A North Carolina hedge fund manager used a personal post-office box and forged bank statements to hide his theft of about $6 million over a seven-year period, U.S. regulators and prosecutors said on Monday.
James Shepherd, who ran a commodity fund that traded contracts at CME Group Inc and IntercontinentalExchange Inc , was charged with the fraud in federal court in Charlotte on Monday. In a related action, the Commodity Futures Trading Commission sued Shepherd for fraud and misuse of customer funds.
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The charges were reminiscent of a larger scam uncovered last year that was perpetrated by Russell Wasendorf Sr., the founder of Peregrine Financial Group. He used similar tools to steal $215 million from clients over nearly 20 years.
Shepherd's alleged swindle lays bare the ongoing challenges of policing the vast hedge fund and commodity pool industry, much of which has come under additional regulation since January through the National Futures Association (NFA) trade group.
Shepherd entered a sealed plea agreement in the criminal case.
"He definitely wants to pay back people who have lost money," his lawyer, John Keating Wiles, told Reuters.
Peregrine last July filed for bankruptcy after the 20-year-long fraud came to light. Wasendorf, 65, is serving a 50-year sentence in federal prison after admitting to stealing from customers and lying to regulators.
After Peregrine's collapse, NFA and other futures regulators put in place a system of electronic confirmations that allows daily checks of the $157 billion or so of customer funds kept at futures brokerages.
Such a system is currently not possible for tracking money kept at hedge funds, where much more money is at stake, NFA President and Chief Executive Dan Roth said in an interview.
Unlike futures brokerages, which keep customer money in a limited set of financial institutions, commodity pools can put their money at broker-dealers, in real estate, in oil wells, and in any number of other places, Roth said.
"They can invest in a gazillion things," Roth said.
The NFA is exploring ways to electronically keep tabs on the money at the commodity pools it oversees, but it's a complicated undertaking.
"It's a significant priority for us," he said, "but I don't know as I sit here that we will have a solution implemented by the end of the year, or anything like that."
$300 BILLION POOL
At the end of 2012, NFA oversaw about 2,500 commodity pools with a total of $300 billion under management. New registration requirements that kicked in this year have pushed up the number of NFA-regulated commodity pools to 8,000, and NFA has yet to put a figure on total amount managed.
The complaints filed on Monday against Shepherd revealed new details about his fraud, including the use of a personal post-office box that he told his auditor and regulator was the property of his bank. Shepherd spent some of the misappropriated money to build a $2 million home in Vass, North Carolina, U.S. prosecutors said.
Shepherd's fraud unraveled in March after his accountant insisted the fund's bank balances be confirmed electronically through a website called Confirmation.com. Shepherd refused and the accountant alerted NFA.
NFA and CFTC declined to name the accountant.
The NFA shut down Shepherd's fund after its investigators could not locate millions of dollars he claimed to have.
"Where there's a paper process that's very easy to manipulate, you're going to have people that do that," said Brian Fox, founder of Confirmation.com. The site also was used to help uncover Wasendorf's fraud.
Since March, NFA has combed through the records of all 8,000 commodity pools that it regulates to confirm that all post-office boxes to which it was sending requests for bank statement confirmations actually belonged to banks. The review found no new fake post-office boxes, Roth said.
While both Wasendorf and Shepherd used P.O. boxes, they differed in their relationships with clients. Shepherd's customers trusted him to invest their money, while Wasendorf was not making investment decisions.
Shepherd's fraud is "what Madoff did on a much smaller scale," said John Roe, co-founder of the Commodity Customer Coalition, which has helped former Peregrine customers get their money back.
Bernard Madoff pleaded guilty in 2009 to running a multibillion-dollar Ponzi scheme and is serving a 150-year sentence in a medium-security North Carolina federal prison.
(Reporting by Tom Polansek and Ann Saphir; Editing by Richard Chang)