IPERS hopes to recoup most of investments linked to fraud scheme

Iowa's largest public pension fund could recoup up to 90 percent of its investment money put at risk in an alleged “brazen” fraud scheme by two New York brokers that involved the overall misappropriation of as much as $554 million in multiple investors' assets, a state attorney says.

Jeffrey Thompson, a deputy Iowa attorney general, said a federal court-appointed receiver has determined that at least $800 million to $850 million once controlled by WG Trading Co. and Westridge Capital Management is available for redistribution among about 40 affected investors – including $254.3 million that was invested by the Iowa Public Employees Retirement System (IPERS). The receiver is slated to file a recommended distribution plan by the end of the year, he said.

“We're really optimistic we're going to get a significant portion of our investment back. It's just how much. That's the good news,” Thompson said in an interview.

“We're probably going to get at least $200 million or more back. Our realistic expectation is to recover between 85 percent and 90 percent of our actual principal that is left, which is really an unbelievable result in this kind of situation,” he added, noting IPERS initially recovered $35 million in investments. “The word is really encouraging. The money is definitely there. It's not iffy. It's been liquidated. There's cash sitting there ready to distribute and there are some additional assets.”

For instance, Thompson pointed to news reports that a collection of “museum-grade” teddy bears amassed by Paul Greenwood, a former general partner in WG Trading, recently was sold at auction in London for about $1.75 million.

Greenwood was indicted last year along with partner Stephen Walsh after federal regulators took emergency action to halt their trading operations and froze the assets of their investment entities in what was described as “a brazen investment fraud” that misappropriated up to $554 million in a scheme that stretched from 1996 until their arrests in February 2009. According to the U.S. Securities and Exchange Commission, Greenwood and Walsh promised investors that their money would be invested in a stock index arbitrage strategy, but instead they “essentially treated their clients' investments as their personal piggy bank to purchase multi-million dollar homes, a horse farm and horses, luxury cars, and rare collectibles such as Steiff teddy bears.”

Last summer, Greenwood, who is cooperating with federal prosecutors in their case against Walsh, pleaded guilty to federal fraud charges, agreed to surrender his financial assets, settled civil claims brought by the SEC, agreed to refrain from violating securities laws and to pay yet-to-be determined “disgorgement” and penalties. Sentencing is slated Dec. 1 for Greenwood, who may face up to 85 years in prison and hundreds of millions of dollars in fines.

Unlike a classic “Ponzi” scheme where money is shifted among investment accounts that are drained of investor funds, Thompson said Greenwood and Walsh maintained a significant pool of money with spinoff accounts in a sophisticated system that was hard to detect and only came to light when stocks plunged in 2008, setting off an imbalance that drew the scrutiny of federal regulators.

“There was always a significant pool of funds from investors generating a lot of earnings,” he said. “If it hadn't been for the drop in the market in 2008, people might not have ever figured this out. This wasn't easy to figure out.”

Thompson said IPERS' initial investment with WG Trading and Westridge was about $400 million and grew to a maximum of nearly $500 million. Regular market losses in the 2008 slump reduced the Iowa assets and the preliminary account value was put at $291.2 million after the SEC froze the assets of the trading entities controlled by Walsh and Greenwood. When all factors of earnings, interest and other financial considerations were taken into account, the IPERS share of the remaining assets identified by the federal receiver was set at $253.4 million. The roughly 40 affected investors have until the end of the month to submit their plans before the receiver makes his recommendation, and Thompson is hopeful a payout agreement can be reached without costly and time-consuming litigation.

“We're wrestling hard because the numbers are big,” he said. “So we're trying to negotiate and we're prepared to fight like hell if we have to get every penny for IPERS.”

IPERS has more than 300,000 members and overall assets totaled $18 billion in fiscal 2009. Westridge and WG Trading managed about 2 percent of IPERS' investment portfolio since 2007.