NakedShorts

The most pointless $300m order ever

Nice try, but he doesn’t have it. And, unless somebody’s slipped up really badly somewhere, neither does Philadelphia Alternative Asset Management Co.

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Paul Eustace of Ontario, Canada, was ordered to pay more than $279 million in restitution and a $12 million civil penalty, based on an order that resolves a CFTC enforcement action against him for defrauding commodity pool participants in four pools that he managed.

The court also entered an order of default judgment against the commodity pool operator that Eustace controlled, the Philadelphia Alternative Asset Management Co. (PAAM), imposing permanent trading and registration bans, requiring payment of restitution of approximately $276 million, subject to offset by prior disbursements and payments by Eustace, and imposing an $8.8 million civil monetary penalty...blah blah blah.

PAAM’s receiver wheedled $1.3 million of actual money out of Eustace, and won another not-likely-to-be-paid-anytime-soon $625,000 order covering the costs of solving his various attempts at asset concealment and related skullduggery.

Hedge Fund Trader...Ordered to Pay
Commodity Futures Trading Commission press release
Aug. 19 2008

Earlier on NakedShorts

The crook is still in Canada
Aug. 8 2008

Phinal Phlings in Philly II

The crook is still in Canada

 
One day, maybe. Eustace caught relaxing at a Junior
 Hockey League game in suburban Toronto. Image
courtesy Y.K. Whoyouare; bars via Windows Paint.

Last November, the US Attorney for the Eastern District of Pennsylvania got around to dropping a criminal indictment on Paul Eustace (above), perpetrator-in-chief of the Philadelphia Alternative Asset Management Co fraud. And in almost nine months since, he’s been extradited from the lush environs of suburban Toronto, given a fair trial, convicted, and locked up for the next 10 years?

Not so fast. According to electronic court records, the prosecution is proceeding not-apace. In the only formal action so far this year, the Defenders Association of Philadelphia was appointed “to represent defendant...until such time as the court determines...whether the defendant qualifies for court-appointed counsel, or until otherwise ordered by the court.” Which is nice, but largely moot until someone maneuvers Paulie’s butt southside the 49th parallel.

Meanwhile, over in Judge Michael Baylson’s courtroom, the largely-pro forma-but-you-know-lawyers ceremonials are under way. Eustace was found in contempt of court, and ordered to pay $624,911.68 “representing the sum of $478,866.10 and the equivalent in US dollars of $146,235.69 (CAD)” to cover costs incurred in blocking and tackling his various attempts at asset concealment and related skullduggery.

As well, the Commodity Futures Trading Commission has also filed paperwork seeking an order:

• Permanently enjoining PAAMCo from further violating the [Commodity Exchange Act] or engaging in any business activities related to commodity trading;
• Ordering PAAMCo to pay restitution...in the amount of $276,273,698.99, less any amounts already distributed to the participants; and
• Ordering PAAMCo to pay a civil monetary penalty in the amount of $8,800,000.

Two words for the collection agents on those accounts: good, and luck. In that order.

Unpaid invoices after the restitution.

Phinal Phlings in Philly I

With that settlement UBS wanted buried. . .deep 

They’re sweeping up the last pieces of Paul Eustace’s Philadelphia Alternative Asset Management Co. But it’s been a while since we looked in on the cleanup, and a slowish summer news week seemed as good a time as any to catch up on developments over the last few months.

Among the highlights:

UBS Fund Services (Caymans) Ltd, the PAAM funds’ hardly-an-administrator-at-all, paid $19 million, including a $4 million expense reimbursement, to settle a suit alleging general all-round blithering incompetence in fund administration;

David Lashbrook and Scott Somerville, Maples & Calder Finance executives who were directors of the PAAM funds, produced $1.5 million to settle a complaint alleging, among other things, that they failed to open account statements that would have revealed the discrepancy between Eustace’s performance claims and what was happening in the real world.

John Wallace and Edward Gobora, respectively PAAM’s chairman and Eustace’s aide-de-camp, paid $500,000 for various sins of omission and commission that, while being relatively irrelevant in the overall scheme of things, certainly contributed to Eustace’s dance lasting longer than it otherwise might.

