Wednesday, April 29, 2009

The economics of Paradigm Global – alleged substance abuse and alleged ponzi schemes

Paradigm Global is a fund of funds owned and controlled by Hunter Biden and James Biden.  These two are Vice President Joe Biden’s son and brother respectively.

Oh yes, and it does involve substance abuse and ponzi schemes (both alleged).

Paradigm Global on its website still contains the assertion that they have never had a down year.  


The PARADIGM Group of Companies was founded in 1991. PARADIGM Global Advisors, LLC is the asset allocation and investment advisory arm of the Group. PARADIGM Global Advisors, LLC is an SEC-registered investment adviser, is registered with the Commodity Futures Trading Commission as a commodity pool operator and commodity trading advisor and is a member of the National Futures Association. 

PARADIGM's portfolios of hedge funds have not suffered a down year since the firm's inception in 1991 and have consistently outperformed stock and bond markets. Volatility has steadily declined over the years. We proudly attribute our performance to our investment philosophy and its application to managing a portfolio of funds.

At various stages Paradigm Global has claimed to have 1.8 billion in funds under management or advice.  That would make it a good business.

Paradigm Global has however been in some reputation trouble twice lately.  Firstly they co-branded a fund with Alan Stanford which (at best) suggests sloppy due diligence.   This was reported here in the WSJ.

Secondly they housed Ponta Negra – an allegedly fraudulent hedge fund that has just been charged by the SEC.  Not only did they allow Ponta Negra to use their offices but they allowed Ponta Negra to use their marketing machine.  This was first reported on this blog here.

Sloppy two times over calls for a little more due diligence on Paradigm Global.  

Firstly the business was not started by the Bidens – it was purchased by them.  It was started by Dr James Park.  When the Bidens purchased the business they believed it to have 1.5 billion of funds under management.  This little section from an affidavit signed by James Biden (the VP’s brother) is revealing.  The affidavit is here.

(a).  The Paradigm Hedge Funds had only between two and three hundred million dollars under management, which were leveraged to over five hundred million, not the more than $1.5 billion under management represented to us by Lotito and Fasciana.  

(b) The returns on the Paradigm Hedge Funds were not as represented to us by Lotito and Fasciana; and (with editing)

(d). The primary manager of the funds, Dr. James Park, had an apparent substance abuse problem and had been an absentee manager for several years...

Now please put this in perspective.  The Bidens – mostly through failure to do proper due diligence – seem to have wound up in control of a fund of hedge funds which they claim (in sworn affidavit) that 

Had less than a fifth the funds under management that they represented to their customers,
Had misrepresented their returns and 
Had a primary manager who had “an apparent substance abuse problem”.

Now if you were told a fund manager only had a fifth the funds that he represented to the world, had misrepresented his returns and had a primary manager with a substance abuse problem what you say it is?  

Whatever – it quacks.

Now this affidavit was signed 13 April 2007.  I presume it is the truth otherwise James Biden is guilty of perjury.

The affidavit is signed a few months after Hunter Biden resigned as the CEO of Paradigm Global – a position he took up in late 2006.

Now I am going to give you one more detail.  In 2006 Paradigm represented that they had 28 staff.  They represented that they had offices in multiple cities including a largish office in New York on Fifth Avenue.  I have uploaded a few of their marketing documents here and here and here.

Two hundred to three hundred million in funds under management would represent less than 5 million in revenue and probably less than 3 million after any third party costs.  Most funds of funds of that period took a percentage of the performance fees – and given the performance of the funds the revenue would have been less than 1% of net funds under management however Paradigm's fee structure was somewhat higher suggesting revenue about 5 million per annum.  

With 28 staff mostly in New York and (according to this marketing document) with representative offices in Los Angeles, Monte Carlo and Tokyo you can’t make this business work very well.

Of course you could make it work if all the staff members were paid well under $70 thousand dollars (which does not seem likely in finance in New York, Los Angeles, Tokyo and Monte Carlo).  You could also make it work if you subsidized it. 

None of this would allow the senior manager to fail to show at the office and indulge a drug habit (as sworn by James Biden).  

Now go back and look at this marketing document.  It contains a few staff members on the marketing side.  Alla Babikova is still given as an email contact on the Paradigm website.  She is also listed on this document as working for Onyx Capital.  Onyx was the marketer of the allegedly fraudulent Ponta Negra hedge fund.  Onyx – or at least staff that worked for Onyx – were also marketers of Stanford.  

Jeffrey Schneider is the contact on this document from the allegedly fraudulent Ponta Negra fund.  He was the founder of Onyx.

I see lots of possibilities: all of them reflect very poorly on the Bidens.

  • They were and remain controllers of a fund of funds which they allege misrepresented its returns and yet which they kept operational.
  • They were and remain controllers of a fund of funds which houses an alleged fraud in its offices (Ponta Negra).
  • They were and remain controllers of a fund of funds which employed a marketing organisation (Onyx) which was associated with distributing alleged frauds (Ponta Negra and Stanford).  
  • They were and remain controllers of a fund that claimed to have 28 staff many of whom are difficult to trace and where the revenue to fund those staff did not obviously exist.  This suggests that either the staff were not paid, did not exist or (more sinisterly) they were paid by stealing from the small amount of funds under management.  You could only steal the client money if the asset custody safeguards were not robust.  There is an audit statement on the SEC files qualified as to the robustness of these protections – however there is no evidence that the lack of robustness was exploited.

All of this was done from the 17th Floor of 650 Fifth Avenue New York.  There are a few other things housed on that floor and you need to walk past Paradigm’s desk to get to them.  

Whatever – it quacks and it is controlled by the Vice President’s family.


Anonymous said...

I don't quite see how you are connecting the dots here.

You reference an affidavit that essentially shows that when the Biden's took controlling interest LESS THAN THREE YEARS AGO.

When you talk about this merger agreement you note the fund had $300M in equity instead of the falsely represented $1.5B. From the Biden's perspective this affects nothing but the terms of the merger as at face value this is purely a business decision and investment.

All of your issues with the company prior to 2006 appear to be the same issues Hunter Biden takes with the company's operations.

I would love to hear about shady doings and fund misrepresentations as of very recent times but until I get more information, I really can't say the Bidens have done anything wrong here.

Hedge funds are inherently opaque. I feel in the end all hedge funds are nothing but deceitful mechanisms for creating more wealth, ponzi or no ponzi.

If you check out any small hedge fund, you'll see that it is similar in that you can't get information. That is the nature of the beast (see: The Baupost Group).

P.S. I'm not entirely sure but I don't think you calculated revenue correctly. It seems you forgot to include the company's leverage, which would magnify the revenue of the company.

John Hempton said...

The fund claimed in 2006 it had 1.8 billion of FUM. It claimed it in marketing documents.

It really had something between 200 and 300.

The Bidens purchased the business based on the claim but later renegotiated the price. They renegotiated based on mistatements made about the FUM.

One part of the renegotiation was based on misstated returns.

This is a CLOSE THE FUND deal. A fund that mis-states its returns is a diabolical entity.

So to WHOM did they mis-state the returns. Were they mis-stated to individual clients? Why are the returns NOT on the web. Why do the returns in the SEC documents not match the returns on the website?


IF said...

You are doing great work.

Anonymous said...

Wow absolutely brilliant.. amazing work...keep up the good thing

Anonymous said...

Paradigm's layers have apparently responded:-

FieryLocks said...

Ron Paul took campaign contributions from these people

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