Stress test results: Who is leaking?

The FT has yet another story about the stress test results – this one being that Bank of America and Citigroup have to raise $10 billion each.  Apart from the obvious which is that Citi appears to need more than Bank of America the whole story (and most of the competitor stories) have left me perplexed.

It’s not the numbers.  There are too many assumptions in bank accounting to make their capital position anything other than an educated guess.

It’s the source of the leaks that perplexes me.

We have had a (minor) scandal about Bank of America being instructed by Paulson (then Treasury Secretary) to consummate their marriage to Merrill Lynch.  

We know that somebody breached disclosure laws.  But in this case the somebody was Ken Lewis under instruction from his political overlord.  

I can’t think of anything more market sensitive than stress test results.  If some banks get massively diluted and other banks do not then some stocks will fly and others might languish.  This information is incredibly valuable.

Leaking is a market regulation breach of the first order.  Prison time.  And there is the odd State Attorney General prepared to investigate.

And yet the leaks seem to come thick and fast. 

I have no really good theory (though lots of bad ones) as to who would be breaching fair disclosure regulations on this scale and why they would be doing it?

And if you are going to be taking that risk why wouldn't you do the obvious trades and get filfthy rich?

Suggestions?

Paradigm Global, the Bidens and allegedly fraudulent hedge funds – a summary

This is a summary of the situation to put all the posts in one place.  You can read this as an alternative to the other posts – though I will leave the original posts up for posterity.  There are some versions on the web that are wildly inaccurate.  All I will assert is that the Biden's firm has been shockingly sloppy about basic due diligence issues.  Unsurprisingly the inaccurate versions are coming from right-wing politics driven blogs (who like the idea that Biden's family is in trouble) and who reinvent complex facts to fit their simple world view.  Some of the financial blogs have been much better.  

The short version is that an allegedly fraudulent hedge fund (Ponta Negra) shared an office and a phone number and a common marketer (Jeff Schneider) with Paradigm Global a fund of hedge funds owned by the Vice President’s family.  

Paradigm Global have said that they were subtenants – and that they were introduced via their common marketer.  

The story however is murkier than that simple explanation.  However it is consistent with repeated and extreme sloppiness by the Vice President's family and the fund of hedge funds they control.

First we run through the players in this drama.

1.  The small alleged fraudulent hedge fund: Ponta Negra 

Ponta Negra is a hedge fund run out of a unit in Connecticut that just had its assets frozen by a Federal Judge and had the SEC accuse it of fraud.  The Justice Department has yet to file criminal charges and unless criminal charges are filed you would have to wonder what the point of the current crackdown is.  

The alleged fraud is brazenly simple.  The company simply produced fake return numbers and doctored accounts from their counterparty brokers to over-represent funds under management. The last set of published return numbers I have access to is here.

(click for detail and you can find the original here)

Ponta Negra was run by Francesco Rusciano – who is also alleged to have faked trading data whilst working for UBS.  Francesco Rusciano sometimes goes as Krancesco.  

Ponta Negra was marketed by Jeff Schneider and Jared Toren.  More on those individuals later.

  

2.  The fund of funds owned by Joe Biden’s family: Paradigm Global 

Paradigm Global is a fund of hedge funds headquartered on the 17th Floor of 650 Fifth Avenue. It was founded by Dr James Park who for a while had a reputation as a guru on hedge funds. Paradigm in marketing documents claim particular expertise in “due diligence” allowing them to source the best hedge fund managers.  

Paradigm claimed as recently as 2006 in marketing documents that it had over $1.5 billion under management and 28 full time staff as well as offices in New York, Monte Carlo and Tokyo. Now (according to its IARD filing) it has about 300 million in 210 discretionary accounts and 6-10 employees.  There are no offshore offices.

As recently as a few days ago their website claimed that they had never had a down year and that their volatility had decreased over time.  This is not impossible – but if it is true that last year was a year of decreased volatility then the performance is truly remarkable.  Consistently positive returns with low volatility make an 80% reduction in funds under management somewhat difficult to explain.

Paradigm was purchased by Hunter Biden and James Biden who are the Vice President’s son and brother respectively.  Hunter Biden was CEO was for a brief time at the end of 2006 and in early 2007.  The original press reports implied that was a permanent position but it was later described as an interim position.  The leadership of the firm since then has been moveable.

In the latest IARD filings Hunter and James Biden are listed as owners.  Markus Karr is listed as the chief investment officer and CEO.   Dr Park is listed as an investment consultant.  

Hunter and James Biden purchased Paradigm when they wanted to get out of the lobbying business.  Having your son as a highly paid registered lobbyist was incompatible with Joe’s (Vice) Presidential ambitions.  The purchase was problematic and litigated.  During the litigation James Biden signed an amazing affidavit which you can find here.  

In it he alleged a few things including that:

• 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.  

• The returns on the Paradigm Hedge Funds were not as represented to us by Lotito and Fasciana; and

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

These are things which is would make continued ownership of the business untenable.  If James Biden is alleging that the returns have been misrepresented to clients and potential clients then he is alleging a crime.  It’s a crime not fundamentally different the crime which Ponta Negra is alleged to have committed.  The only responsible course of action for the Bidens would be – after being made aware of the problem – call the regulatory authorities, sack the offending staff and write a letter to clients indicating that they can have what is left of their money.  Even a small misstatement of returns to prospective clients constitutes a crime.