In a settlement yet to be approved by the court, Kottke & Co, Chicago, will pay $239,000 in a settlement relating to funds owned by Option Capital, a pre-PAAM Eustace venture, that Eustace improperly transferred to cover trading losses he incurred while running a proprietary account for Kottke. In a pattern that would be repeated, he quickly incurred substantial losses, then defaulted on the note.

Curiously, or not given the high contempt awarded transparency in the Cayman Islands and, for that matter Switzerland, the UBS settlement included a “Confidentiality and Public Relations” clause under which:

The Settling Parties agree that, other than as required by law...they will not publicly divulge the terms of this Agreement or the facts of the negotiations leading thereto and shall not...post the Agreement on any publicly accessible web site unless required to do so by applicable law or order of a court or other government.

So, not that it’s anything more than 35 pages of intensely tiresome legalbabble,a copy of the settlement agreement, along with some UBS Caymans-related related history just in case this comes to the attention of anyone about to be seduced by its glossy, but incomplete, marketing documents. You’re very welcome.

Settlement agreement
PAAM et al v. UBS Fund Services (Caymans) Ltd

Friday: The Crook is Still in Canada

Maples & Calder's CNN closeup

Click to play video

It denies suggestions of tax evasion, saying that
international companies are trying to avoid
being taxed twice. They add, US taxes are paid
when earnings are distributed to US citizens.

Cough...cough...cough. (Clears throat). Excuse me. (Wipes eyes). In an unrelated development, they also take their responsibilities as company directors really, really seriously. Although the $1.5 million levy imposed for not opening envelopes in the PAAM Scam might have something to do with that.

Offshore tax havens
by Mary Snow
CNN Jul. 26 2008

This week in crime

Thursday’s scheduled re-run of Bayou co-conspirator James Marquez’s sentencing, which blew up last month in an argument over allegations that his signature had been forged on a number of documents cited by the government, is off; according to a spokesman for the US Attorney’s office, the new date is Jan. 22 2008.

For those keeping score at home, Bayou principal Scammy Israel III is due up in early January, while Dan Marino will face the music Jan. 25. Subject, of course, to change. Again.

The day will not be entirely devoid of hedge fund fraud-related proceedings, however: in US District Court in Philadelphia, Judge Michael Baylson is being asked to approve the proposed $75 million settlement between MF Global and the receiver ad litem for Paul Eustace’s Philadelphia Alternative Asset Management Co.

Objections to the settlement are due today; a source familiar with the case said that none had been filed so far, although he had heard of some less than entirely gruntled noises coming from investors. “But I’m not sure whether that’s just grumbling because they think the amount should have been higher, or whether they’re actually going to file a formal objection.”

The fall-out from PAAM’s failure is not over, however; the trial of the receiver ad litem’s case against fund administrator UBS Caymans is scheduled to start Jan. 22, while civil actions against the fund’s directors, David Lashbrook and Scott Somerville, along with John Wallace, a PAAM director, and Ed Gobora, a PAAM employee, are still on the books. Not to mention the criminal charges recently filed against Eustace himself.

Joint motion of the settling parties
Receiver ad litem vs Man Financial Inc and Thomas Gilmartin
Dec. 6 2007

Peace breaks out in Philly

Almost 2½ years after the Commodity Futures Trading Commission pulled the plug on Paul Eustace’s Philadelphia Alternative Asset Management Co, MF Global has agreed to cough up $75 million to settle claims that it helped perpetrate fraud. According to a press release issued late Monday, “a definitive settlement agreement has been executed by the parties and court approval will be sought within the next 10 days.”

Under the agreement, $69 million—the settlement amount that MF Global reported in its most recent quarterly results—will go to PAAM investors, while the other $6 million will cover legal fees and other expenses. According to the late October statement:

MF Global will obtain full releases and dismissal of the proceedings against it while admitting to no wrongdoing in this matter. Settlement of the case avoids the vagaries of a jury determination and the substantial cost of litigation.

Copies of the agreement have yet to show up in either court records, or among MF Global’s SEC filings. But when they do...

Receiver Ad Litem and MF Global Ltd Settle
Philadelphia Alternative Asset Fund Litigation
Press release Dec. 3 2007

Fighting Paulie’s battles

Meet yer old pal, the US taxpayer

And now, over to the Assistant US Attorney for the Eastern District of Pennsylvania, Judy Goldstein Smith, for a quick update on last month’s indictment of Philadelphia Alternative Asset Management Co founder Paul Eustace.

