight seems less explicable. His resume describes 26 years of finance work, including almost 11 years of serving as a financial adviser to high-net worth clients. It’s reasonable to suppose he might have understood that, compared with even much smaller investment funds, Q3 I LP had almost no controls at all.

Many hedge funds arrange for an independent fund administrator to provide monthly or quarterly profit and loss statements to limited partners. And most funds hire an accounting firm to perform an audit at the end of the fiscal year. In contrast, as the SEC has alleged, Dr. Tran and Seijas were forwarding to Q3 I LP’s limited partners screenshots from Ackerman’s cellphone as performance updates. Dr. Tran would then calculate limited partners’ pro rata share of profits and send out the account statements.

Furthermore, Q3 I LP does not appear to have had a prime brokerage relationship. Typically large banks serve as prime brokers to clear and settle trades for hedge funds, as well as hold their cash balances and serve as custodians of their securities portfolios. If Q3 I LP had a prime broker, Ackerman would not have had the ability to inflate the fund’s account balances.

Dr. Tran appears to have been especially adept at raising capital. In January, two Q3 I LP limited partners told the Southern Investigative Reporting Foundation that Dr. Tran’s posts on his personal Facebook account convinced them the fund really was doing well.

And Dr. Tran went on an extensive shopping spree from mid-2018 through the autumn of 2019 and posted all the details on his refreshingly immodest personal Facebook account. (This seems to contrast sharply with Ackerman’s behavior; federal prosecutors allege Ackerman concealed his property purchases by putting other people’s names on the titles.)

For a vacation in June 2019, Dr. Tran took his family for pricey luxe stay to the Maldives, according to his Facebook posting. In August 2019 Dr. Tran posted pictures of his new 50-foot Okean motor yacht (whose base sticker price was roughly $1.14 million) and in November 2019 of his 2018 Bentley Continental GT (that retailed for at least $264,300). Dr. Tran appears to have paid cash for both, according to a search of uniform commercial code filings. (By late January, Dr. Tran had shut his Facebook account.)

The Southern Investigative Reporting Foundation in December sent Dr. Tran a lengthy question about these purchases. He did not respond. In late January,  

Dr. Quan Tran, right, his wife, Evan Elizabeth, and his brother-in-law, Seth Duhy, attend a Nov. 9, 2019, performance of “Moulin Rouge” in Manhattan. Source: Facebook
Dr. Quan Tran, right, attends a Nov. 9, 2019, performance of “Moulin Rouge” in Manhattan with his wife, Evan Elizabeth, and his brother-in-law, Seth Duhy. Source: Facebook

On Dec. 13, 2019, Ackerman sent an email to some Q3 I LP limited partners apologizing for the “endless delays the past month” in providing them performance figures, according to Special Agent Rodriguez’s affidavit. Ackerman said that because of a health problem that had led him to pursue treatment in New York City, he was suspending the fund’s trading for the rest of December and all of January.

Less than 30 minutes after Ackerman sent that email, Dr. Tran sent his own email to Q3 I LP limited partners and offered a very different take on Ackerman and the fund’s health, per Special Agent Rodriguez’s affidavit. Following Ackerman’s Dec. 3 departure from a hospital stay, Dr. Tran wrote, he and Seijas visited him at his house in Sheffield Lake, Ohio: After gaining access to his computer, “[We] discovered what appeared to be a very large discrepancy between the assets [Ackerman] had been reporting to us and the balance in the trading account.”

Dr. Tran said that when confronted about this alleged discrepancy, Ackerman claimed he had moved the assets to another, more secure trading account but refused to name where it was or give Dr. Tran and Seijas access to it, according to Special Agent Rodriguez. Soon afterward, they alerted the SEC’s Miami regional office about the issue, Dr. Tran said.

When news of the regulators’ investigation of Q3 I LP spread across the informal physicians networks in mid-December, “it felt kind of like you’d been struck by lightning, it was so sudden,” said one physician and limited partner, “except getting hit by lightning probably doesn’t make you feel betrayed and foolish.”

Upon learning of Q3 I LP’s looming troubles, a pair of friends who had become fund limited partners, Lafayette, Colorado-based Dr. Anthony Kokx and Morgantown, West Virginia-based Dr. Jaime Miller, hired a lawyer to investigate the fund. They referred all questions to their lawyer, Mark Hunter.

Reached in mid-January, Hunter would say only “we’re in the early stages of an investigation and I’m trying to obtain the facts.” He added, “Hopefully I will be able to say more soon.”

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Over the course of the investigation into Q3 I LP’s collapse, the Southern Investigative Reporting Foundation identified seven of its limited partners: Miller and Kokx, as well as five other individuals. These five limited partners spoke on the condition of anonymity because they were actively cooperating with federal regulators and law enforcement officials.

Q3 I LP’s general partners did not respond to multiple inquiries from the Southern Investigative Reporting Foundation, including emails posed to Ackerman and Dr. Tran. Nor did they respond to voice messages. And James Seijas did not reply to messages left at his Shrewsbury, New Jersey, home.

Paul Flannery, a lawyer at Flannery, Georgalis LLC who represented Ackerman in his Feb. 14 arraignment in Cleveland, declined to comment on Feb. 17 about his case. Flannery said his firm is still determining if it will represent him in the future.

Updates: This file was updated Feb. 18, 2020, to reflect details gleaned from Homeland Security Investigations’ Special Agent John Rodriguez’s affidavit about alleged irregularities associated with Michael Ackerman’s management of Q3 I LP’s portfolio. A comment about lawyer Paul Flannery’s representation of Michael Ackerman has also been added. 

An earlier version of this article incorrectly identified James Seijas’ wife, Donna. The story was updated on March 2, 2020. The Foundation for Financial Journalism regrets the error.

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Mr. Neuger and Mr. Fitzmaurice Decide to Pursue Other Opportunities

EcoAlpha Asset Management, a hedge fund that sought to capitalize on what it touted as the looming global natural resource scarcity, closed its doors last month.

Southern Investigative Reporting Foundation readers will recall the fund from a January story that looked at the lack of disclosure surrounding the founders’ backgrounds, particularly of Win Neuger, who was the driving force behind AIG’s disastrous foray into securities lending, a gambit that required nearly $44 billion in emergency federal assistance. His actions prompted an AIG subsidiary to sue the company for its losses (a suit that was since settled with terms undisclosed).

EcoAlpha was the brainchild of Matthew Fitzmaurice who himself was at the center of a previous Wall Street mania, having spent three years as the chief investment officer and, briefly, the chief executive, of Amerindo Investment Advisors, a money management firm whose portfolio was entirely composed of the most volatile dot-com era shares. As a result, the fund’s performance resembled a Richter scale during an earthquake, swinging from a stratospheric 265 percent gain in 1999 to a loss of 65 percent in 2000. (The founders of Amerindo, Gary Tanaka and Alberto Vilar, were sentenced to prison in 2008 for stealing client capital; there was no suggestion from regulators and prosecutors that Fitzmaurice did anything wrong.)

In the email announcing the closure, EcoAlpha’s general partners said the decision was prompted by the unexpected departure of Bill Brennan, a veteran portfolio manager responsible for managing the fund’s water-oriented equities. To the Wall Street veteran’s eye, however, attributing a fund’s failure to one partner’s departure is truly unusual.

Analysts and portfolio managers regularly leave one fund for another or start their own, and while investors (more formally known as limited partners) may be concerned about departures, as long as performance is acceptable, it rarely warrants a redemption notice.

A more likely cause for EcoAlpha’s closing is much more mundane: despite its high-profile investment thesis, and after more than six months in business, the fund managed to land only one substantial investment — a $2 million investment from Columbus, Ohio’s Kelley Family Foundation. As the fund was being formed Fitzmaurice told his partners that he anticipated landing a $50 million investment from Portland, Oregon investment advisory Arnerich Messina, the primary investor in AWJ Capital Partners, a fund of funds with an emphasis on sustainability investing Fitzmaurice had founded prior to EcoAlpha.