If the Bidens were to continue to own the management company – and to take the benefit of that ownership – without taking these steps then the Bidens are accessories after the fact to that crime.  

The alternative hypothesis (clearly possible) is that the returns were misrepresented to the Bidens but were not misrepresented to clients.  Then no crime has been committed on clients and it is possible to keep running the fund.

Anyway given one possible misrepresentation I figured I would go looking for other misrepresentations. 

If the number and depth of the staffing was misrepresented when potential customers did due diligence that would also constitute fraud.  Certainly there is a reasonable possibility of that.  For instance this due diligence document asserts 28 full time staff – and names them.  Here is an organisational chart:

(click for detail - you can find the original in this document)

 

This organisational chart differs dramatically from the current structure as described in IARD filings (6-10 employees).  It is unclear when the employee numbers were scaled back so dramatically.  Moreover it is very difficult to trace many of these employees in FINRA’s database which means if the people exist they are no longer licensed within the industry.  Again it is possible that the firm used to have 28 staff and now has 6-10.  Indeed the rapid decline in staff numbers might be the reason that there was space to sublet to Ponta Negra.    

Another inconsistency worries me.  As at August 2005 Paradigm warranted that all custody of client asset assets – including subscription and redemption funds and the computation of net assets is done by reputable third party custodians.  This is an important element of due diligence for prospective investors.  See this extract…

(click for detail - the original can be found here)

This looks kosher and highly comforting except that I can’t find out much information about Global Fund Services.  [I looked in the obvious places like the White Pages.]  Folio Administrators however does have a presence and I have written to them to confirm their role.  I will report any reply...  Reply reported below... see postscrips.  Folio has confirmed the relationship which is highly comforting...

My main concern though is that these custody details differ dramatically from the (much later) IARD filing.  Here is the extract from the IARD filing:

   

(Click for detail and you can find the original here by following obvious prompts.)  

 

In the IARD filing they handle client cash and a related person handles client securities.  Moreover that related person is not a broker dealer subject to SIPC protection.

Whilst holding client assets in house is not a certain indicator of fraud it is a huge red flag.  The lesson of Madoff (or Stanford for that matter) was that a fund that actually controls custody of client assets is dangerous – whereas a fund which has custody at a reputable independent custodian or prime broker is unlikely to outright steal your money (though they sure can lose it).  The really big frauds have been funds with inadequate external controls over custody.  Bayou for example was another hedge fund with controlled its own custodian.  

There are legitimate reasons why a financial institution might use in-house custody.  A bank for instance really does take custody of your cash.  However I can’t see any good reason for bringing custody in-house as your staff numbers shrank by two thirds and your business model remains unchanged.  However telling people you have third party custody when they do due diligence but not having it is fraud.  I presume no fraud and that they must have bought the custody in house possibly to save money.  

However I am still worried about custody.  This audit report lodged with the SEC specifically mentions material weakness with respect to safeguarding of securities.  Having material weakness in custody arrangements allows theft.  That makes it a very bad audit report.  

All of these red flags – the decline in staff numbers (28 to 6-10), the decline in funds under management (over $1.5 billion to 200-300 million), the returns that James Biden alleged were misrepresented and the unusual change in customer asset custody probably happened before the Bidens had purchased the management company.  They must have all happened despite the fund making positive returns better than indices and with reduced volatility (as claimed on the website). 

There is one more red flag – again pre-Biden ownership – which I have not previously discussed on this blog.  That is the Canadian fund called Paradigm Global.  Canadian Paradigm Global was associated with James Park’s Paradigm Global and often claimed that James Park (then the hedge fund guru) had a consulting relationship with them.  That relationship ended and the Canadian Paradigm changed its name to Portus Alternative Asset Management.  Portus was later discovered to be a ponzi which – in typical ponzi fashion – paid its distributors well over the odd to distribute its toxic product.  James Park was clearly involved in this fund in its beginning and lent his reputation to it – but he was safely (and probably reasonably) distant by the denouement.  You can find press reports here, here and here.

Player 3 – the distributor of dodgy hedge funds: Onxy Capital and Jeff Schneider

Onyx Capital was how I found this mess.  Onyx – was a firm based in Austin Texas but also subleasing space from Paradigm.  Onyx was a marketer of hedge funds to relatively unsophisticated clients.  I say “was” because Onyx appears to be running dead – and its website died a few days before Ponta Negra was closed by SEC action.  

The typical sort of client was someone who had sold a medium sized business for a lot of money (a few million) and was looking for investment advice including what the smart money (that with a New York address presumably) was doing.  Sharing a New York address with a firm owned by the Bidens probably helped.

The principal of Onyx was Jeff Schneider.  To complicate research he spells his name multiple ways.  Onyx – being a seller of hedge funds and financial advisor – was almost certainly required to be licensed but never was.

Jeff Schneider has a past which would raise eyebrows in most people doing a due diligence.  He was “allowed to resign” from Merrill Lynch after allegedly being party to fraud by foreigners.  In that case he denies guilt.  He was sacked from CIBC, fined and given a 90 day industry suspension for allegedly defrauding CIBC’s bonus system.  In that case he neither accepted nor denied guilt but accepted the fines.  You can find the details in his FINRA broker registration statement.

