NFA began Eustace inquiry in 2004

Suspended Man executive was a new hire

The National Futures Association began an inquiry into Paul Eustace and the activities of his corrupt Philadelphia Alternative Asset Mgt Co in September 2004, some nine months before the fraudulent operation finally collapsed, after a customer complained about the handling of a – profitable – bond trade.

As well, NakedShorts has learned that Thomas J. Gilmartin, the recently-suspended Man Financial senior vice president whose relationship with Eustace is the focus of inquiries by PAAM’s receiver, joined the company in early 2004, just months before the original PAAM trading account was opened.

An NFA business conduct committee complaint filed Sept. 29 against PAAM and Eustace accuses the entities of providing misleading information to pool participants and the NFA. Eustace, who has filed for bankruptcy in Canada, has 30 days to provide a written answer, and faces a range of largely administrative sanctions, although he may be fined up to $250,000 for each violation.

The NFA complaint said that its original narrow inquiry focused on a bond trade that Eustace originally placed in his proprietary account, but later transferred to one of his managed account customers. Despite the trade’s profitability, the customer was unhappy with the way in which his account was being managed, and felt that Eustace had deviated from their agreed trading strategy. And, from there, it went pretty much straight downhill:

• The investigation grew into a full-scale review that ultimately revealed that Eustace and PAAM used false performance data to show a 25% return to fraudulently solicit investors to Philadelphia Alternative Asset Fund LP, “and issued false statements to participants showing profitable futures trading for the LP fund when the fund never traded futures or options [Emphasis added].”
• The defendants also posted false trading results on the PAAM website for two other pools: Philadelphia Alternative Asset Fund Ltd,an offshore fund, and Philadelphia Alternative Asset Feeder Fund LLC,a domestic fund. Those entities began trading in 2004 and accepted over $230 million from participants, but “experienced huge losses” in the first half of 2005.
• NFA desposed Eustace in April 2005 about the bond trade. Eustace said that he was no longer managing accounts for customers, but was instead managing the Ltd and Feeder funds, and “further represented he did not trade any other accounts” or funds. He made no mention of the LP fund.
• When asking follow-up questions of the original complainant, the NFA learned that Eustace had unsuccessfully solicited that customer to invest in the LP Fund. “This was the first time that NFA had heard of the LP fund.”
• Under further questioning, Eustace said that LP fund held only his personal funds and was traded through an account at a Chicago FCM. Several days later, he changed his story to say that LP did not have a trading account, was originally set up to trade for a state pension plan that decided not to invest, and was dormant.
• “Because of the differing stories Eustace gave…NFA sent a notice to members asking for information about any accounts” maintained by the Eustace entities. It subsequently received a call reporting an investment in the LP fund that was, based on statements received from Eustace, worth $1 million. The individual provided LP fund statements that showed profitable futures and options trading in the LP account.
• “In an effort to find out where the LP fund traded, NFA contacted all FCMs by telephone to determine if they had a trading account for the LP fund,” but none did.
• “NFA requested all documents from Eustace pertaining to the LP fund. NFA also decided to review the activity of the Ltd fund and Feeder Fund, and requested performance information from FCMs which carried the accounts for these funds.”
• “PAAM’s website represented the Ltd fund had scored gains of nearly 6%” in 2005, through May 20. “However, the Ltd fund actually experienced losses exceeding $144 million during this period, and, in May alone,” lost around $85 million, or more than 50% of the value of the Ltd fund’s trading accounts. “(In September 2004, NFA had reviewed the performance of the Ltd fund as part of its inquiry into the transfer of the bond trade and found no discrepancies at that time [Emphasis added].)
• The original Commodity Futures Trading Commission action that finally shut down Eustace and PAAM was filed in federal court in Philadelphia on June 21, and announced by a press release on June 29.

Meanwhile, a search of Gilmartin’s futures industry employment record, available on the NFA website, shows that he joined Man Financial sometime after Feb. 13 2004, the date on which his registrations as an associated person and an NFA associate member were withdrawn by his previous employer, Calyon Financial Inc, where he had worked since 1993.

Those registrations were reinstated by Man Financial on Apr. 2 2004, just a day after they were filed.

Calyon was formed in the merger of the French banks Credit Agricole and Credit Lyonnais; among its predecessor organizations was Carr Futures Inc, the Credit Agricole Indosuez subsidiary that suffered devastating personnel losses on Sept. 11 2001 when a hijacked aircraft struck the north tower of New York’s World Trade Center just above its 92nd floor offices. None of those in Carr’s offices that morning survived.

Gilmartin had, before joining what is now Calyon, worked briefly for Fimat USA, in 1992.

It is not known whether Gilmartin had a relationship with Eustace while at Calyon or its predecessors, although the original CFTC complaint alleged that PAAM and Eustace had fraudulently solicited investors in the LP fund since October 2002.

Comments

[Informed Investor]

Check into Ed Gobora, he is listed as one of the officers. He was sanctioned by the SEC in 2002 for fraud concerning currency trading. Google him and the case on the web.