But Arnerich Messina did not invest in EcoAlpha. Part of the reason may be that approximately 50 percent of Arnerich Messina’s capital was classified as “offshore” for tax purposes and EcoAlpha did not have an offshore investment vehicle. When the foundation called for comment, a colleague of company co-founder Anthony Arnerich took a message and said he was on vacation through mid-June.

Additionally, EcoAlpha had sought to launch with about $3.4 million in partner capital — including nearly $1 million each from Ron Blaylock, Fitzmaurice’s Georgetown University roommate, and Neuger — but for reasons that are unclear, less than $2 million of that was invested; Blaylock, according to several former EcoAlpha officials, did not participate in a second round of financing.

A call to Blaylock’s office was not returned.

With only one outside investor and just over half the agreed-upon partner capital funded, EcoAlpha cut the partner salaries 75 percent in January, according to an email that the Foundation for Financial Journalism obtained.

Fitzmaurice, reached on his cellphone on May 20, hung up when asked for comment and he did not return a follow-up call. Calls to EcoAlpha partners Jonathon Clark, Win Neuger and Elias Moosa were not returned.

Correction: A previous version of this story described Ron Blaylock as not investing in EcoAlpha. That is incorrect; he invested approximately $1 million. The Southern Investigative Reporting Foundation regrets the error.

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The Past Imperfect: Mr. Neuger and Mr. Fitzmaurice Would Like Your Money, Again

The website of a new Minneapolis venture, EcoAlpha Asset Management, strikes a different chord for a hedge fund, holding itself out to the deep-pocketed as not just a way to maybe beat the market, but as a vehicle to economically engage with the vexing questions of access to natural resources, population growth, wealth creation and renewable energy.

Its pitch to investors is simplicity itself: As countries around the world pour countless billions of dollars into solving these problems, EcoAlpha will (presumably) benefit mightily from owning the shares of companies and the physical assets that address these issues.

EcoAlpha launched in early October. And as is the case with many a nascent fund, its investment team is heavily credentialed, with ample experience and prestige schooling. But the brief biographical sketches of  its co-founders, Win Neuger and Matthew Fitzmaurice, are most compelling for what is left out.

While chief of AIG Global Investment Corp., Neuger engineered and oversaw perhaps the most economically destructive episode of the entire global financial crisis: AIG’s securities lending portfolio’s headlong foray into mortgage- and asset-backed securities between 2005 and 2007, which ultimately forced the Federal Reserve to engineer a nearly $44 billion rescue. For his part, Fitzmaurice was for three years the chief investment officer and briefly the chief executive, of Amerindo Investments Advisors, the money management operation that was a poster child for Wall Street’s dot-com era loss of judgement.

With an investment thesis that is gaining traction as so-called impact investing evolves away from philanthropies and into the for-profit realm (and launched with the help of Ron Blaylock, a key fundraiser for President Barack Obama and a private equity executive with his own past regulatory headache), Neuger and Fitzmaurice want institutional capital — and plenty of it.

What they don’t want, in all probability, are probing questions.

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Fitzmaurice, whose bachelor’s and law degree are from Georgetown University, arrived at Amerindo after a decade-long stint at Wessels, Arnold & Henderson, a Minneapolis-based small-cap stock underwriter. Amerindo was famous for its outsized returns — one portfolio reportedly booked an astonishing 249 percent increase in 1999 — making it an investor and media darling throughout the decade. But just as its massively concentrated portfolio soared as all things tech were frantically bid up, it collapsed when the Dot Com bubble burst spectacularly in the spring of 2000.

Fitzmaurice dutifully pitched Amerindo’s bull case for tech shares in the face of the rout, but Amerindo was mortally wounded and by August 2002 he had resigned. Several months prior to his leaving, The Wall Street Journal noted in a May 2002 article that in the span of just three years, Amerindo’s assets under management dropped to $1.4 billion from $8 billion.

In 2005, the Securities and Exchange Commission and the Department of Justice jointly sued and indicted Amerindo’s high-profile founders, Gary Tanaka and Alberto Vilar, for allegedly misappropriating a $5 million client account as well as an alleged parallel fraud related to failing to both provide certain investors contractually guaranteed minimum levels of returns and failing to return their capital. Both were convicted and are serving lengthy jail sentences. (None of the civil or criminal cases brought against Amerindo or its founders suggested that Fitzmaurice was aware of or played any role in the fraud.)

After Amerindo, Fitzmaurice opened a pair of small hedge funds in and around Minneapolis. In 2003, he and Mitch Bartlett, a former colleague from Amerindo, put together Talaria Partners, a long/short equity fund whose details are sparse (Bartlett, now an analyst at Craig-Hallum, did not return a call seeking comment.) In 2006 he launched AWJ Partners with current EcoAlpha colleague Jonathon Clark. A type of hedge fund known as a fund of funds, AWJ allocated its investors capital to hedge funds with investments in water, renewable energy and sustainable agriculture. According to Securities and Exchange Commission filings, AWJ managed slightly over $47 million in assets as of February 2014; its performance results could not be obtained. (Despite Fitzmaurice’s billing as a “rising star” in hedge funds by Institutional Investor magazine, he and Clark shut AWJ shortly afterward.)

Win Neuger, a Minnesota native and Dartmouth graduate also at AWJ with Fitzmaurice, is perhaps the least understood central character in the entire credit crisis.

(A brief personal disclosure: I wrote “Fatal Risk,” a 2011 book about the collapse of AIG that featured Neuger and the securities lending portfolio story in several sections. Reached at his home prior to the book’s publication and informed about its reporting, Neuger declined to comment.)

Recruited to AIG in 1995 to consolidate its far-flung investment businesses, as both the company and AIG grew (in both profitability and by acquisitions,) so did Neuger’s role.

By 2005, when Neuger’s boss, AIG’s legendary CEO Maurice “Hank” Greenberg, ran afoul of both a skittish board of directors and a crusading Attorney General named Eliot Spitzer and was forced to resign in haste that March, Neuger had become a very powerful man: He oversaw more than $700 billion in AIG Global Investment Corp. assets, sat on AIG’s executive committee and would take home a $6 million compensation package that year.

Somehow, though, it wasn’t enough. Free from Hank Greenberg’s risk-management constraints, Neuger implemented a plan he called “Ten Cubed” that would have the institutional asset management unit generating a $1 billion operating profit within several years. (About half the asset management unit’s operating income was coming from the sale of guaranteed investment contracts.)

Central to this scheme was a small, easily overlooked unit called AIG Global Securities Lending that even long time AIG insiders were only faintly aware existed.

(For life insurance companies, securities lending is an ancillary business. As policies are written and premium payments come in, insurance companies take that cash and purchase highly-rated corporate bonds whose maturities roughly approximate their expected pay off dates. Hedge funds and other money managers often need to borrow corporate bonds for a short period of time and to do so, will post as collateral the bonds par value plus a small interest rate, say $1,020, for the loan’s duration. The insurance company then takes the $1,020 and buys a short-term, highly rated government bond. When the borrower takes the collateral back, the insurance company sells the government bond and keeps the accrued interest as profit.)

Neuger, whose lieutenant Peter Adamczyk oversaw the securities lending portfolio on a daily basis, managed to convince the AIG general counsel’s office to approve of a change in risk-parameters for the securities lending program, as this lawsuit alleges, without informing its “clients,” for example AIG’s various life insurance subsidiaries. (The suit was settled without terms being disclosed.)