Anyway Jeff Schneider was a full time employee of Paradigm Global from 2004 to 2007 or 2008 (his FINRA regulatory records say Feb 2008 but Felix Salmon gives a different date).  After that he worked for other firms, notably Puritan Securities.  He also set up Onyx – but his FINRA record states that was working at Onyx only from March 2009 though other records suggest he established Onyx much earlier.  I have an email from Ponta Negra dated June 2008 giving Schneider an email at Onyx.  The FINRA CV (compiled by Schneider) is thus false.

The decision to allow Schneider to cease being a full time employee but to maintain an office within Paradigm Global’s office and to continue to state in some marketing documents that he is an employee was made when the Bidens controlled Paradigm.

Felix Salmon is characteristically blunt about Onyx and Schneider.  He describes it as the hedge fund equivalent of a chop shop.  

That said – it was probably Onyx that turned Ponta Negra into investigators.  Because Onyx is largely based in Austin Texas the Texas division of the SEC is taking the Ponta Negra case.

Onyx distributed other dodgy product – most notably the head of investor relations at Onyx (Justin Hare) was also a full time sales employee of Stanford.  Justin Hare’s myspace page (which has since been made private) is the source of the photos of the glamourous life of a Stanford salesman that I posted here.  

Anyway Onxy and Jeff Schneider introduced Paradigm to Alan Stanford’s organisation.  Paradigm obviously thought fairly highly of Stanford and vice versa because they launched a cobranded product – the Paradigm Stanford Core Alternatives Fund.  

According to the Wall Street Journal no Paradigm money got sent to Stanford though some Stanford moneys were sent to Paradigm and I gather have since been returned.  

This suggests carelessness on the part of Paradigm.  Financial institutions are fundamentally based on trust.  If people do not trust you then you do not have a business.  The Stanford relationship was the second time that Paradigm had lent its name to a large-scale ponzi (the first being Portus).  Remember that Paradigm – being a fund of funds – is meant to be an expert in due diligence.  And they failed.  Badly.

There was one other ex Paradigm employee who later worked at Onxy – that is Alla Babikova.  If you go back and look at the org chart above she essentially runs the sales function.  She was Schneider’s boss in those days.  At Onyx Schneider it seems became her boss.  I have saved Alla Babikova’s FINRA record here.  Unlike Schneider’s it is clean.  

Jared Toren was also an employee of Onyx – though I gather he might have left Onyx to market for Ponta Negra.  He also has a clean FINRA record but one that does not mention for instance that he once shilled for Onyx.  I have emails from him in that function.  The record is – at best – incomplete.  At a minimum Jared has made minor false representations to regulators.  

Paradigm in the pre-Biden days also used to employ John Page.  He had the same rank as Jeff Schneider in the above org chart.  His 30 page long FINRA record (which you can find here) is full of customer complaints settled for six figure sums.  His regulatory problems existed both before and after his employment by Paradigm.  John Page was eventually forced to bankruptcy by UBS who sued him for repayment of bonuses and commissions that they had previously paid him and I think for moneys that they had paid out to clients as a result of his infractions.  As noted above – Paradigm appears to be careless about who it employs and associates with.

The Ponta Negra/Paradigm/Schneider connection

This blog observed for the first time that Ponta Negra was (a) housed within the offices of Paradigm Global, (b) had a phone number that was the Paradigm Global switch and (c) used the same marketing agent as Paradigm – a marketing agent who is often listed as a full time employee of Paradigm.  That marketing agent was Onxy/Jeff Schneider.

This was news because the SEC says that Ponta Negra was run from a unit in Stamford Connecticut.  (The address is on an early marketing email I have and also linked above.) 

Moreover this is the third time that it has been publicly confirmed that Paradigm has associated itself with an alleged fraud.  The prior two were Portus and Stanford.

This suggests a degree of clumsiness – and it is a real problem for funds of funds.  Funds of funds have – as their single most important skill – the ability to do due diligence.

And the due diligence on Ponta Negra was really easy.  My original post on Ponta Negra is repeated at the end of this post.  Pretty well everyone with any real expertise I showed this to came to the same conclusion as me.  It was highly suspect.  The marketing literature failed basic requirements – not mentioning consistent custodians or auditors and having returns inconsistent with the strategy.

The Paradigm/Onyx/Ponta Negra/Biden story has hit the main stream press (at least if you consider FT Alphaville and Felix Salmon at Reuters to be mainstream press).  

I see little to object to in any of their stories (FT here and here and here, Felix here).

The line they take is essentially that Paradigm Global – owned and controlled by the Vice President’s family – is less than careful about who it associates with and who it lends its name to.  

However they accept that Paradigm Global itself did not know that Ponta Negra was a fraud marketed out of their offices.  They accept the “we were dumb” view of how Paradigm got caught up with Ponta Negra (and also with Stanford before them).

I have no evidence that Paradigm Global knew anything was wrong with Ponta Negra anyway. But plenty of evidence that they were sloppy.

That in itself is a problem.  Paradigm pitches itself as a highly sophisticated fund of hedge funds with superb due diligence processes.  That they did not suspect that Ponta Negra was a fraud almost immediately suggests that their marketing spiel (excellence in due diligence) is only marketing spiel.  

