In­vest­ment ad­viser sold fake in­vest­ments

The Pak Banker - - OPINION - Matt Levine

THERE are a lot of cre­ative and amus­ing in­vest­ment frauds in the world, but there is one great sim­ple in­vest­ment fraud, one orig­i­nal source from which all the oth­ers de­vel­oped: Tell peo­ple that you have a risk-free in­vest­ment that will give them their money back, with 15 per­cent in­ter­est, any time they want.

Why don't peo­ple do this all the time? Well, I mean, they do. It's a pretty pop­u­lar fraud. But it is usu­ally a fairly small-scale and la­bor-in­ten­sive fraud, be­cause most in­vestors who are at all so­phis­ti­cated re­al­ize that the risk­free 15 per­cent re­turn is it­self a red flag. Real in­vest­ments are risky or un­cer­tain or at least illiq­uid; the proper re­sponse to a guar­an­teed liq­uid 15 per­cent re­turn is "what's the catch?" So the charges that the Se­cu­ri­ties and Ex­change Com­mis­sion andfed­eral pros­e­cu­tors brought today against Andrew Caspersen are sur­pris­ing in that Caspersen al­legedly used ex­actly that pitch to take $25 mil­lion from a sin­gle hedge fund, which is a level of size and so­phis­ti­ca­tion where you wouldn't ex­pect peo­ple to fall for it. But here's what Caspersen's in­vestor al­legedly bought:

The Novem­ber Note stated, in part, that: (i) the SPV would pay the Foun­da­tion the prin­ci­pal sum of $25 mil­lion "in im­me­di­ately avail­able funds" to­gether with in­ter­est on the un­paid prin­ci­pal; (ii) in­ter­est on the out­stand­ing un­paid bal­ance shall ac­crue at an an­nual rate of 15%; (iii) in­ter­est shall be paid quar­terly; (iv) upon 90 days' no­tice to the SPV, the Foun­da­tion may re­deem the prin­ci­pal sum of $25 mil­lion; (v) the SPV "shall main­tain cash or cash equiv­a­lents in an amount equal to or greater than" the to­tal of the out­stand­ing prin­ci­pal and ac­crued but un­paid in­ter­est.

So the in­vestor -- a char­i­ta­ble foun­da­tion af­fil­i­ated with "a multi-na­tional hedge fund, head­quar­tered in New York" -- was ex­pect­ing a 15 per­cent an­nual re­turn on an in­vest­ment with 90-day liq­uid­ity fully col­lat­er­al­ized by cash. That prom­ise is it­self pretty sus­pi­cious, and Caspersen's al­leged ex­pla­na­tion of why this too-good-to-be-true op­por­tu­nity was avail­able was even weirder: Sup­pos­edly Coller Cap­i­tal, a firm that buys sec­ondary stakes in pri­vate-eq­uity funds, had agreed to take out a loan to buy a sec­ondary stake in a pri­vate-eq­uity fund run by Irv­ing Place Cap­i­tal, but turned out not to need the loan, but "was ob­li­gated to pay in­ter­est" any­way be­cause it "had al­ready agreed to the Loan," so Caspersen was rais­ing money to lend to Coller to just park it and pay 15 per­cent in­ter­est. That ... doesn't re­ally hap­pen?

Any so­phis­ti­cated in­vestor might sus­pect that some­thing was amiss, ex­cept that Caspersen him­self was im­pec­ca­bly cre­den­tialed to pull it off. Caspersen was a manag­ing di­rec­tor in the Park Hill Group, a unit of PJT Part­ners (and for­merly of Black­stone) that re­ally was in the busi­ness of mar­ket­ing and fund­ing sec­ondary trans­ac­tions in pri­va­tee­quity stakes. Irv­ing Place in­vestors re­ally were sell­ing stakes in their fund, and Coller re­ally was re­ported to be a buyer. Caspersen al­legedly told the in­vestor that his own fam­ily of­fice was in­vest­ing in the loan, and the Caspersen fam­ily of­fice re­ally did at one point man­age $1 bil­lion. The loan was -- ac­cord­ing to the com­plaint -- fic­ti­tious, and Park Hill, Coller and Irv­ing Place all had noth­ing to do with what Caspersen was sell­ing. But, be­sides the silli­ness of the in­vest­ment op­por­tu­nity it­self, the other de­tails had the ring of truth.

I mean, not all the other de­tails. Af­ter Caspersen hooked the foun­da­tion for $25 mil­lion, he tried for an­other score, and ear­lier this month he al­legedly asked the foun­da­tion for an­other $20 mil­lion. Again the pitch was pretty ridicu­lous -- an­other (fic­ti­tious) in­vestor had re­deemed out of the mag­i­cal 15 per­cent notes, but Caspersen "had con­vinced Firm-1 [i.e. Coller] to re-is­sue the other in­vestor's prom­is­sory note to new in­vestors." That is, Coller had taken out a loan at 15 per­cent in­ter­est, re­al­ized that it didn't need the money, paid back part of the loan -- and then Caspersen con­vinced Coller to take out an­other loan that it didn't need? Come on. The in­vestor was, I guess, sus­pi­cious at this point, and told Caspersen that he wanted to speak to "In­di­vid­ual-3," sup­pos­edly a Coller em­ployee who had signed the doc­u­ments for the first loan: In re­sponse, CASPERSEN sent an email to In­di­vid­ual-1 [the hedge-fund em­ployee who had in­vested the $25 mil­lion] and to an email ad­dress con­tain­ing both the name of In­di­vid­ual-3 [the sup­posed Coller em­ployee] and the name of Firm1 [Coller Cap­i­tal] (the "Email Ad­dress"), to set up a con­fer­ence call for later that day.

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