In mid-2005, the then $60 billion AIG securities lending portfolio begin to invest borrowers’ collateral in mortgage-backed securities, capturing vastly more yield but exposing them to a series of risks that were ignored when AIG insiders raised concerns.

The first risk was that the MBS purchased were known as Alt-A, a category falling between prime and subprime on the credit spectrum, but in 2005, with loan verification practices collapsing, these bonds were carved from loan pools whose credit profiles were deeply troubled.

Moreover, the portfolio, which had always sought to closely matched its assets and liabilities — when the bonds loaned out were due and when they were expected to return the cash collateral — was, by the end of 2006, almost $900 million skewed towards the liability side. With cash coming in as more life insurance bonds were lent out, no one was the wiser as the new cash met redemption requests from the insurer and the return of borrower’s collateral.

Then the market for sub-prime bonds seized in early 2007 and the fate of AIG Global Securities Lending was sealed: the life insurers demanded their portfolios of corporate bonds returned and borrowers demanded their cash back. By late 2007 AIG was forced to use its operating cash to keep both the portfolio afloat and increasingly angry insurance regulators at bay. As market after market froze throughout 2008 even AIG’s once seemingly limitless resources wouldn’t be enough.

Anyone looking for evidence in AIGs corporate filings between 2005 and 2007 of the security lending program’s colossal build up of assets and risks is out of luck, however, as it isn’t mentioned, even obliquely.

For his part, Win Neuger never hit his “Ten Cubed” goal as the $43.7 billion Federal Reserve portfolio bailout got in the way, but as consolation, he earned just under $23 million between 2006 and 2008, including over $6.3 million in 2008, a year when AIG booked a $99.3 billion loss.

In the aftermath of AIG’s bailout, Neuger was interviewed several times by congressional officials and federal regulators examining AIG’s role in the credit crisis but avoided any sanction. Nor does mainstream media, as evidenced by this interview with Fox Business channel’s Maria Bartiromo, appear to have any interest in his past.

After resigning from AIG in 2009, Win Neuger became president of PineBridge Investments, AIG’s old hedge fund unit that was acquired by Hong Kong-based private equity firm Pacific Century Group in 2010. He resigned in February, 2012.

In a small irony, Pinebridge’s headquarters are located several floors below C.V. Starr, the insurance company helmed by his old boss, Hank Greenberg.

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The Southern Investigative Reporting Foundation made attempts via phone and email to obtain interviews with Neuger and Fitzmaurice but EcoAlpha spokesman Eric Olson declined to make his colleagues available, saying by email, “As a new company we prefer to remain focused on our present goals rather than participate in interviews at this time.”

An earlier call to Fitzmaurice’s cell was referred to Olson. A work colleague of Ron Blaylock’s told SIRF via phone that he was attending a funeral and would be unable to comment.

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A Reckoning for the Hedge Fund King of Akron, Ohio

Anthony Davian, a once-prolific presence on social media who held himself out as a iconoclastic hedge fund manager prior to his August 2013 indictment on a series of fraud charges, was sentenced several hours ago in a Cleveland courtroom to four years and nine months in federal prison.

Federal Judge Patricia Gaughan of Ohio’s Northern District court also ordered Davian to make restitution of approximately $1.8 million to his defrauded investors and serve three years of probation after his release. Should Davian waive his right to appeal, he is slated to report to prison in late December or early January, pending his recovery from a recent foot surgery.

According to a pre-sentencing guideline that federal prosecutors filed on Nov. 18, they sought a 60-month sentence (and full restitution) for Davian based on an investigation they claimed showed Davian had never sought to manage money, but only to raise investor capital to fund personal and business expenses, including paying off an office lease and attorney fees.

A once forceful presence on what is now broadly known as “Finance Twitter,” Davian’s signature remark was “Ching!” (after a trade he had been discussing allegedly turned profitable for his portfolio). He was the subject of a July 2013 Southern Investigative Reporting Foundation investigation that raised doubts about his performance and whether he was even managing the several hundred million dollars he then publicly claimed.

In the weeks after the Southern Investigative Reporting Foundation’s report was released, lawyers from the Securities and Exchange Commission and the Department of Justice filed claims in federal court to shut down Davian’s portfolios and seize assets. Apart from an expensive Audi and a Bath, Ohio, property where Davian sought to build a mansion, there was apparently little for government lawyers to seize.

In the courtroom, according to notes given to the Southern Investigative Reporting Foundation by someone present in the courtroom who asked not to be identified because he sought “to put this behind me,” Davian’s wife and mother made statements that sought mercy from Judge Gaughan before the sentence was entered. His mother discussed what she argued was Davian’s long history of mental illness; his wife said that all of their children had substantive medical issues that were “drowning them in medical expenses.”

Davian’s attorney, Paul Adamson of Akron’s Burdon & Merlitti, was unavailable to comment to the Southern Investigative Reporting Foundation prior to this article’s publication, according to a colleague answering his phone.

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Bryan Caisse Comes Home

A former submarine weapons officer turned hedge fund manager, Bryan Caisse was arrested on Saturday in Bogota, Colombia, by officers from the Department of State’s Diplomatic Security Service.

His name should ring a bell for Southern Investigative Reporting Foundation readers: Caisse was the subject of a December report detailing how the once well-regarded mortgage-bond fund manager disappeared from New York in the autumn, leaving a daughter and numerous investors from his fund behind and in the dark.

In October, a prosecutor with the New York County district attorney’s major economic crimes bureau impaneled a grand jury to investigate a host of allegations surrounding Caisse’s nonpayment of a series of so-called working capital loans to his hedge fund, Huxley Capital Management.

Specifically, the prosecutor was interested in unpaid loans from Caisse’s friends and family, many of whom had lent him money on the assurance that there was virtually no risk involved and that it would be repaid with interest in under a year. The Southern Investigative Reporting Foundation obtained documents showing Caisse avoided repaying several of these investors by creating email accounts for a pair of fictitious personal assistants that repeatedly assured the investors a wire transfer was forthcoming or an overnight mail delivery of a check was en route.

Manhattan District Attorney Cyrus Vance unsealed charges earlier today.

The article prompted a flood of replies from readers, many of whom were angry over the portrayal of Caisse, a proud U.S. Naval Academy graduate, recalling a generous and fun-loving friend and former colleague. Several writers noted that Ritchie Capital Management, which lent Caisse’s Huxley $2 million, had not claimed fraud despite having not been paid back. (Ritchie’s position is, however, more discreet: Representatives of the Chicago-based fund, which as the original article noted is no stranger to regulatory woes, argued to the grand jury that any issue is civil in scope and does not — in their view — appear to be criminal.)

In addition, there were numerous objections to a brief reference about Caisse’s drug use, drinking and colorful personal life, as well as expressions of doubt that the 50-year-old had fled the New York City area at all.

But there is no doubt that starting around the third week of October, Caisse showed up in Medellin, Colombia, claiming to be working closely with Colombian businessman Edgar Botero (an engineer best known in that country as the head of the Miss Colombia pageant) in developing a resort between the coastal cities of Cartagena and Barranquilla.

Nothing much emerged from those plans, but Caisse took up residence in Medellin, moving into a small apartment above the Shamrock Irish Pub. Spending many of his days (and nights) drinking with the small U.S. expatriate community there, Caisse alienated several Americans, who grew weary of business plans that never materialized, playing host to him and his increasing reliance on them for loans.

So earlier this month, when Antonio Zamudio, a special agent with the Diplomatic Security Service, showed up in Medellin asking questions about Caisse’s whereabouts, there was no shortage of people hanging around the Shamrock willing to spill the beans, a rare occurrence in a city where visibly cooperating with law enforcement has long been a death sentence.

