Fletcher Hedge Funds Like A 'Ponzi Scheme,' Trustee Alleges

Dec 2 2013 | 8:08am ET

Alphonse Fletcher fought to avoid having a bankruptcy trustee appointed to oversee one of his hedge funds, and it has become clear why.

The trustee, Richard Davis, has accused Fletcher of defrauding investors in his Fletcher Asset Management, with "wildly inflated valuations" that make the firm look like a "Ponzi scheme." Davis, in a new report last week, alleged that Fletcher's funds have probably been insolvent for five years.

Davis, who previously accused Fletcher of using nearly $1 million from the Fletcher International Fund to pay legal bills from his lawsuit against the famed Dakota Apartments, where he lives, was appointed last year, after Fletcher put the International Fund into bankruptcy. That move followed years of litigation with three Louisiana public pension funds, which invested $100 million with Fletcher but received IOUs when they sought to redeem.

Davis lays out what he sees as the reasons why: Fletcher "held only one assets of undisputed value—Helix stock—worth less than $8 million," Davis wrote. But Fletcher said the fund was worth $352 million when it filed for bankruptcy.

The difference is due to "the extensive use of wildly inflated valuations, the existence of fictitious assets under management numbers, the improper payment of excessive fees" and "misuse of investor money," Davis alleges. He said that Fletcher generated "cashless notes" as part of a scheme to bilk the funds of more than $30 million in fraudulent fees and to attract new investors.

"In many ways, the fraud here has many of the characteristics of a Ponzi scheme where, absent new investor money coming in, the overall structure would collapse," Davis wrote.

In 10 cases, Davis alleges, Fletcher immediately marked up new investments, mostly private investments in public equities deals, at an average of 2.7 times what he paid for them—and valued them at roughly 7.5 times what they wound up selling for. Davis added that the firm that valued Fletcher's assets, Quantal International, didn't check its mathematical models—which were improperly applied, anyway—against market values, allegations that Quantal denies. And, Davis said, much of the money invested with Fletcher went to things never countenanced by his clients, such as a $27 million unsecured loan to the hedge fund manager and $8 million to a movie directed by Fletcher's brother.

Davis' report also identifies a fourth public pension fund, that of the Massachusetts Bay Transportation Authority, as a Fletcher victim. The MBTA fund invested $25 million with Fletcher in 2007 and, like the Louisiana pensions, hasn't been able to get it back.


In Depth

Q&A: Decathlon Capital On Revenue-Based Alternative Lending

Oct 30 2017 | 3:49pm ET

The explosion in private credit activity since the end of the financial crisis is...

Lifestyle

CFA Institute To Add Computer Science To Exam Curriculum

May 24 2017 | 9:25pm ET

Starting in 2019, financial industry executives sitting for the coveted Chartered...

Guest Contributor

Saxby: Not All EBITDA Is Created Equal

Nov 30 2017 | 8:02pm ET

Record levels of dry powder are driving competition among private equity firms to...