When I wrote my original post on Ponta Negra (preserved below for posterity) it was blindingly obvious (to me at least) that Ponta Negra made no sense whatsoever.  

It should have been blindingly obvious to Paradigm too – but it wasn’t.  About half the readers thought it was a scam – and the lawyers for Ponta Negra were sure I was implying it was a scam.  Even the most cursory check on Ponta Negra would have identified it as suspect.  Moreover in its literature Paradigm claims to have a database of just about every hedge fund and special skills at identifying scams.  They were – it seems – just too gullible and they failed at their core function.

I guess their advertising material – detailing extensive expertise at detecting scams- is just plain crap.  Like their $1.5 billion under management and their custody arrangements and even (as alleged by James Biden) their stated returns. 

The Paradigm defence

Paradigm rejects that the notion that they actively participated in the alleged Ponta Negra scam.  That is an accusation I do not make.  I only make the suggestion that – through clumsiness and the failure to perform even the simplest due diligence that they lend their name to alleged scammers.  I also note that James Biden himself has sworn that Paradigm misrepresent their own return and makes allegations consistent with them misrepresenting themselves in marketing material.  

Paradigm’s only statement to date is simply to observe that Ponta Negra was a subtenant introduced to them by their common marketer.

That defence would be entirely plausible to even the accusation of clumsiness except that Paradigm Global has a history of lending its name or reputation to (alleged) scam hedge funds.  By far the most important was Portus Alternative Asset Management – an association that pre-dates any Biden involvement in Ponta Negra.  But to pick Stanford and Ponta Negra suggests above average carelessness.  

And employing chop-shop operators like Schneider – who operates from an unlicensed investment advisory firm (Onyx) is also in great contrast to the due diligence that they claim they undertake when they invest their own money.

This place is littered with red flags.  There are more – but I think this should be enough to get the mainstream media and the SEC involved.

Oh, and if I were Rusciano from Ponta Negra I would be busy finding a lawyer with experience plea bargaining.  This story has a long way to run.  

I for one though will be signing off.  I have real stocks to look at.  The whole point of being a digger – and I am a digger – is to make money from that which other people have not worked out.  And unfortunately I see no way to make money here.

John

My original note on Ponta Negra – which was posted under the title “Hedge Fund Marketing Material”

I regularly read the letters from fund managers more successful than me.  I like to know what they are doing.

Sometimes I cannot work it out at all.  Maybe that is because I am stupid - or maybe that is just because they are making it up.  I have identified a couple of frauds that way...

Here is the letter from a fund (name withheld for now) which I do not understand.  Can anyone explain this strategy to me?

Dear Fellow Investors:

The global economic stress as measured by FX short term volatility, sovereign and corporate CDS spreads and VIXX indices persisted in the month of February, as the barrage of negative economic indicators remained unabated.  

Continued stress on the financial sector that peaked with the record quarterly loss of AIG and the collapse of Citigroup equity valuations has left policy makers and market participants perplexed as to how the current turmoil will be resolved.

The month of February marked one of the most complex environments in foreign exchange that we have experienced since the inception of the Fund, as the ambiguity in governmental commentary on interest rate decisions and the measures being considered to aid the distressed economic climate caused abnormal gyrations in the G10 arena.  

We remain committed to our long DXY bias but as was mentioned in last month’s commentary, we have preferred to express this through a short EUR/USD bias and selectively partially imperfectly hedge it with a lower weighted long GBP/USD trade. 

We believe that the euro zone will continue to be weighed down by the massive 1.3 tn. EUR of outstanding debt of Eastern Europe that will be a challenge to refinance at reasonable yields in the current climate. 

The reversal of our short USD/JPY hedge was well-timed, as the announcement of the reissuance of U.S. Treasury samurai bonds to the Japanese marketplace has accelerated the upside momentum in USD/JPY. We have decreased the size of our short EM bias as commodity prices appear to have temporarily stabilized and we prefer to selectively express views through cross regional plays such as short EMEA/LatAm with underweights in HUF, PLN and overweights in CLP, BRL. 

We will continue to utilize low quantities of leverage and fewer numbers of intraday positions, as we anticipate the persistence of a high volatility marketplace into the end of Q1 2009.

Now of course it would be nice to understand how these guys do it - because they are good.  Very good.  Here are there monthly performance numbers.

 

Of course - as I do not understand the letter I can't vouch in any way for the validity of these results.  So I am not publishing their name on this blog.  But if anyone can explain this to me I would be very grateful...

POSTSCRIPTS:

1.  The FBI has arrested Rusciano - see this article.

2.  Folio Administrators has confirmed the relationship with Paradigm's international funds.  Here is the email:

Dear Mr. Hempton,

 

I can confirm that Folio Administrators Limited are the appointed fund administrator for Paradigm Global Fund.  Folio has been providing fund administration services to Paradigm's offshore funds since July 2004.

 

Please let me know if you require any further information.

 

Kind regards

 

William Harris

Director

 

Folio Administrators Limited

Folio House

James Walter Francis Drive

Road Town, Tortola

British Virgin Islands, VG1110

 

Tel: (284) 494-****

Fax: (284) 494-****

www.folioadmin.com

 

I have some concerns though and have further followed up.  In an Auguest 2005 document linked here they clearly say that Folio has been an administrator of their offshore fund for THREE YEARS.  That would bring the date to 2002 - whereas Folio Administrators confirm the date since 2004 only.   Here is the extract:

Again I will follow up.