Caisse’s former friends at the Shamrock told Zamudio that Caisse was planning to be back in Medellin on Saturday, Jan. 18, providing an opportunity to interdict him as he sought to board a plane in Bogota for the trip. On Saturday afternoon, at least one Shamrock regular got a text from Caisse, saying he was “delayed” in Bogota by authorities for an unspecified reason.

On Oct. 8, 2014, Manhattan District Attorney Cyrus Vance sentenced Cassie to serve 1 ½ to 4 ½ years in state prison for stealing more than $1 million from former U.S. Naval Academy classmates and friends, persuading them to give him loans in connection with a new company.

Update: This story was updated on Oct. 8, 2014, with information about Cassie’s sentencing.

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The People of the County of New York v. Bryan Caisse

Over five days in mid-October, prosecutors with the New York County district attorney’s major economic crimes unit brought forth a stream of witnesses who told a grand jury about a money manager named Bryan Caisse.

One after another, their testimonies painted a remarkably similar story: Caisse had borrowed money to aid his hedge fund, Huxley Capital Management, as it launched. Prosecutors allege that the distinctive feature of these loans is that they weren’t repaid. Moreover, they allege that some of the loans were used for Caisse’s personal expenses.

The loans, based on documents shared with the Southern Investigative Reporting Foundation, appear to have been structured as so-called working capital loans whose purpose was to help the newly formed fund pay bills and launch new portfolios until it could generate enough profit to sustain itself.

Such loans are common enough in the hedge fund business and usually bear interest rates above the market rate — in one example, based on documents reviewed by the foundation, the rate promised was 8 percent — and are typically paid off over the course of a year or two. Historically they represent decent risks in that many hedge funds make it past their first two years of existence and thus can pay the loans back.

Caisse’s marketing approach, according to his lenders, was tantalizing to lenders worried about risks in Huxley’s strategy of trading bonds (and derivatives) carved from pools of residential mortgage loans. He assured them that Huxley’s credit was essentially that of the U.S. government, reasoning that a portfolio invested solely in U.S. Treasury bonds and mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac would always have streams of interest coming in.

More directly, Caisse was for many years a well-regarded figure in the mortgage bond trading community and sported an impressive track record of generating returns for investors. Handsome and outgoing, he was a highly effective salesman.

Determining how much capital allegedly was lost is not easy, but it is likely to be in the millions of dollars. The report of claimed losses vary. One person asserts having lost $15,000; another man alleges he obtained a second mortgage on his Manhattan residence to invest with Caisse. One Huxley lender told the Southern Investigative Reporting Foundation that on the day he provided grand jury testimony he met two men (also there to provide testimony) who claimed they had each invested more than $100,000.

Several weeks ago the grand jury handed down a sealed 10-count indictment against Caisse, including nine counts of larceny. It represents a truly stunning reversal of fortune for a man whose hedge fund launch was seen as being on a fast track to amassing a fortune.

When the indictment will be unsealed is not currently known and a spokesman for the New York County district attorney’s office declined comment when reached by phone.

Complicating matters is that Caisse’s whereabouts have been an open question for several months.

Interviews with lenders to the fund and a family member indicate that starting sometime in the late spring he stopped returning calls and emails.

Caisse’s younger brother Steven, an owner of a software business catering to the powersports car industry, told the Southern Investigative Reporting Foundation on Dec. 5, “I haven’t spoken to Bryan in at least nine months and I honestly have no idea where he is.”

While denying any knowledge of his brother Bryan’s legal woes — Steven Caisse described the issue as “a private family matter” — he did acknowledge that he and his family have banded together to care for his brother Bryan’s teenage daughter.

Indeed for nearly a week, numerous attempts to reach Bryan Caisse on his cellphone and email accounts failed.

On Dec. 7, however, Caisse was reached through Facebook’s instant messaging application, and in a brief phone call he denied any awareness of legal problems stemming from his hedge fund.

In a call later that evening — and in a series of instant messages — Caisse’s tone shifted considerably and he alluded to a confluence of events that had led to the collapse of the fund, and he confirmed he had left New York City, at least temporarily.

(Caisse’s initial call on Dec. 5 appears to have been made using a mobile phone’s voice over internet protocol application. A follow-up call he made that evening came from a phone number originating in Colombia.)

When one pieces together Caisse’s breathless theory, it all amounts to something of a conspiracy in which larger forces were at work against him. On first pass, these claims seem (to put it charitably) implausible. But investigation does confirm that Huxley Capital Management’s fate was highly unusual in many ways. And after some very consequential mistakes in personal judgment by Caisse, the district attorney’s office had a trail of bread crumbs laid before it leading right to his front door.

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A screenwriter needing a character to illustrate a Wall Street fable could do a lot worse than using the life of Bryan Paul Caisse as a muse.

Born in the northern Massachusetts town of Athol and a 1985 graduate of the U.S. Naval Academy, Caisse served four years of active duty on a nuclear sub and, after leaving the service, found his way to New York.

Without a job and newly enrolled in New York University in pursuit of an M.B.A., Caisse, as he tells it, was half drunk and shooting pool in a dive bar in 1991 when in walked a pair of guys in suits. More than a few rounds later, the suits were defeated and buying Caisse a nightcap. Learning that he had been a weapons officer aboard a nuclear sub — and could hustle like a champ — they suggested he interview at their firm. The next morning, after interviewing while hungover and wearing a stained shirt, he was hired by a firm he said he had never heard of by the name of Bear Stearns to sell a product he hadn’t supposed existed called mortgage-backed securities.

Bryan Caisse’s joining Bear Stearns amounted to a match made in heaven.

In the early 1990s, Bear Stearns was building out its capital markets unit and sought to emphasize its underwriting of mortgage-backed securities, volatile and complex instruments that even in 1991 had proven alternately lucrative and deadly for larger, more established firms like Salomon Brothers and Kidder Peabody.

Yet with an engineering degree and plenty of advanced training in physics, modeling and selling mortgage bonds was not taxing for Caisse. Nor did Bear Stearns have problems with Caisse’s entertainment-driven approach to building client relationships: If (most) every salesman on Wall Street was expected to entertain clients at dinners or sporting events, he would go much further, taking them to getaway weekends when they would guzzle booze, eat like kings, fish offshore or attend the biggest games, all on Bear Stearns’ dime. (The expectation was that if Caisse spent $5,000 entertaining clients, he would in short order get $25,000 or $30,000 in trading commissions from them.)

Eventually Caisse would come to understand that being a salesman at a big Wall Street firm was akin to being a good accountant: You would have something approaching job security and, in most years, a (very) good income. But the stars of Bear Stearns — who were paid well with salaries stretching into the millions of dollars — were the traders. In 1994 he got his shot at trading when Bear Stearns’ nascent asset management unit was expanding, and for three years he profitably and independently ran a mortgage book for Bear Stearns Investment Advisors.

In 1997 Caisse left Bear Stearns: He joined his former Bear Stearns boss Gary Lieberman in launching West Side Advisors, a hedge fund managing only mortgage-backed securities. At Bear Stearns, the pair had done well but earned what the rapidly growing firm allowed the two to keep; at a hedge fund the sky was the limit.

And for a decade West Side Advisors provided plenty of blue sky for Bryan Caisse.

At around $500 million in assets and posting steady returns, West Side avoided excessive leverage and the absurdly complex bond bets that occasionally turned the mortgage-backed securities markets into a charnel house for the mathematically apt.

Sticking to the fund’s proverbial knitting proved lucrative for Gary Lieberman, who would buy a piece of the New Jersey Nets and a house once owned by Harrison Ford; Bryan Caisse, too, became wealthy and while sports franchise ownership wasn’t his thing, he began to have serious fun.

