The dumb way to steal from your investors

If a manager who runs a $30 million hedge fund decides to embezzle money, it usually makes sense to actually embezzle it and then run away, rather than just transferring it to a shell-company brokerage account and then losing half of it selling short Treasuries. Evidently someone forgot to give that sage advice to Matthew La Madrid and his hedge fund management company Plus Money. According to a recent SEC complaint:

The complaint further alleges that, unbeknownst to investors, in the fall 2007 Plus Money and La Madrid abandoned the covered call trading strategy, emptied out the monies in the Premium Return Funds’ brokerage accounts, and dissipated the money through a series of illicit transfers.

The SEC’s complaint alleges that investors were not told that in the fall 2007, La Madrid and Plus Money transferred nearly all monies from the Premium Return Funds’ brokerage accounts to Vision Quest Investments, a La Madrid dba, which in turn transferred $10 million to relief defendant Palladium Holding Company. The complaint further alleges that Palladium:

* Transferred $5 million to its own brokerage account and used the funds to trade in numerous short-sell transactions involving Treasury bonds; as of April 25, this activity had depleted more than half of the account’s value
* Wired $500,000 back to La Madrid
* Transferred $1.8 million to several real estate title companies
* Used $95,000 towards the purchase of two automobiles
* Transferred another $90,000 to a Denver-based car dealership

What I do not understand is why La Madrid did not simply make the losing bets in the hedge fund. If he had lost the money in the fund then he would have been guilty of little more than misleading his investors about his investment strategy (the fund was supposed to invest in covered calls).

0 thoughts on “The dumb way to steal from your investors

  1. Clearly, you are not sophisticated enough to understand all of the subtle strategies employed by hedge funds. Nor am I.

  2. Thanks for the link. If we’re going to broaden our conversation to hedge fund managers who don’t understand the risks they’re taking, this is going to take a very long time (and include Nobel laureates Myron Scholes and Robert C. Merton http://en.wikipedia.org/wiki/LTCM).

    I short stocks, and I realize that I have unlimited downside potential. However, it’s pretty rare to have your portfolio truly blow up without using leverage (which the hedge fund manager in the original post was certainly doing, since treasury funds just don’t move that much otherwise). What bothers me is wonderful companies like Vanguard falling prey to fads like a 130/30 “Market Neutral” fund, believing that they can hedge their long holdings with short ones. Sure, sometimes you can hedge, and sometimes both your long and your short positions can go against you simultaneously.

    Even worse, look up Capital Decimation Partners to see how a hedge fund pursuing a guaranteed-to-fail strategy can still make enormous sums for its managers.
    http://krugman.blogs.nytimes.com/2008/03/16/capital-decimation-partners/

  3. I worked with Matthew LaMadrid (known as “Beau”). To be honest, I don’t recall that he finished high school, (it possible he got his diploma, but I don’t recall that he finsihed school). I know he did not go to college and for years he was barely able to keep his head above water. He worked at a mortgage brokerage company (remember, education is not key for these types of companies). Why folks thought it was a good idea to send him their hard earned bucks so that he could invest in cover calls is beyond me. All I can say is that they had no idea what this guy was really about and where he came from. He wasn’t even bright enough to know how to keep his scam going! Should’ve gone to college! Or at least gotten a licesense.

  4. Sorry Great Dane – my spam filter caught your most recent comment. I have marked it as not spam.

    I love Capital Decimation Partners. I may name my hedge fund that.

  5. Railey, (If that is your real name.) What you don’t know about him could fill an ocean. He graduated in 1984. If you “worked” with him, it was probably when he was working at the grociery store. Not when he became successful 10 years ago. Alot can change in that span of time. It doesn’t take much time to learn any business in this age of the internet. If you know so much about running a proper scam, maybe you should do one. Obviously you still work for the man and are bitter that you didn’t think of it first.

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