Another shameless plug for the Cooler Mr Hempton

My cousin Nick's jazz band is going from stregth to strength.  

Here is the latest review of the Nick Hempton band:

http://www.allaboutjazz.com/php/article.php?id=32698

What was it like to be a Stanford salesman?

I can’t resist.  Some things really are funny in their sad sort of way.

Justin Hare was a marketer who sold hedge funds for Onyx Capital.  Justin also worked for Stanford (the alleged ponzi).

Onyx (and its principal Jeff Schneider) at a minimum introduced Paradigm (a firm owned by the Vice President’s family) to two alleged frauds (Alan Stanford, Ponta Negra).  

Anyway Justin Hare (like several people involved in this) is not registered as a salesman for anything financial even though that is how he made a living.  (Justin – fix your registration.)

Justin did not hide it though.  He is a young good looking man, recently married to an equally young good looking wife.  He goes to church and at least on his myspace page he has enough attractive young women as friends to meet Nouriel Roubini’s preferred ratio.  

Being young and naïve he almost certainly thought that there was nothing wrong with his employer (the allegedly ponzi Stanford) and so he proudly put on his myspace page the photos of his business trip to Antigua.  

I have repeated them below.  People who lost money at Stanford probably will find this less grimly amusing than me.

First two photos - both posed - in the private jet

And here is Stanford's own private jet hangar in Antigua

With its own entrance to customs

Just to make sure you were in the lap of a really big-spending company the whole thing is labelled "Stanford Aviation".  

And whilst the road to Stanford Aviation was not paved with gold it was paved with something peculiar...

From here they were taken to the upmarket resort at Jumby Bay...

And I guess it surprised nobody that the Pavillion at Jumby Bay had its own dedicated Stanford wine cellar...

Or that Sir Allen's boat was parked in harbour.

What amazes me about this though is the lack of self reflection.  Justin Hare is young.  He is 25.  Nobody showers ordinary 25 year olds with this much lavish attention.  

But there is no evidence that the salesman in question thought this sort of excess unusual or indicative of something smelly.

We live in a society where the appearance of money - and the possibility of having some - gets people to leave either their conscience or their judgement at the door (or in this case the departing aircraft hanger).  

And that is why I found these photos grimly amusing.

John

PS.  The Myspace page has been set on private so you can now no longer see the photos without being one of Justin Hare's "friends".

Given that people who sell products like this tend to resurface I have decided to put a single identifying photo up.  This is Justin Hare on the plane.

Also - the (US) Stanford receiver is suing 66 Stanford salesmen for their sales commissions received.  Justin Hare is not on the list.  

I have not forwarded a copy of this post to the receiver - but if people feel strongly about it they are most welcome.

J  

PPS.  Here he is skiing at Whistler.  Stanford money hard at work!

Final postscript:  I tracked Justin Hare down again.  He appears to have taken an entirely honest sales job.  It probably pays less - and it certainly does not come with trips to Antigua.  I almost feel like taking this down now Justin is working an honest job for honest money.  But hey - lets keep it here as a reminder for Justin.

Just how sloppy is Paradigm Global?

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

The SEC recently alleged a fraud by Ponta Negra – a small hedge fund run out of an office in Stamford Connecticut.  This blog first observed that Ponta Negra also maintained an office with Paradigm Global.

Moreover in SEC filings they gave their phone number as the Paradigm Global switch and they used the same marketer as Paradigm Global.

This was first exposed on this blog here.  Read this post first.

Now Paradigm have – through their lawyer – sought to defuse this issue.  Their lawyer summed up the story as follows (as reported in the Politico):

"They were subtenants," he said, adding that marketer Jeff Schneider "who did some marketing for paradigm over the last couple of years introduced us to Ponte Negra, and we had some available office space."

"That's 100% the extent of the relationship," he said.

"There's no smoke or fire as relates to this unfortunate Ponte Negra situation. There's nothing there at all," he said.

Jeff Schneider was a full time employee of Paradigm (according to their own marketing material) until relatively recently (January 2004 to February 2008 according to FINRA records).  To say that he did some marketing for Paradigm over the last few years is understating the extent of the relationship.

Anyway the excuse is that Ponta Negra is a subtenant – and in no way associated with Paradigm.

The excuse comes down to Paradigm being careless about their reputation rather than in any way involved in the alleged Ponta Negra fraud.

And I admit it – the only hard evidence I have is for Paradigm being unduly careless about their reputation.  

And in this light I thought I might have a look at just how careless by looking at Jeff Schneider’s FINRA record.  Jeff Schneider it seems has a history that might make him difficult to employ by anyone who does thorough due diligence and cares about their reputation.  

Remember this guy was a full time employee in a senior position at Paradigm. 

• Whilst working for CIBC markets immediately before taking the position at Paradigm he allegedly temporarily transferred securities from a customer account to another member of the firm allowing the other member of the firm a bonus.  He is acused of but denies sharing in this bonus.  He settled this for a fine, a non-admission of guilt and a 90 day industry suspension.  