Summering in East Hampton, N.Y., and traveling the world, Caisse appears to have been the world’s happiest 20-year-old (albeit one that was trapped in a 40-year-old body), maintaining a social life that deserved professional chronicling and fueled by ample amounts of cold beer, expensive tequila and strong pot. With a pair of marriages behind him, New York’s Upper West Side was his playground as he dated models, had flings with actresses, went to the best restaurants and partied with rock stars.

But in several ways, Caisse retained a closeness to his roots that has rarely been seen in successful New York hedge fund managers, remaining proudly loyal to family and old friends, staying in constant contact and entertaining them generously when they came to New York. Moreover, in 2007, he fought for and won a long custody battle for his daughter.

In 2008, with the mortgage bond market collapsing and West Side Advisors’ portfolio experiencing sharp losses, Caisse — who had spent much of 2007 on the sidelines of the fund while in the midst of his custody battle — left to set up a hedge fund with the aim of taking advantage of the massive bargains that were for there for the taking for by someone with cash and experience. The fund was called Huxley Capital Management as a tribute to Aldous Huxley’s “Brave New World” and a reference to the collapse of certainty in the wake of the credit crisis.

Statistically speaking, mortgage bond traders said at the time (and with rank envy) that there was very little chance of Bryan Caisse’s not making an absolute killing.

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For something everyone said couldn’t fail, the launching of Huxley Capital Management proved to be a hard road to travel.

To start, the paperwork alone set back Caisse six figures and then there was rent, accountants, compliance and a small blizzard of lesser expenses. Taking expensive flights back and forth between New York and Dubai (where petrodollar princes sat atop virtual piles of cash that they were newly keen to put to work in the capital markets), he secured a memorandum of understanding for a $200 million investment in the then near future.

So to keep the fund going until the Dubai capital came in and he could start charging 2 percent management fees, Caisse borrowed cash from his ever expanding circle of friends. One of those lenders was Dr. Wellington “Tony” Tichenor, a Park Avenue allergist whom Caisse had met on East Hampton social scene through a mutual friend, acting coach Gary Swanson.

“Gary introduced me and he spoke highly of Bryan,” said Tichenor. “His resume checked out and his credentials were solid; I liked the guy. He was smart.” Ultimately he would loan Caisse an amount he described as “more than $50,000, but not $100,000.” (Although he was never paid back, Tichenor did arrange for a girlfriend to get a job at Huxley; Swanson did not return multiple phone calls seeking comment.)

Calamities big and small began to intervene, however.

On Dec. 11, 2008, Bernard Madoff’s infamous Ponzi scheme surfaced, sending reverberations through the money management landscape. In short order, a nearly completed investment from Carl Icahn, the result of months of discussion, was canceled. Several days later, Huxley’s management was told that the pending Dubai investment had been put on hold. (For hedge fund managers the true fallout from the Madoff scandal wasn’t over ethics but funding. It would be several years before institutional investors would support a fund that wasn’t sponsored by a unit of Goldman Sachs or J.P. Morgan.)

In the post-Madoff wreckage, small funds like Caisse’s Huxley were truly orphans.

Six months later, in June 2009, Caisse secured a working capital loan from Chicago’s Ritchie Capital Management for $2 million. Ritchie, which had just put its own series of headaches behind it, owned Royal Palm Insurance and was able to secure Huxley $50 million from Royal Palm in a managed account. (A managed account is a portfolio within a hedge fund for a single client. While managed accounts are counted in the all-important assets under management figure, the fund usually charges a 1 percent management fee and keeps 10 percent of profits, half the standard fees of what most hedge funds charge their investors.)

Using leverage, Huxley got the Royal Palm portfolio up to $500 million in value and by all accounts did an absolutely stellar job managing it for a year.

Nonetheless, the reality of life at Huxley was hardly gilt-edged: With only $480,000 in annual management fees being generated, there wasn’t nearly enough to cover the $120,000 monthly in expenses from eight employees and a midtown Manhattan address. By that autumn, key employees began to leave. On a December 2010 trip to Dubai to raise funds, Caisse was able to peddle the leveraged $500 million in assets figure during a second attempt to get funding from Dubai, reckoning that Huxley’s solid performance was sure to attract the investors who could make that a reality.

Once again Caisse returned to New York with a commitment from Dubai to invest in the fund.

The other shoe, however, was soon to drop.

Ritchie sold Royal Palm in February after a dispute with Security First Insurance was settled through a protracted arbitration. (Some observers might find in this a supreme irony; the chairman of Security First was a founder of Royal Palm). A central condition of the deal was that all of Royal Palm’s investment assets would be converted to cash.

By the end of the month, Huxley effectively had zero assets and owed Ritchie $2 million.

Soon afterward, finance officials in Dubai, not wanting to be the only investor in the fund, halted their investment.

Refusing to quit, but with a desperate need for cash, in the spring of 2011 Caisse again turned to friends and family, except this time it was old friends; their trust in Caisse was strong but their asset base was not. When he took working capital loans from these people (unlike what occurred with Dr. Tichenor and other lenders from 2008), he was taking money that represented a material part of their net worth, slated to make future mortgage payments, college tuition or their retirement.

(So called friends and family money has long been a ready source of hedge fund start-up capital, but there is an unspoken tradition that the manager usually takes money only from those best able to risk it or who can live with a longer repayment time frame.)

Still, Caisse again got the attention of institutional investors and by that June appeared well on the way to getting Huxley off its back for a third time, but a bad car accident left Caisse effectively bedridden for the balance of 2011 and ended the resurrection efforts.

In January 2012,  Caisse took a job at Performance Trust Investment Advisors in Chicago, signing a contract that was designed to provide him ample cash up front so he could pay back investors. Ultimately the deal fell through: Chief executive officer Doug Rothschild said it was because Caisse would not move to Chicago for what he said were “personal reasons.” Caisse told people that it was because another executive got skittish over the use of derivatives in the fund’s mortgage portfolio.

In February of this year, back in New York and trying to get Huxley going again, the music finally stopped playing for Bryan Caisse.

The New York County district attorney’s major economic crimes unit, with a host of complaints from lenders, opened an investigation into whether Caisse had used their funds for personal purposes. Many lenders, convinced that Caisse was not being forthcoming about repaying them, were grateful recipients of phone calls from Sean Pippen, the major economic crimes unit prosecutor leading the investigation, and happily sent him emails, documents, texts and notes of their dealings with Huxley and Caisse.

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Borrowing from old friends appears to have been a profound mistake for Bryan Caisse, and one that was especially compounded by his role in a series of increasingly implausible excuses for not returning their money.

The story of one lender, whose loan represented 30 percent of his life’s savings and who had invested in Huxley in 2011 on the promise that the money would be paid off in one year, is illustrative of the circus that getting paid back would devolve into.

This lender spent excruciating weeks emailing Caisse’s assistants at Performance Trust in late 2012 to get checks that he repeatedly was assured  were in the mail.

The emails — which were examined by the Southern Investigative Reporting Foundation — document a host of concurrent personal and professional crises that befell Caisse and his assistants and that conspired to prevent them from successfully sending checks via overnight delivery.

To examine this correspondence is to plumb the depths of acute incompetence to a level rarely imagined (save by the drollest of comedy writers). It is a world where seemingly educated and experienced professionals cannot send packages overnight to a neighboring state, where the post office returns every letter mailed damaged and undelivered, where wiring instructions are routinely bungled, and where HSBC, a global money center bank, purportedly would not wire funds except to another HSBC account.

(A baffled banker from HSBC who had handled some banking matters for Huxley later appeared in front of the grand jury and said that the bank regularly transfers funds to accounts at other banks.)

Furthermore, all communication with Caisse had to be handled by email. One assistant, a woman named Kristy Smith, would not speak on the phone because, as Caisse explained to the lender, she had a strong lisp and English accent. A casual reading of several weeks of her emails, however, suggests a particularly American style of writing, as well an unusually close working relationship with Caisse, in that she accompanied him to a hospital, for example, as he got chest X-rays. Shortly after the lender demanded to know the physical address of her office so he could send her a prepaid Federal Express envelope to expedite delivery of his erstwhile checks, Smith told him she had been fired by Caisse.

