University Times

The disgraced investment fund operators who are accused of spending institutional money — including a chunk of Pitt’s endowment — to fund extravagant lifestyles have asked a U.S. District Court judge in New York to release more than $1 million in frozen assets to cover living and other expenses.

The Commodity Futures Trading Commission (CFTC), one of the organizations that filed civil suits against partners Paul Greenwood and Stephen Walsh and their related firms, is hoping the judge won’t buy their argument. In a March 3 filing in response to the pair’s request to release some assets, CFTC reiterated its concern that investors may be left holding the bag.

“[T]he Commission’s initial review of their assets indicates a strong probability that the defendants do not have sufficient assets to remotely cover the losses incurred by their misappropriation of investor funds. Any additional dispersing or dissipation of funds would serve to further reduce the likely recovery for the victims of this scheme,” CFTC’s counsel stated.

CFTC’s opposition scoffed at what Greenwood requested as necessary living expenses. In addition to requesting more than $900,000 to cover third-party expenses for his horse farm, according to the filing Greenwood sought monthly household expenses of $9,900; $35,000 for orthodontists, $62,000 for tuition, loan interest of $54,000 and annual property upkeep expenses of more than $350,000. “If these excessive expenses are allowed to be paid with frozen assets, this would irreparably harm the defendants’ victims by greatly reducing their possible recovery,” CFTC’s filing stated.

Pitt could be out some $65 million in endowment funds invested with New Yorkers Greenwood and Walsh, who were arrested by the FBI last week on federal charges of conspiracy, securities fraud and wire fraud. Neighboring Carnegie Mellon University had invested $49 million with them.

The universities jointly filed a complaint against the duo and their firms Feb. 20 in federal court in Pittsburgh in hopes of recouping their investments, which include $21.25 million Pitt invested with the partners in early February. That suit has been put on hold while civil actions filed by the Securities and Exchange Commission and CFTC actions work their way through the New York court.

Pitt and CMU are among some 16 institutional investors in a commodity pool controlled by the two, who face prison time and fines related to the criminal charges. The conspiracy count carries a maximum sentence of five years in prison. The securities fraud and the wire fraud counts each carry maximum sentences of 20 years.

The SEC suit charges 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.”

In addition, according to a Department of Justice statement, Walsh is alleged to have misappropriated investor funds for himself, and to have made large cash payments to his ex-wife.

Greenwood and Walsh are alleged to have misappropriated most of the millions that institutional investors believed were being invested in what was pitched as a conservative “enhanced stock indexing” trading strategy that beat the returns of the S&P 500.

The apparent fraud came to light after Greenwood and Walsh refused in early February to cooperate with a National Futures Association audit of WG Trading Investors (WGTI).

In the audit, the NFA, an independent self-regulatory group for the futures industry, found that of approximately $812 million supposedly on the books of WGTI, more than $794 million was booked as receivables due from Greenwood and Walsh and investments in entities that they controlled. Greenwood allegedly signed IOUs to WGTI totaling approximately $293 million; Walsh allegedly wrote IOUs to WGTI for $261 million.

In 2001, Pitt trustees approved a three-year plan to diversify the University’s portfolio that raised to 10 percent the portion of the University’s endowment invested in hedge funds and other “marketable alternatives.”

The trustees’ investment committee last summer again changed the endowment asset allocation policy to increase that percentage.

In consultation with the University’s investment staff and consultants Wilshire Associates and Cambridge Associates, in a June 16, 2008, vote, the committee authorized an additional 3 percent of the endowment’s total market value to be invested in marketable alternatives such as those made with Greenwood and Walsh.

The target allocation in the marketable alternatives category was set at 18 percent of the endowment’s market value with a range of 13-23 percent. (See June 26, 2008, University Times.) According to the University’s consolidated financial statements, as of June 30, 2008, the endowment’s exposure to such hedge and arbitrage funds was 16 percent.

Pitt administrators aren’t saying much about the investment losses. However, Chancellor Mark A. Nordenberg reiterated in his March 4 report to Senate Council the points made in the administration’s written response to a University Times letter to the editor (see letter this issue).

He told Senate Council his ability to comment was limited.

“I begin with that express limitation because there are limits to what we know, which is the nature of fraud. There also are legal proceedings that are underway that we cannot afford to complicate, both because as a general matter we want to support the efforts of the involved federal agencies and because these are proceedings in which we hope to recover at least some of our assets.”

Nordenberg said he chose to make his first public comments to Senate Council “because the people around this table are a part of the community that includes groups and people who have a direct stake in these matters” and that he would speak further when he could.

Absent a definitive accounting from Pitt administrators, exactly what percentage of the University’s endowment was invested with Greenwood and Walsh’s firms is unclear.

As of June 30, 2008, Pitt’s endowment was nearly $2.4 billion, according to the financial audit report approved by trustees at their summer meeting.

A Dec. 18 University Update stated that, as of Nov. 30, 2008, market conditions had caused the endowment to shed some 22 percent of its value.

Based on an endowment of $2.4 billion, a 22 percent drop would mean an estimated loss of $528 million, leaving $1.87 billion. Given the estimated $65 million Pitt investment cited in the lawsuits against Greenwood and Walsh, approximately 3.5 percent of Pitt’s endowment could be impacted.

Kimberly Barlow & Peter Hart