• There were several allegations that at CIBC he recommended inappropriate investments and excessively traded client accounts.  Damages in most these cases was under half a million dollars and some cases were settled by CIBC for amounts up to one hundred thousand dollars.

• There were also allegations of unauthorised trading of client accounts which were settled by CIBC for amounts in excess of $50 thousand.
  

Needless to say he was dismissed by CIBC.

• At Paine Weber he was accused of failing to respond to client requests causing damages to clients of $18000.  Paine Weber settled for $10 thousand but Mr Schneider denies any liability.

• He was permitted to resign from Merrill Lynch after allowing foreign clients to exercise (losing) trades and to not pay for their losses.  He argues that he was following Merrill Lynch procedures and that the clients just disappeared.
  

You can find the details here in his FINRA report.

Given this history are you surprised that Jeff Schneider is the marketing agent for Ponta Negra – an alleged scam?  

Or are you more surprised that a firm owned by the Vice President’s son and brother continued to employ Jeff Schneider as a marketing agent?

At best the Biden’s firm is sloppy.  Sloppy enough that it is highly surprising that the main stream media is not asking questions.

John

PS.  I am a life-long adherent of slightly left-of-centre politics.  I campaigned against John Howard in his own electorate and was (proudly) at Maxine McKew's election party when she pulled off the improbable win.

I would have donated to the Obama campaign except that - for a non-US citizen - that would be illegal.  My problem with Obama is that he is too centrist.

If the election were held again tomorrow and I could vote it would be for Obama/Biden.

There are some people aruging I am writing these posts because of some right wing political agenda.  They are just wrong.  

This issue just deserves exposure.  I did not set out to expose the Bidens.  I found Ponta Negra and followed where it led me.  I almost collapsed in surprise when I found the strong Biden link.  

J

AIG – a really neat run through

I do not do links unless they are really good.

This is really good.

The Aleph Blog has a simply wonderful piece on AIG – going through and asking in a clear way which (if any) AIG operations were sound.

It helps if you have some expertise in insurance – for instance it helps if you know instinctively that when insurance company A owns insurance company B it winds up with some double counting of capital and hence lower solvency than if the companies are independent and jointly owned by a holding company.

That said Mr Merkel has done what nobody in the press has done and really analysed AIG.  His bit on security lending is really useful.

The formatting however is awful so I suggest you read the PDF.  And put the blog on the RSS feed.

--

Finally when AIG went under I thought the life insurance companies were sound.  I later decided otherwise.  Mr Merkel explains why in very simple terms though I suspect the life companies are even worse than he makes out.

Happy reading - and don't buy any of the debt because there is no value left in my view.

John

A statement by Paradigm - and some questions

Message to readers: if you are new to the Paradigm/Biden/Ponta Negra connection read this post first.  

Marc LoPresti – the regular lawyer for Paradigm Global has apparently made a few statements regarding this blog’s suggestion that Ponta Negra (an allegedly fraudulent hedge fund) and Paradigm Global (a fund of funds controlled by the Biden family) were very close.  

I can’t find the statements, only a second hand reference to them at the Politico.  However to quote:

"They were subtenants," he said, adding that marketer Jeff Schneider "who did some marketing for paradigm over the last couple of years introduced us to Ponte Negra, and we had some available office space."

"That's 100% the extent of the relationship," he said.

"There's no smoke or fire as relates to this unfortunate Ponte Negra situation. There's nothing there at all," he said.

Let’s pick this apart.  

First I suggest you ring (212) 271-3388.  This is the phone number for Paradigm.  Do it after hours and you will get a choice on their automatic menu.  Ask for extension 213 on their automatic switch.  You get the following message:

You have reached Francesco Rusciano at the Ponta Negra Fund 1 LLC.  Please leave your message at the tone.

You get this message several days after Ponta Negra has been closed by a Federal Judge.

They were (at best) subtenants using the same phone system.

Secondly the LoPresti statement downplays the extent of the relationship between Jeff Schneider and Paradigm.  I have posted several old Paradigm marketing documents that place Schneider as the second most important marketing person at Paradigm (see here for an example).  

Moreover the senior marketing person at Paradigm (Alla Babikova) is given as running the New York office of Onyx (Schneider’s organisation).  She does this whilst still working in Paradigm’s office.  She is warranted as a full time employee of Paradigm in a few Paradigm marketing documents.  

I have some questions for the respected Marc LoPresti.  

• Did Paradigm implement any procedure after your dealing with Alan Stanford to ensure that Paradigm's name would never again be used by scamsters?  If so have these procedures failed?  If not, why not?
  
  
• Did Francesco Rusciano actually have an office at Paradigm as suggested by the message on the answer phone?  The SEC filings suggest that Ponta Negra was run by Mr Rusciano from his home in Stamford.  How often was Mr Rusciano in his tenancy?  Did he use the tenancy for marketing purposes – so as to trade off either Paradigm or the Biden’s name?

• Could you please list the other subtenants of the 17th Floor of 650 Fifth Avenue? I can find other stuff there which looks suspect and I want you to assure us that it has nothing to do with Paradigm and is no way trading off your reputation.  Remember Alan Stanford traded off your reputation listing you as one of his investment strategies (and noting the joint branded fund).  