A second assistant of Caisse’s, Christine Woo, then took over the task that appeared to the lender to be finding new ways to avoid giving him back his money. Like her former colleague Kristy Smith, Woo also refused to talk on the phone. Shortly after engaging with the lender, she suddenly refused to deal with these issues any further, citing the complexity of the matter.

Having a pair of personal assistants is rare for an individual portfolio manager on Wall Street and having a pair of assistants that deal with nothing but his personal affairs — even as they pertain to a prior employer — is rarer still. What is even more unusual is how both Christine Woo and Kristy Smith didn’t have Performance Trust email addresses and used only Gmail addresses to communicate with the lender.

The Southern Investigative Reporting Foundation called Performance Trust and spoke to Megan Clark in its human resources department; she said no one named Christine Woo or Kristy Smith had ever worked there. Nor were they former Huxley colleagues. Dan Castro, a former Huxley portfolio manager, said that no one with those names had worked there.

In April, Caisse sent emails to the same lender’s wife promising repayment when his new assistant “Kristy” returned from England after caring for her sick father.

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Caisse has his defenders to be sure.

One of them is Ken Scott, a self-described private investor who was one of Huxley’s biggest lenders. He said that when the district attorney asked him about the loans, he replied that every penny of the working capital loans had been used for normal business expenses and argued that if it hadn’t been for some horrible luck, Huxley would have generated enough cash to pay everyone off.

Characterizing the grand jury as a witch hunt, Scott described it by referencing the infamous Lavrenti Beria quote, “Bring me the man and I’ll show you the crime.”

“No one has shown me what Bryan has done wrong, and that includes the DA,” said Scott.

Ritchie Capital Management’s general counsel noted to the grand jury that the firm’s management company made the loan, not one of its client portfolios. Fund officials acknowledge that while the loan is in arrears, they do not view the Huxley matter as a criminal issue, but rather a civil one in which the fund itself is in debt, not Caisse. They have not sued Huxley and have extended the loan’s maturity several times.

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After some initial brief phone contact, described above, Bryan Caisse did not, despite multiple promises, provide a detailed explanation about these issues to the Southern Investigative Reporting Foundation, nor did he ever send an extensive series of emails he promised. The two occasions he spoke to the Southern Investigative Reporting Foundation, his phone number appeared to trace to Medellin, Columbia. On a few days he did manage to instant message for several minutes though Facebook. The day before this story posted, he appears to have deleted his Facebook account.

Caisse declined to make an on the record comment and he would not disclose his whereabouts, other than alluding to a lack of available privacy for discussing Huxley. Pressed on the matter, he would only say, “[I’m] staying with a friend.”

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The Very Difficult Summer of the Erstwhile Hedge Fund King of Akron, Ohio

On Aug. 4, 2012, a bright, young mortgage department employee at J.P. Morgan named Ben Sayer was all smiles: The head of a rapidly expanding hedge fund said to have almost $200 million in assets — one Anthony Davian of Davian Capital Advisors — had invited him to attend his fund’s annual golf outing for clients at the swanky Firestone Country Club in Akron, Ohio. And this meant, to Sayer at least, that he might be on the verge of snagging a job offer at Davian’s Akron-based fund.

While a job offer at any hedge fund certainly represented a dream opportunity to him, the prospect of being offered a slot at Davian Capital was something apart: It was a fast-growing and remarkably successful effort, with annual returns allegedly exceeding 20 percent when other, much more well-known funds were struggling to earn half as much.

Better still, Sayer liked the way that Davian himself used social media — Facebook, Twitter, YouTube and other services — to share ideas and market his two funds. It seemed to Sayer, a 27-year-old University of Akron graduate, that Davian was as willing to swap insights with him as readily as he would kick around ideas with veteran traders managing hundreds of millions of dollars. Davian’s informality and willingness to engage in dialogue made him appear entirely different from the hedge fund industry legends in New York.

Sayer was right about one thing: Davian eventually did offer him a job as an analyst at Davian Capital and he could dream, briefly at least, of acquiring the experience that would propel him to riches and perhaps enable him to launch his own fund one day.

But within a month of Sayer’s taking the position, the smile had vanished from his face and questions about the firm came to him fast and hard. Not only could he not get a straight answer from Davian about where the $200 million of client capital was, but by this past June, the fund itself had come to a standstill after being besieged by fraud allegations from all directions.

Things got even worse: After Anthony Davian’s wife found him passed out in their car suffering from carbon monoxide poisoning earlier this month, he was rushed to the intensive care unit of a hospital. Meanwhile, a growing number of regulators swarmed over the fund asking some very pointed questions about what had happened.

When the Southern Investigative Reporting Foundation examined the fund’s documents and conducted multiple interviews with investors and the fund’s founder and employees, it uncovered a very different reality behind the well-constructed image of Anthony Davian and his fund. It appears that Davian’s greatest accomplishment may be the invention and marketing of his image as a tech-savvy fund manager of an immensely successful hedge fund portfolio.

While Davian’s assertions that his fund’s asset base reached about $200 million appear to be pure fiction, there’s no doubt that the fund’s investors have suffered sharp losses in their investments, with the extent of the damage still unknown. Though the Davian Capital Advisors drama can’t rival other hedge fund sagas in size, for sheer difficulty in sorting out the true from the false it has few rivals.

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If potential investors had done any advance digging, they might have encountered several red flags in Anthony Davian’s background. Raised in the Greater Cleveland area, Davian attended Holy Name High School in Parma and the University of Akron, from which he claimed to have received a 2003 degree in accounting, following a course of study that helped make him “a lethal short seller.”

While Davian did attend the University of Akron and appears to have studied some accounting, he did not graduate, according to the school’s registrar’s office. Moreover, according to public records, the school had a $2,221 lien in place on Davian’s assets as of April 2011 for nonpayment of unspecified debts. An attempt to garnish Davian’s wages from a series of bank accounts he disclosed to the courts proved unsuccessful in 2011 and 2012 since the accounts were closed or empty.

Some years earlier, in April 2003, Davian had sought personal bankruptcy protection from his creditors in the U.S. District Court in the Northern District of Ohio, and the online record indicates he was granted relief by that July. At least six other claims against Davian from creditors remain outstanding, including another lien attached by a law firm he once hired.

After Davian attended college and before he began managing money, he spent some time working for his father’s Cleveland-based tool and die factory.

In recent years, though, Davian’s appeals to investors, especially online, were anchored by his frequent assertions that money management simply came easily to him. Less clear is when he started and with how much capital; Davian himself has presented two separate versions of his debut.

In a February 2012 video posted on YouTube with the immodest heading “Financial Rockstar,” Davian claims to have started his fund in 2007, raising capital in a classic “bootstrapping” fashion. While he may have scrambled for money, he seemed to avoid early worries about profits, with his video declaring he had realized returns of 42 percent after accounting for fees in just his first year of trading. This sharply outpaced the returns of dedicated short sellers and equity long and short managers, whose returns for that year averaged 13 percent and 12.8 percent, respectively, according to the Dow Jones Credit Suisse Hedge Index.

His trading proved so profitable that by August 2007, Davian was spending much of his time “golfing and fishing,” according to his YouTube account.

Yet an October 2012 letter that Davian wrote to a short seller (who requested anonymity) offers quite a different launch narrative, yet equally superlative in its instant success. The letter states that Davian’s first fund started in 2008 and by that August it had grown 52 percent after having shorted the stock of Merrill Lynch, Lehman Brothers and National City Corp., affording him the ability to “basically travel around raising capital, golfing and eating and drinking along the way.”