So, Judy, when do you get to slap the cuffs on, update the mugshot, and arraign this guy?

The defendant is a resident of Canada. For this reason, if the defendant does not voluntarily appear...the government will be required to begin extradition proceedings, which may take as long as three to four years.

Hmmmm. We’d heard that. Any other issues?

Due to civil actions pertaining to this defendant in the US and Canada, the defendant’s assets have been frozen, and it is possible that these assets will not be returned to the defendant. Although the defendant is employed, he has informed the government that he has been unable to retain counsel in the US because he does not have sufficient funds to do so.

That all?

This case is complex. Also, because the defendant does not reside in the US, there are legal issues which require the advice of counsel prior to the defendant’s appearance in this Court.

I didn’t doubt it for a moment. Any ideas?

Both the government and the defendant believe that the appointment of counsel will conserve the resources of the court by expediting the resolution of this case.

Well, thanks for your time Judy. Of course, listeners, it would be churlish to point out that Paulie has a long history of agreeing to things and then not doing them, so in the spirit of the season, we won’t mention that. Anyway, good news for all you folks back in Oakville, Ontario, it looks like Paulie—the one with the mile-wide smirk and the tall but true tales of leading folks in a merry dance—will be lurking around the local kids’ hockey rinks for Christmas or two yet. And now let’s go back to the studio...

Government’s Motion for Temporary Appointment of Counsel
US v. Paul Eustace
Nov. 28 2007

PAAM trial pushed back to 2008

Judge Michael Baylson has once again pushed back the scheduled start of the trial between the receiver ad litem for Philadelphia Alternative Asset Management Co and Man Financial Inc (now MF Global). Most recently set to begin immediately after Thanksgiving, the trial will now start Jan. 8 2008, “subject to a possible short continuance of several days if one of the trial counsel is actually on trial in another court.”

So make that a maybe.

MF Global chief executive Kevin Davis said on Oct. 30, in the company’s quarterly results announcement, that it was currently “in active discussions” over a settlement and booked a $69 million charge against earnings to cover the tab. Now everybody gets another six weeks to sort that out before the soiled laundry meets the Tide.

Which might get interesting, as a NakedShorts’ spy at a PAAM shareholders’ meeting Oct. 24 said that investors were singularly unimpressed with the bid. Reportedly (NakedShorts’ invitation was lost in the mail, again) the entertainment included recordings of conversations between the now-indicted PAAM founder Paul Eustace and frat-buddy Thomas Gilmartin, the PAAM funds’ broker at Man Financial.

Music to soothe the savage breast, or even beast, it was not. Reportedly.

Bringing Paulie back

Last week’s indictment of Philadelphia Alternative Asset Management Co founder Paul Eustace on commodity and wire fraud charges raises the question of when his shining face will finally show up in front of a judge in federal court in Philadelphia.

The short answer, unless he waives extradition from the bright lights of Oakville, Ont., and appears of his own volition (don’t hold your breath): quite a while. Discounting an aggrieved investor calling Blackwater in for one of those extraordinary rendition deals.

(Click for a larger image, or go to the source.)

Earlier on NakedShorts
Paulie, those sirens are for you
Nov. 9 2007

Paulie, those sirens are for you

Eustace indicted for
commodities, wire fraud

More than two years after the Commodity Futures Trading Commission shut down the Philadelphia Alternative Asset Management Co, federal prosecutors have charged founder Paul Eustace with commodities and wire fraud.

The 13-page two-count indictment was released yesterday by the US Attorney for the Eastern District of Philadelphia. It charged that Eustace’s fraud on investors in funds operated by PAAM, and Option Capital Fund, an earlier venture, cost over $200 million, between Spring 2001 and Jun. 2005.

Among the accusations, Eustace (cough, cough) allegedly:

• Made ‘loans’ to himself from the funds;
• Transferred investors’ funds to his personal accounts;
• Used approximately $500,000 in investors’ funds to pay a legal settlement;
• Took incentive fees based on phony profits; and
• Created account statements that inaccurately depicted the health and viability of the commodity pools, showing the funds under his control were profitable when they were actually losing money.