• Could you please also answer the question as to how many staff you have?  The answer is six to ten in the SEC IARD filings – and 28 in some marketing documents.  Did you ever have 28 staff?  Were Schneider and Babikova full time staff as listed in your marketing documents?  If so when (if ever) did they cease to be full time staff?

• Could you please also answer the allegation made in James Biden’s sworn statement that your returns were misrepresented?  By whom and to who were they misrepresented?  Did you approach legal authorities to report staff or agents of yours for misrepresenting your returns?  Or was James Biden’s statement perjury?
  

Thanks in advance.

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.  

COMPANY HISTORY

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.

The first post I did not make on Ponta Negra and its link to the Bidens

Note - an error in this post has been corrected - see the end note...

Being a blogger you sometimes need to hold your horses.  Lawyers do threaten.  I wrote this post.  I circulated it to a few friends but on the promise that they would not further circulate it.  

I did not post it.

I suggest you read the FIRST POST ON THE BIDEN/Ponta Negra connection before you read this.  However you should enjoy this...

It was originally titled "The Scorpion Post".  You will see why.  Some of the links in the post do not work because - under legal threat - I deleted some posts and some documents.

You will also note that since I wrote this (hitherto unpublished) post the amount of information I have linking the Bidens to various ponzis/frauds has increased.

A Scorpion Post - Chasing down a Ponzi

If you are a Republican political obsessive please read this to the end. There is a really big sting in the tail… you might like it…

This blog would – on average – have readers considerably more financially sophisticated than the average person. Indeed looking at where my emails come from its not quite a roll call of Wall Street’s finest– but the crowd is well heeled and well connected.

The fund I put up yesterday is almost certainly a Ponzi. Indeed just reading the numbers as posted I was pretty sure it was a Ponzi – and in this post Madoff/Stanford world I would have thought that most of my readers would be trained to look at results which do not in any way resemble plausible and scream Ponzi.

I did not reveal the name of the Ponzi fund in yesterday’s post but I will today. It is called Ponta Negra Fund LLC and its manager is the Ponta Negra Group.

Surprisingly about a third the emails I got and a fair few of the comments did not even raise the possibility it was a fraud.

Fraud was the first thing that I thought of – and it was the first thing I thought of when I first heard of this fund in June last year. I thought Ponzi in a pre-Madoff world. I am really startled that all my readers did not think Ponzi in a post-Madoff world.

I have two fund marketing documents, one containing results to May last year – the other containing results to February this year. I have uploaded them to Scribd – and you can find them here and here. Download them if you really want to follow the scam.

I was fairly sure it was a Ponzi before I observed the other tell-tale signs – but - for the sake of completing the experiment I will reveal them to you.

Firstly both documents are formatted in a very strange way. If you cut and paste text you get words without spaces. So a cut and past will look like this:

Aswehadanticipated,interdayvolatilitybegantospike...

Rather than just saying:

“As we had anticipated inter-day volatility…”

This format takes some doing. The spaces are formatted as pictures rather than text. The reason for doing this is that it makes the documents non-searchable and hence unable to be found using Google. I guess that indicates that they have something to hide.

Now take a look at the February document. The contact is "Jared Toren" whose phone number is 512 306 0300. The fund has an address of Level 17, 650 Fifth Avenue New York. The first problem is that the phone number for the sales contact – for a fund headquartered in New York City – is in Austin Texas. Very strange.

If you Google the phone number you get a link to Eagle Rock Capital LLC. Here is their website (click here). Because I expect the site to disappear I have taken a picture of it for posterity.

There is not much there. No contact address, nothing really except a place holder and phone number.

But Eagle Rock Capital has a history – as a personal lending company. This is an extract from the San Marcos Record – which describes the company as providing personal loans (click here). I have reproduced below:

In the earlier Ponta Negra document you find a different contact – a

Jeffry Schneider from Onyx Capital, LLC. Onyx Capital is a funny entity. It too has a website or two (click here for one).  [Editors note - this site has changed...]

The Onyx website is constructed almost entirely of pictures not text. Nothing is searchable by Google. On their home page they offend with stray apostrophes – but that would not be noticed because it is not text and so never went through a spelling checker. Here is the cover page:

And here is their contact page:

Note no physical address is given. That is very strange indeed.

Jared Toren and Jeffrey Schneider do appear together in – you guessed it – civil litigation. I have filed the complaint on Sribd (click here).

The allegation in that suit is that Jared Toren and Jeffrey Schneider worked at Hedgeco – an internet based marketer of hedge funds – and that they stole the client list. They either joined or established Onyx. [EDITORS NOTE - SEE END]

In other words Jared Toren and Jeffrey Schneider are alleged to have stolen a client list and are seemingly using that list to market a Ponzi scheme (Ponta Negra). They possibly also used it to market New World.

Ok – all of this would not have interested me. I have numerous times reported frauds like this to the SEC and even to the FBI – and I have yet to see any action. Mr Markowitz and Madoff is an experience that anyone who has dealt with the SEC has seen before.

I have simply given up

This is however a Scorpion Post. Here is the sting.

The address given in the second Ponta Negra marketing document is 17th Floor, 650 Fifth Avenue New York. I can’t find any reference to Ponta Negra there – but there is a fund-of-hedge-funds based there. It is Paradigm Global Advisors and they manage roughly 270 million dollars according to the Wall Street Journal and 500 million on some other estimates I have seen.