In this same correspondence, Davian explained that he attempted to fight off boredom by launching the Davian Letter, which disseminates his trading ideas to subscribers at $79 or $99 a month. The newsletter generates profits of “several hundred [thousand dollars] annually,” Davian wrote, implying that by the fall 2012, he had at least 2,000 subscribers. (In fact, the newsletter never earned more than than $30,000 a year.)

Investors don’t seem to have lodged any complaints after hearing Davian’s extraordinary assertions; instead they appear to have swooned over the massive returns Davian alleged to have realized. (The initial years of a money manager’s career are often closely scrutinized by prospective investors who watch for how market volatility is handled — but that does not appear to have been the case for Davian.) No one asked why a money manager capable of earning returns in the 40 percent to 50 percent range (during one of the most volatile stretches of stock market history) would have troubled himself with a newsletter business peddling daily stock tips to subscribers for $1,200 a year.

Davian’s vigorous promotional activity had few peers. In the YouTube video, he comes very close to guaranteeing “high 20 percent or mid-30 percent” returns.

For Davian, would-be investors’ embracing of his social media posts afforded him endless promotional opportunities. Davian became a popular Wall Street voice on Twitter, with his @hedgieguy handle issuing dozens of messages daily on everything from macroeconomic issues to potential trades. In what became his trademark, he made identifying a worthwhile trade appear very easy, especially during 2011’s rout in Chinese reverse-merger stocks: Once a stock he highlighted as problematic collapsed, he would tweet out, “Ching!” (simulating the sound of a cash register closing) to signal even more profits for Davian Capital.

(Following questioning by the Southern Investigative Reporting Foundation, Davian has “locked” his Twitter account, closing public access to his messages.)

As someone who had almost 5,000 followers on Twitter in late May and who had sent out more than 43,000 tweets, Davian has a name recognition that typically takes established money managers a decade and billions of dollars in assets to muster. For the members of the public who plugged into Davian’s Twitter stream, it was like walking into a nonstop conversation at a party full of traders swapping ideas, jokes and opinions. This vitality was not lost on others. Indeed Ben Sayer initially connected with Davian in 2011 by following him on Twitter.

Davian’s success at deploying social media led him to strike a populist pose online, deriding the graduates of high-profile universities and graduate schools: He argued that their very academic training made them “smidiots” (a pairing of “smart” and “idiots”) and vowed to never to hire them.

Yet, results are all that matters in money management. At the end of the day, as Davian liked to tell his investors, keeping focused on this mind-set is how he managed to build a successful hedge fund and why guys who went to Ivy League schools were trying to get into his firm.

According to its quarterly letters to investors, Davian Capital Advisors certainly deserved to be sought after: The company reported gains of more than 8 percent and 20 percent, respectively, for its two main portfolios in the nine months through the end of September 2012. The company boasted that a newly hatched small-cap short-only fund, the Rubber City Gravity Limited Partnership, reported 21.2 percent returns during its first eight months of operation last year.

Such returns made it seem as though Davian’s performance compared quite favorably with that of the legendary fund managers dominating Wall Street’s landscape.

Rewards soon followed. Davian began building a big house in a woody section of Bath, just outside of Akron, promoted by his builder on his website. He diversified beyond money management, telling everyone about a brewpub he was backing and an organic pet food and supplies business he cofounded.

Social media seemed to grant Davian the luxury of an online forum where he could say whatever he wished as long as his company’s numbers appeared to be rising.

That is until the day some people showed up at his office with very specific questions they wanted answered. It was the day of the client event attended by Sayer: Aug. 4, 2012.

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Brian Clark and his former college roommate at Florida State University first encountered Davian on Twitter in 2011 and struck up a dialogue with him that led to the latter’s subscribing to the Davian Letter. (Clark’s former roommate, who requested anonymity, is referred to here as “Nick Miller,” to shield him from job loss and litigation from his employer. His account was supported by personal and business documents and corroborated by numerous on-the-record sources.)

Miller and Clark each have taken different routes to following the capital markets. Clark runs an information technology consultancy in Tallahassee, Florida, and stock trading is his hobby. Miller is an analyst and trader for a bank’s portfolio management arm.

Davian invited Miller and Clark to visit his company because they had completed a pair of research reports for his newsletter and he was interested in exploring if they might do more; Davian and Miller had spoken about the possibility of Miller’s working for the fund.

Yet Davian would have been better off if Miller and Clark had missed their flights since the two Floridians had an entirely separate agenda: They had been doing their homework on Davian’s fund and planned their visit as a way to find answers to a growing list of questions.

As a trader who had dealt with dozens of hedge funds, Miller could not stop thinking about Davian’s frequent remarks about the hassles of setting up a new fund. Davian complained about lawyer fees — a standard hedge fund manager gripe — but then would let slip that he had been forced to spend “a few thousand dollars on legal bills.” In Miller’s experience, most fund managers would click their heels in joy if they could launch a new fund with less than $75,000 in legal fees.

Then there was the fact that virtually no one seemed to work at Davian Capital Advisors. In conversations with the attendees at the client event, Miller and Clark learned that the fund’s staff amounted to Davian, an accountant referred to by Davian as the chief financial officer and an analyst who worked as a bank teller three months before joining the fund, according to her résumé. This appeared to be a very different workforce from the “team” described in videos by Davian as “the best.” When Miller and Clark questioned Davian about how he could make the $200 million fund’s investment decisions with effectively one other person, they did not get an answer.

Their chance sighting of a rather humdrum marketing document for the hedge fund served to crystallize their concerns about Davian and his fund. After arriving at the Davian fund’s offices following the cocktail reception, Miller and Clark picked up a flyer from a stack on a table and immediately noticed something awry in the section on risk management measurements: specifically in the rendering of the Sharpe ratio, an equation measuring variability of reward. The Sharpe ratio is often used as a risk management barometer to assess whether a fund’s investors are being adequately compensated for the risks being taken with their money by the fund’s managers.

A high Sharpe ratio indicates that investors are generally being rewarded for the risk assumed; but an astronomically high Sharpe ratio for a fund exposed to the daily risks of the stock market suggests that something is greatly out of whack. The Sharpe ratio for Davian Capital Advisors seemed to suggest that the fund was generating exceptional returns while taking on virtually no risk, a scenario too good to be true. The fund’s Sharpe ratio was more than 6; anything over 3 would have been remarkable. This meant that Davian had not caught the single biggest error that could be made in calculating the hedge fund industry’s baseline risk measurement.

Bearing a more reserved demeanor than his old roommate, Clark patiently explained to Davian that the Sharpe ratio was mathematically impossible. In short order, it was removed from display.

There was a final thing that struck the pair from Florida as odd at the festivities: the complete lack of clients. At the party of 20 or so, most attendees were people invited by Davian from his Twitter following; just two or three were investors, a remarkably light showing at the primary social event for a fund with $200 million in assets.

After their return to Florida, Clark and Miller had no more direct dealings with Davian or his fund, but their overheard questions and pointed observations to Davian and other client event attendees last August appear to have had some effect: Investor withdrawals increased and little new money came in.

One investor who had seen enough and wanted his money back was Richard Weilnau, a semiretired real estate developer and motorcycle buff who splits his time between Florida and Ohio. He had been waging a low-intensity conflict with Davian for most of 2012 in an effort to withdraw his $100,000 investment after Davian failed to provide him with trade activity updates, he told the Southern Investigative Reporting Foundation.

“During our discussions about investing in the funds [Anthony Davian] assured me that I would get a frequent update on the fund’s trades so I could track performance myself,” Weilnau said. Shortly after he made his investment, “Anthony told me managing the paperwork from the [fund’s] three prime brokers made that impossible. So I tried to redeem immediately.”

