Consultants Touted Firm Accused in Fraud

Wall Street Journal
FEBRUARY 27, 2009
By JENNY STRASBURG and STEVE STECKLOW

Money managers Paul Greenwood and Stephen Walsh, arrested this week on fraud charges, boasted a healthy list of pension and endowment clients thanks in part to several prominent consulting firms that recommended them.

The consulting firms, including Wilshire Associates, Cambridge Associates and Mercer investment consulting, provided glowing reports about the managers' firm, Westridge Capital Management Inc., to prospective investors, who now find themselves potentially facing millions in losses.

Messrs. Greenwood and Walsh stand accused of defrauding investors of at least $553 million through a long-running scheme in which their firms, including Westridge Capital Management, claimed steady, safe returns in marketing materials. Federal authorities say the men misappropriated client money and spent it on expensive horses, homes and other luxuries.

Attorneys for Messrs. Walsh and Greenwood declined to comment. A person who picked up the phone at the trading desk of their brokerage, WG Trading Co. in Jersey City, N.J., didn't comment. A message left at the firm's Greenwich, Conn., headquarters wasn't returned.

Though the Westridge firm wasn't huge -- it said in January in public filings it managed $1.8 billion -- its roster of pension and endowment clients was impressive. Money managers covet these clients as they often tend to stick by their investments for the long term.

A review of minutes of investments meetings and other documents by The Wall Street Journal shows that consulting firms were key in bringing Westridge some of its biggest clients.

A spokesman for Mercer declined to comment, citing policy related to individual clients.

Wilshire, of Santa Monica, Calif., did thorough due diligence on Westridge, reviewing audited financial statements, regulatory filings and bank-account records before recommending Westridge to clients, said Kim Shepherd, a spokeswoman for the firm. Wilshire considered the experience of Westridge's investment managers and the success of its trading strategies, she said.

A spokeswoman for Cambridge, of Boston, said just one of its current clients still has an investment in Westridge that was made based on Cambridge's recommendation. In the past, Cambridge did recommend Westridge to other clients, according to investment-committee minutes. Still, "Westridge was not a broadly recommended manager by Cambridge," the spokeswoman said.

Consulting firms are crucial players in the investment business, advising hundreds of institutional investors on where they should put their money. Their vetting of money managers can take months and their blessing can lead to hundreds of millions of dollars of new cash for the money managers. Allegations against Westridge strike at the heart of consultants' business, industry participants say.

Typically, clients pay big consulting firms a flat fee for a multi-year contract or a small percentage of assets that the clients invest.

Wilshire recommended Westridge to several firms, including an investment of as much as $1 billion at the Pennsylvania Public School Employees' Retirement System, which ultimately decided not to invest in Westridge.

"Westridge has been doing this strategy since April 1996 and has never generated negative alpha in any month during that time," said a September 2008 memo to the fund's board from its chief investment officer and a Wilshire managing director. "Alpha" refers to returns beyond those that would be generated by simply investing in broad market indexes.

Wilshire also recommended Westridge to several other big clients including the Iowa Public Employees' Retirement System and Kern County Employees' Retirement Association in Bakersfield, Calif., both of which did invest, according to investment-committee records and people familiar with the funds.

"We never rely on just one recommendation, but instead it's a long, arduous process before an investment is made," said Julie Economaki, spokeswoman for the Iowa fund, which had about $339 million, or 2% of its portfolio, invested with Westridge. Kern fund officials didn't respond to requests for comment.

Mercer, of New York, "performed a thorough review of Westridge and WG Trading and rated them highly," leading the Sacramento County Employees' Retirement System to make a multimillion-dollar investment, Richard Stensrud, the fund's chief executive, told system participants in a letter Wednesday after news of allegations against Westridge surfaced.

Federal authorities Wednesday accused Messrs. Greenwood and Walsh of promising clients they would invest the bulk of their funds in a stock-exchange index arbitrage strategy, but actually investing only a small amount, diverting most of it for their own personal use.

According to federal prosecutors, several institutional investors who placed money through WG Trading Investors LP received promissory notes that Messrs. Greenwood and Walsh represented would pay interest at a rate equal to the investment returns earned by the stock-indexing strategy.

"Contrary to their representations to their investors, Greenwood and Walsh misappropriated the majority of the investor funds," prosecutors said in a press release.

Messrs. Walsh and Greenwood have a long history working on Wall Street together. For a brief period in the 1980s, they ran a premier options-trading boutique, attempted takeovers of several companies and created and sold a popular computerized financial quotation system called "Shark." A former associate said they kept a live shark in a tank in their offices in the early 1980s.

Mr. Greenwood, a former economics professor who had taught at Ohio State University and York University in Toronto, teamed up with Mr. Walsh, a former options trader, in 1979 in a brokerage firm that eventually was called Walsh, Greenwood & Co. Mr. Walsh worked at Kidder, Peabody & Co. from 1974 to 1979, according to records kept by the Financial Industry Regulatory Authority.

They developed a proprietary, real-time, securities data processing system for investment analysis by traders and portfolio managers that took advantage of the processing power of desktop personal computers, which were then relatively new. They sold a unit that marketed "Shark" to Wang Laboratories in 1985 for an undisclosed amount.

In the 1980s, Walsh Greenwood staged unsuccessful takeovers of several companies, including Champion Products Inc., an athletic-wear manufacturer, and Stride Rite Corp., a shoe company. In 1990, they did gain control of Signal Apparel Co., which later sought bankruptcy protection.

In the 1990s, Walsh Greenwood held a minority stake in the New York Islanders hockey team. Mr. Walsh served as co-chairman of the board while Mr. Greenwood was executive vice president. They later sold their stake. A spokesman for the Islanders didn't return a call seeking comment.

Walsh Greenwood also faced regulatory issues. In 1985, the American Stock Exchange fined the firm $10,000 for alleged past options-trading irregularities. The firm settled the charges without admitting or denying them.

The following year, the SEC accused the company of violating federal securities law. The SEC allegations included that the firm used more than $6 million in customers' securities as collateral for some of its own bank loans, and failing to maintain accurate records of the securities' location. The company later settled the charges, without admitting them, and agreed to a series of corrective actions, SEC records show.

On Thursday, some residents of North Salem, N.Y., a town of 5,000 in an affluent, rural stretch of Westchester County, were reeling over the arrest of Mr. Greenwood. He serves as the town's supervisor, the equivalent of mayor.

"He's done wonders for the town," said Cynthia Curtis, chairman of the local planning board. "This is a very tragic situation."

Mr. Greenwood's assistant, Marion LaFranco, said when Mr. Greenwood began his elected two-year term for the part-time job last year, he opted to take a salary of just $1 a year, even though he was entitled to $85,000.

Resident John Steele Gordon, a financial historian who helped Mr. Greenwood write speeches during his campaign, says Mr. Greenwood also keeps the books of the local library and is credited with helping to clean up a polluted local lake after years of delays. "Everybody else I talk to says, 'How could this have happened? Paul just couldn't be guilty of things like that.'"
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