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June 11, 2009

University seeking return of $21.25 million last-minute investment

In an attempt to reduce the University’s potential losses, Pitt lawyers are arguing for the return of $21.25 million that was sent to an investment firm just as the fund operators’ apparent misappropriation of investors’ funds was being uncovered.

Pitt wired the money to Connecticut-based WG Trading Co. on Feb. 6, just days before regulators suspended fund operators Paul Greenwood and Stephen Walsh for failure to cooperate with an audit.

The National Futures Association, an independent self-regulatory group for the futures industry, on Feb. 12 took an emergency enforcement action against the two, prohibiting them and their firms from soliciting new investments, trading or transferring funds.

The two subsequently were arrested by the FBI and charged with conspiracy, securities fraud and wire fraud. They are accused of misappropriating investors’ money in an apparent Ponzi scheme through which they funded extravagant lifestyles.

Pitt began investing endowment funds with Greenwood and Walsh’s Westridge Capital Management in 2002.

Published reports have identified other institutional investors including pension plans for CBS Corp., Wells Fargo, Viacom, the Iowa Public Employees’ Retirement System, the Sacramento County Employment System and the North Dakota State Investment Council. Bowling Green State University, Ohio Northern University and Carnegie Mellon University also invested endowment funds with the Westridge firms.

The Pennsylvania Public School Employees’ Retirement System narrowly missed being caught up in the scheme. It was set to invest up to $1 billion with Westridge on the recommendation of investment consultant Wilshire Associates but a deal approved in September 2008 hadn’t been finalized by the time the fund managers’ apparent misdeeds came to light.

Pitt and CMU also have been Wilshire clients, although CMU announced earlier this year that it had terminated its relationship with the consultant. Pitt Vice Chancellor for Public Affairs Robert Hill said the University continues to retain Wilshire.

In a joint complaint filed Feb. 20 in federal court in Pittsburgh against the fund operators and their related firms, Pitt sought damages in excess of $65 million and CMU sought damages of more than $49 million.

That lawsuit has been stayed while separate actions filed by the Commodity Futures Trading Commission and Securities Exchange Commission go forward in federal court in New York. (See March 5 University Times.)

The SEC suit charged that “Greenwood and Walsh have used their affiliated entities to engage in an egregious investment fraud” and have “used client money invested in [their partnership WG Trading Investors] as their personal piggy-bank to furnish lavish and luxurious lifestyles, which include the purchase of multi-million dollar homes, a horse farm, cars, horses and rare collectibles such as Steiff teddy bears.”

The New York court has frozen the defendants’ assets and appointed a temporary receiver, Los Angeles-based Robb Evans & Associates, to oversee them.

The receiver’s initial tally found what many observers had feared: The assets appear to be insufficient to repay fully what investors had entrusted to Greenwood and Walsh’s firms.

In a May 27 initial report to the court, the receiver stated, in part, “Claims from investors preliminarily total about $1.5 billion. Based on all of the information available to the receiver, it appears there will be a shortfall of approximately $600 million.”

The report (which included a 52-page inventory of Greenwood’s collection of 1,348 teddy bears bought for a total of $3 million), also listed investors’ account balances as of Jan. 31 without identifying the investors by name.

The University, in its June 1 claim, noted that although the report does not disclose investors’ identities, “The University has been able to identify those entries purporting to show its account information. This report data does not show the University’s $21.25 million was ever removed, transferred, dissipated or invested by defendants,” adding that the University believes that the money it transferred Feb. 6 remains in WGTC’s accounts, “is directly and easily traceable to the University, is not a part of the receivership estate, and should not be subject to claim by, or distribution to, any other party seeking to withdraw or recover funds from WGTC, any of the other limited partners of WGTC, or any other investor victimized by the Westridge defendants.”

In its report to the court, Robb Evans & Associates stated it intends to file a proposed claims verification procedure with the court by June 30, after which the issue of distribution procedures may be addressed.

—Kimberly K. Barlow

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