Weilnau said he encountered “every excuse in the book” from Davian, but most were a variation of “we’re in some illiquid investments and can’t pull them right now,” a baffling excuse from a long and short equity fund, whose long investments were mostly liquid, larger capitalization stocks, including those of Volkswagen and eBay, and whose short investments were in companies like Herbalife and Nu Skin. There was, of course, the penny stock short portfolio, which was sharply less liquid, but most funds with a stock portfolio valued at $200 million can easily meet a $100,000 redemption request within a month’s time.

Weilnau’s struggles to get back his investment and the sorts of questions that Clark and Miller raised finally led Davian Capital employee Robert Ake to confront Davian this past May over his growing inventory of concerns about the fund’s health.

That was a problem for Davian because Ake was the fund’s chief financial officer. “By late spring nothing made sense [financially] and someone had to say it,” Ake told the Southern Investigative Reporting Foundation.

To be sure, Ake’s title was CFO, but in no serious understanding of the title was that the job he performed. The limits placed on Ake were akin to those imposed on journalists in the former Soviet Union, with a great deal of crucial information being considered off-limits — matters like the fund’s bank statements.

Ake never got an answer from Davian about why he was forbidden to see the fund’s bank balances, he said. The few times Ake tried to broach the subject, he was brushed off.

Recognizing a major problem, Ake referred to the brokerage’s account statements to begin to find answers to some of his questions about the fund’s business. The first thing Ake tried to determine was the exact amount of the fund’s assets. In the accounts that Ake saw regularly, there had not been more than a couple million dollars in client assets. For a year or more, whenever Ake had asked Davian about the location of the nine figures’ worth of client assets, he was ignored or given a nonsensical reply.

What Ake observed — and Davian could not explain — was that the ebbs and flows of the cash reserves in the fund’s brokerage statements tracked the fund’s expenditures on renovations for a new office space. Ake also supposed that perhaps some of the money was being siphoned off for Davian’s personal expenditures.

Ake’s confrontation about this, the minute revenue earned by the Davian Letter and Davian’s statements to clients — with insinuations like the fund had special access to popular initial public offerings — went nowhere.

The fund’s director of investor relations and marketing, Sean-Michael Kvacek, took a similar tack with Davian, who poorly received his blunt assessment of the skepticism in the institutional capital world about Davian Capital. The traditional sources of hedge fund capital — endowment and pension funds, as well as many high net worth individuals — had too many questions that could not be answered to their satisfaction, Kvacek told his Davian Capital colleagues. Everyone approached by Kvacek for money seemed to share the assessments of Nick Miller and Brian Clark.

On May 15, Kvacek phoned Davian about the difficulties the fund was facing in bringing in new investment capital. Davian responded to Kvacek that there had been months when he wasn’t sure the fund could make payroll because of withdrawals, adding, “I’ve been able to plug the holes and in one case I brought in an additional $500,000.”

Kvacek told Davian that with the fund’s having close to $200 million under management, plugging holes should not be a problem. (He assumed this because the fund was entitled to a fee of 2 percent of assets, which would have come to roughly $4 million, if $200 million were the total.)

Responding bluntly, Davian began listing the expenses that eat up that $4 million: a 32 percent tax rate, payroll, payroll taxes, medical costs, Bloomberg terminal fees, as well as legal and accounting expenses. But in trying to rebut Kvacek, Davian listed less than $3 million in expenses and some of the costs cited seemed improbably high, such as $250,000 for accounting fees.

Kvacek was fired two weeks later when, according to a lawsuit filed by Davian Capital against him, he was discovered forwarding his notes from work and fund documents to an acquaintance at a Nevada-based fund of funds. Davian told the people at his company that the Kvacek suit was about protecting Davian Capital’s intellectual property.  The fund’s lawyers even reached out to the person at the Nevada fund who had received Kvacek’s emails to inform him that attempting to use the sent documents could result in litigation.

To resurrect the moribund fundraising effort, Davian instructed Kvacek’s co-worker Natasha Ivan to tell prospective investors that the fund had $5 million in assets. (It was not clear how Ivan was to explain the sudden shift in the fund’s overall size.)

Kvacek, who did not return repeated phone calls requesting comment, had not forwarded files to hurt Davian Capital, he told Ake and Sayer. Rather he did so because the other fund was Carter Global, founded by Jack Carter, the eldest son of former President Jimmy Carter, Kvacek told his colleagues. He figured that if anyone could effectively alert authorities to what he had come to believe was a complete fraud, it was a former senatorial candidate and president’s kid.

On June 3, Davian Capital’s four remaining full-time employees and a summer intern (the son of the architect building Davian’s new house) quit, never to return to the office.

Kvacek’s hunch that Jack Carter could get results proved to be on target. Within two weeks of Kvacek’s departure, the U.S. Secret Service called Robert Ake and he cooperated fully. As part of that process, Ake wore a wire and recorded Davian discussing “everything,” Ake said. (The Secret Service’s investigative efforts are traditionally associated with currency counterfeiting, but the agency does have jurisdiction over allegations of Ponzi schemes attempted by money managers.)

In late June the Secret Service and the U.S. Postal Service searched the offices of Davian Capital Advisors and confiscated records and computer hard drives.

Brian Leary, a Secret Service spokesman, declined to comment about Davian Capital Advisors, citing a longstanding policy of refraining from discussing potential or current investigations.

Toni Delancey, a Postal Service spokeswoman, did not return repeated requests for comment.

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On June 25 in a phone interview, Davian strongly denied that his fund had any problems, saying, “Rumors are being spread by an ex-employee we are suing in court.” He added that only one other employee, research analyst Ashley Cook, had resigned in order “to attend law school.”

Davian insisted four full-time employees still worked for the fund but declined to name them or put them on the phone with a reporter. When told that he sounded like he was talking in an empty office, Davian responded that his colleagues was very busy trading and that there was no time for an interview.

Responding to a question about the actual amount of client assets under management, Davian acknowledged that there had been a misunderstanding. He said he had often stated that the fund had “between $150 million to $200 million under management” but had been referring not to internally managed client assets but to the assets owned or managed by the client base of the Davian Letter.

Davian then declined to discuss the dollar amount of assets currently managed by Davian Capital Advisors.

On both July 1 and July 8, Davian missed scheduled phone interviews with the Southern Investigative Reporting Foundation. On July 9 he sent the foundation an email from what he said was the intensive care unit of a local hospital, as he recovered from what he called “a near death experience.” He said he had been on life support through July 10, but declined to explain how he was able to send an email from his iPad on July 9.

In later emails, Davian declined to respond to questions about whether he had attempted suicide. (In an email exchange provided to the foundation, between the angry investor Weilnau and Davian over Davian’s management of the fund, Davian referred to his illness  as resulting from an “accidental carbon monoxide poisoning.”)

Davian Capital Advisors appears to have suspended operations, according to former employees, and investors are scrambling to figure out what, if anything, remains of their money.

Weilnau said optimism about recovering all or most of investors’ capital might not be warranted given that the whistleblower was a CFO who sent an ad hoc group of frantic investors in several states an email stating that he had been prohibited from seeing the fund’s cash position.

The relatively little amount of money that Ake was able to discover, Weilnau said, has led the ad hoc network of investors to believe that the outlook for recovery of their funds is grim: “I asked Ake what was in the brokerage account cash balances and he told me it was about $30,000 total,” Weilnau said. “That makes me think the money is far from Akron.”

“I’ve had calls with the Secret Service, Securities and Exchange Commission and the Department of Justice and none of them can tell me what’s happening because of the ongoing investigation,” Weilau added.

In conversations with investors as recently as July 13, Davian strongly denied that any problems existed at the fund and insisted that the quarter’s investing was profitable, although he said June’s results are still being tabulated.