Eustace, 42, lives in Oakville, Ont., a suburb of Toronto. At pixel time, it could not be established when he will be formally charged; if he fights extradition, it is likely to be months rather than weeks before he appears in court.

Denise Nadeau was not available for comment.

US v. Paul Eustace
Indictment: Counts One and Two

[Eustace] charged with bilking hedge fund clients of $200 million
Press release Nov. 8 2007

Earlier on NakedShorts:
Paulie, they’re coming for you
Oct. 17 2007

PAAM settlement said to be close

From MF Global Ltd’s second quarter result statement this morning:

MF Global Ltd is currently in active discussions to settle litigation against its US operating company, MF Global Inc., brought by the Receiver Ad Litem for Philadelphia Alternative Asset Fund and related entities. As a result of these discussions, the company has recorded a litigation accrual of $69 million in its income statement. The company believes that these settlement and litigation costs are fully insured...

...A definitive settlement agreement is anticipated within the coming weeks. MF Global will obtain full releases and dismissal of the proceedings against it while admitting to no wrongdoing in this matter. Settlement of the case avoids the vagaries of a jury determination and the substantial cost of litigation.

As part of the separation from its former parent, the UK-based Man Group plc, MF Global Ltd was indemnified for costs exceeding $50 million arising from its PAAM involvement.

MF Global Reports Fiscal 2008 Second Quarter Results
Oct. 30 2007

He's a pretender (and good at it)

Customer Relations 101, by Kevin Davis

It’s always an honor to meet the chief executive officer of a major financial services company. But for him (or her, if any), probably not so much dealing with the out-of-town riff-raff a-hob-nobbing. Especially if the him in question is Kevin Davis, chief executive of MF Global Ltd (formerly Man Financial). As this vignette, hiding in plain sight among the hundreds of square miles of innocent forest destroyed in the fallout from the collapse of Paul Eustace’s Philadelphia Alternative Asset Management Co, aptly demonstrates:

During his May 10 [2005] visit, [Philadelphia Stock Exchange vice-chairman and PAAM director John] Wallace drank cappuccino and chatted with Davis.

While Wallace remembers Davis speaking well of the Offshore Fund and its performance, Davis denies discussing anything other than the Philadelphia Stock Exchange with Wallace. Indeed, Davis testified that he did not even know with which customer Wallace was associated, nor did he care, because “part of my role as CEO is to meet and greet various of my colleagues’ customers as they come in through the day.

I don’t know who they are. I just do
do a good job of pretending that I
am interested in what they have to say.

(Davis Dep. at 116:19 – Apr. 24 2007, Ex. 30.)

Of course, the whole PAAM thing, and its $170 million of investor losses, is “just a brokerage issue.”

Davis’s next public appearance is on Tuesday, Oct. 30, at a 10:00 am conference call to discuss MF’s fiscal second quarter results. It’ll be interesting to see if any of Wall Street’s Finest (© Jeff Matthews)
get to questions about that RICO pigeon fluttering around the federal court in Philadelphia.

Or whether MF’s LTCM-level leverage at its minority-owned subsidiary, the Commodity Futures Trading Commission, is enough to keep that “may seek to cite and fine us” investigation, already more than two years old, in a bag until it’s too late to be of any use to the PAAM plaintiffs.

Receiver ad litem v. Man Financial Inc et al
Memorandum of law in opposition to motion for summary judgment
Page 65; Page 84 (pdf numbering).

I. Jail Eustace, PAAM receiver demands

Contempt motion alleges failed
manager continues stealing

II. More Eustace cunning stunts

III. Paulie, they’re coming for you
IV. When they come for me

V. Classic Eustace
VI. The Good Sidley

II. More Eustace cunning stunts

Canadian lawyers lend a helping hand

Paul Eustace, principal of Philadelphia Alternative Asset Management Co, should be jailed for contempt of court, according to a motion filed in federal court in Philadelphia late Monday. Not enough that his hedge fund collapsed with investor losses of around $170 million in Jun. 2005, Eustace has repeatedly violated court orders and “continues...to steal from the receivership estate” by refusing to turn over assets, and using the assets for his personal benefit.