Now Paradigm is a name that will ring a few bells. The firm is owned by Hunter and James Biden. Hunter is Vice President Joe Biden’s son and James is the Vice President’s brother. (I told the Republican activists to read to the end…) You can see a picture of Hunter Biden with his dad at the Obama inauguration below.

Paradigm Global does not have an entirely pristine reputation. Here is a Wall Street Journal article about a fund that they co-branded with Stanford Financial (click here). I copied the picture from that WSJ article.

According to the WSJ article Paradigm claims that the Bidens never met or communicated with Mr Stanford. I believe them. They lent the name Paradigm to the Paradigm Stanford Capital Management Core Alternative Fund without ever having met the principals of Stanford. Such is the standard of due diligence on Wall Street.

I was worried at first that Ponta Negra might be a legitimate fund headquartered in another cubicle on the 17th Floor of 650 Fifth Avenue. It turns out that there are several funds also HQ'd there. Paradigm it seems does all the signage on the floor – but once you get past the couple of Paradigm people on the front desk you find several doors behind which reside several hedge funds – a hedge fund hotel if you want. Most of the offices were empty mid-morning – which was very surprising. These funds are largely marketed by Paradigm.

Still there could be a fund (Ponta Negra) independent of Paradigm on the 17th floor. There could be – they too would need to employ a Jeffrey Schneider as a marketing agent. To quote the Wall Street Journal story:

A Paradigm marketer, Jeffrey Schneider, confirmed accounts provided by others that he brought in the Stanford business. Stanford would bring clients to the fund and Paradigm would manage it, according to Mr. LoPresti. The fund is mentioned on the Web site of a Stanford entity called Stanford Trust Co. as one of its "investment management strategies."

Ok – by this point you should at least be open to the possibility that the Vice President’s son and brother employ someone who uses the good Biden name and a stolen client list to market Ponzi schemes.

There is no allegation here that the Bidens are involved. Just that their standard of due diligence is low. Very low.

Now the Biden’s hedge fund hotel contains an assortment of other colourful funds. One of them is a SIPC registered broker dealer who also manages client money. This broker dealer does not list their auditor anywhere on their website. However they report startlingly good funds management results for 2006 and 2007 though they have surprisingly failed to update their website to include 2008 results. Their website boasts that their trades will be completed with zero commissions and transaction charges allowing them to focus exclusively on the investments that best meet the needs of the clients without the concern of transaction charges and hidden revenue sharing…

Any resemblance to Bernie Madoff is purely coincidental.

EDITORS NOTE.  I originally referred to Capital Group Holdings as marketing a previous Ponzi.  It was HOLDING CAPITAL GROUP.  I sincerely apologise for the error and have deleted a section of this post.

Alleged fraudulent hedge fund associated with the Vice President’s family harasses blogger

I wrote a post about Ponta Negra – a hedge fund that I thought was more likely than not to be fraudulent.  I did not name Ponta Negra in the post but I put two of their marketing documents on the web and some people found them.  

I withdrew that post after threats from lawyers.  I also removed the documents from the web.

I have reposted the two marketing documents I have from Ponta Negra here and here and the first threat from the lawyer here.  

I have done this because Francesco Rusciano of Ponta Negra has formally had his assets frozen by a Federal Judge at the request of the SEC.  Also see here for the formal charges.  

Anyway I asked the lawyers for the things that I would need to do due diligence on Ponta Negra – that is the identity of the auditor, permission to talk to the auditor, identity of the prime broker and permission to talk to the prime broker.  

I was denied.  The lawyers argued that I was “just a blogger”.  Their denial letter is here.

The first marketing document however identified a supposed prime broker as Citigroup.  I wrote to citigroup several times – and spoke to senior people in their government relations area and told Citigroup the entire story.  I believe that Citigroup did not react appropriately to a fraud committed in their name.

Anyway I will save you the suspense.  All of this would not be the biggest story on my blog except that Ponta Negra is marketed out of the office of Paradigm Global – a fund of hedge funds owned and controlled by Hunter Biden and James Biden.  Hunter and James are the son and brother of Vice President Joe Biden respectively.

You can find this several ways.  

1. Ponta Negra gives its address in the second marketing document as 650 Fifth Avenue, 17th Floor.  This is the same address as Paradigm Global.  

2. The contact on the first marketing document for Ponta Negra is Jeffry Schneider.  This is the same Jeffry Schneider who is quoted in this Wall Street Journal article as being the marketer for Paradigm Global and effectively spins for the Bidens.

3. This SEC filing gives an address and phone number for Ponta Negra.  The address and phone number is a number through the switchboard of Paradigm Global and until recently it was a way of getting into contact with Ponta Negra.

At a minimum Paradigm Global – a fund of fund managers owned the Vice President’s family, housed an alleged fraudster.  The alleged fraudster used the same phone number as the Vice President’s family business, the same marketing machine and traded off the good name of the Vice President’s family business.

There are numerous posts about Ponta Negra, Paradigm and other assorted entities (Onyx Capital for one) that I have withheld posting on.  I will put them up as a series.  The ties between the Vice President’s family and some very questionable dealings are very strong.

The next step for the SEC has the surname Biden.  Are they up to it?

To be continued.

John