...Beginning on June 25, 2005, just two days after this court first entered the restraining order, and continuing thereafter, Eustace knowingly and intentionally defied this court’s order, while professing to the FBI, Commodity Futures Trading Commission, the receiver and this court that he was providing and would continue to provide full cooperation.

Since that time...Eustace has failed to disclose, improperly transferred and blatantly concealed personal and receivership assets and destroyed or assisted in the destruction of documents and evidence that he was required to disclose and turn over to the receiver. When questioned about the existence of these other assets, documents and information, Eustace and several of his Canadian attorneys have undertaken affirmative efforts to conceal and impede the receiver's discovery of evidence and dissipate assets...

...Illustrative of his bold defiance of this court's Orders, Eustace dissipated assets held in escrow by his Canadian counsel as recently as August 7, 2007, according to documents just produced by Paul Stunt, Eustace's criminal attorney in Canada.

Among the specific allegations in the contempt filing:

III. Paulie, they’re coming for you

More than two years since Paul Eustace blew up his Philadelphia Alternative Asset Management Co in an inferno of bad trades, hidden accounts and all manner of other prima facie criminal debris, the day when he gets to don the uncomfortably interconnected wrist accessories may be drawing ever closer.

The motion, brought by PAAM’s receiver Monday seeking Eustace’s incarceration for contempt of court, may not do the job by itself. But it could well concentrate the minds of both the US Attorney for the Eastern District of Pennsylvania, and the Royal Canadian Mounted Police.

No date has yet been set for a hearing on the contempt motion. But if Judge Michael Baylson, who was himself US Attorney for the Eastern District of Pennsylvania from 1988-93, does find Eustace in contempt and orders his incarceration, it sets up an interesting international legal conundrum.

IV. When they come for me...

...I want this guy in my corner

In response to a court order compelling the production of his records, Jonathan Marler, Eustace’s primary attorney in Canada and Eustace’s current employer, admitted that he had disposed of all of Eustace's files several months ago. Mr Marler’s decision to allegedly dispose of Eustace's files occurred at a time when Eustace knew that the receiver was attempting to obtain those very files from Mr Marler and Eustace’s other Canadian counsel. Despite this knowledge, Eustace permitted Mr Marler to dispose of the records in yet another example of the deliberate efforts being made by Eustace to thwart the Receiver's investigation into his conduct and his assets [Emphasis added].

Eustace’s job at Marler Grabbitt & Runne: Bookkeeper. No, really.

[The following document is a 37-page time sink, but its worth it for Marler’s mastery of the old flim flam flummox.

Marler: Let the record show that you're looking at me in a very menacing manner and if you do that again, Mr Berman, I will get up and leave.
Q: I'm not menacing at all...

Marler: And you're pointing your finger at me which in itself is menacing.
Q: You may notice I'm pointing at the ceiling, sir, not at you.
A: Now you are.  A minute ago you were pointing directly at me.

Throw ’em a fake and a finagle
They’ll never know you're just a bagel
Razzle dazzle ’em
And they’ll beg you for more!

Examination of Jonathan Marler
Mar. 9 2007]

V. Classic Eustace

Paul Eustace’s trading brilliance was strongly in evidence immediately after the Commodity Futures Trading Commission shut down Philadelphia Alternative Asset Management in Jun. 2005. Despite a court-imposed asset freeze, Eustace immediately called the Connecticut car dealer who had sold him a yet-to-be delivered classic Porsche for $62,000, and sold it back for $48,000. The dealer’s check was delivered to a Canadian lawyer, and was the subject of an interrogatory at a deposition earlier this year:

Q: Have you ever seen the cheque?
Eustace: No.
Q: You must have; you endorsed it.
Eustace: Oh, did I?
Q: Yes.

Not sure that anybody has a name for the Eustace strategy, but it seems to go something like this:

• Take a 25 percent loss (at least).
• Lie about it.

It’s consistent. And it’s certainly worked out well so far.

VI. The Good Sidley

Sidley Austin LLP is one of the largest and most influential securities law firms in the US, with a big footprint in alternative investments generally, and its futures asset management district particularly.

Much of its recent ink-and-pixels have been earned by William J. Nissen and his aggressive—even defiant—efforts to shield Lake Shore Management from the investigatory zeal of US futures regulators trying to establish just how much of its alleged assets under management are extant and under which of several, probably Caribbean, rocks they might be hiding.

But Sidley doesn’t always side with the alleged bad guys. On Jun. 24 2005, the day after the CFTC shut-down Philadelphia Alternative Asset Management Co, partner Tom Cauley terminated Eustace and his funds for cause, and with appropriate dispatch:

---

From: Cauley, Thomas K.
Sent: Friday, June 24, 2005 3:49 PM
To: Paul M. Eustace
Cc: Sawyier, David
Subject: Philadelphia Alternative Asset Management Company

Paul -- We have just been advised that you attempted to transfer funds out of your personal trading account at Velocity in violation of the Order Freezing Assets that was entered by a federal judge yesterday. As you will recall, you and I had a specific discussion earlier today about the fact that the Order Freezing Assets covered your personal assets, and I specifically advised you not to move or transfer any of your personal assets. In light of this disturbing information concerning your efforts to transfer funds out of your personal trading account at Velocity, we regret to inform you that we can no longer represent you or your funds. We therefore hereby terminate our representation of you and your funds. Tom Cauley.

Jury to decide RICO allegations

Man’s summary dismissal attempt shot down

A bid by Man Financial Inc for summary dismissal of Racketeer Influenced and Corrupt Organization claims in a suit brought by the receiver of Paul Eustace’s Philadelphia Alternative Asset Management Co has failed, and the allegations will be tried when the case goes to court next month.

Judge Michael Baylson’s ruling was arguably the most significant among a series of decisions on summary judgment motions, most of which were rejected. The trial is due to begin next month, with jury selection set for Nov. 13 and the trial “most likely to start” Nov. 15. An attorney involved in the case said yesterday that, to his surprise, “this date looks pretty solid now. These things can always change, but I can’t see too much getting in the way of this.”

In an eight-place analysis of the RICO claims, which, if successful, would make the futures brokerage liable to treble damages, Baylson acknowledged facts supporting both the receiver’s complaint, and the defendants’ arguments. (Man Financial Inc demerged from its former parent, the UK-based Man Group plc (EMG:L) and is now MF Global Ltd (MF: NYSE)).

Plaintiff asserts that the racketeering predicate acts are wire fraud and that there is evidence of record to show sufficient incidents to constitute an enterprise, a pattern, the requisite element of continuity, plus the proximate cause of damages. Defendants correctly state that RICO should not be used to turn a “garden variety” fraud case into a RICO case allowing treble damages. However, the Supreme Court has often stated that if Plaintiff has evidence of the RICO elements, summary judgment is improper.

Dealing with other summary judgment motions, Baylson also declined summary judgment on the receiver’s claims against Man Financial for:

Administrator of the Year Award

Q: When you have told us that you were required to obtain independent support for reconciling items, what was the purpose of that? Why do you need independent support?

A: Because it’s UBS’s practice to obtain independent support.

Q: Do you know the reasoning for that, why?

A: I don’t believe so.

Fair enough. Let’s talk to the boss. See what he knows.

Q: If it was determined by UBS during the course of this NAV calculation and NAV review that documents that were being relied upon for the reconciling item had been falsified by the investment manager, what did UBS’s policies and procedures require UBS to do?

A: I’m not aware of any policy that specifically raises that specific type of issue.

Q: Well, was there a practice in place at UBS, or that you would have in your position as a group head, if it had come to your attention that documents that were being relied upon for reconciling items had been falsified by the investment manager? What would have been your practice? What action would have been taken if any?

A: I don’t know what I would have done.

---

The Cayman-based [UBS] Fund Services team was awarded Top Rated status in the 2006 Global Custodian Hedge Fund Administration Survey. This industry acknowledgement provides us with the reassurance that, in partnership with our clients, we can work together to meet their needs both now and in the future.

---

NOTE (added Oct. 10, 3 pm EDT, in response to reader inquiries): The dialog reported above was extracted from depositions given by UBS employees in the legal action surrounding the collapse of Paul Eustace’s Philadelphia Alternative Asset Mgt Co. The questioning, by Man Financial (now MF Global) counsel Therese Doherty, focused on Eustace’s manipulation of the Oct. 2004 NAV—almost eight months before the fund collapsed with investor losses of around $170 million—and UBS’s failure to confirm information supplied by Eustace.