300 investors don`t know if they will see the money they gave to alleged fraudster Matthew La Madrid

Date: Thursday, May 8, 2008
Author: Brett Arends, Wall Street Journal

If you do one thing today, avoid obscure "hedge funds" run by a friend of a friend.

Around 300 private investors are this week wondering if they will ever get back the $31 million that they invested between 2004 and 2007 in three unregulated hedge funds run by San Diego, Calif.-based investment manager Matthew La Madrid.

That works out at around $100,000 per investor in the Plus Money, Inc., "Premium Return Funds."

Most entrusted their hard earned money to Mr. La Madrid based on little more than word of mouth and his Web site, according to the Securities & Exchange Commission.

The SEC, alleging fraud, just got an emergency court action to shut these funds down and freeze any remaining assets. The commission alleges La Madrid has siphoned out most of the cash without telling investors.

According to documents filed with the court, Mr. La Madrid began moving money out of the funds last fall. The commission says the cash then followed a complex trail through interlocking accounts and other parties. It says some was used to speculate in the bond market. Another $4.5 million "went to various individuals and entities, including $500,000 back to Mr. La Madrid, $1.8 million to several real estate title companies, $95,000 towards the purchase of two automobiles, and $90,000 to a Denver car dealership," according to SEC documents.

Mr. La Madrid's attorney, Joseph N. Casas of San Diego, said Wednesday: "My client denies all of the allegations and he expects to be exonerated."

Whatever the eventual findings, investors certainly face a nervous and unhappy time. Their money is frozen and it is unclear how much they will eventually get back. So far the SEC has only been able to lay its hands on $2.5 million of the original $31 million, though commission officials say it is early days and much more may turn up.

The simpler question is: Why were investors putting their money into these obscure funds in the first place?

The 41-year old manager promised to make them money through a so-called "covered call" or "option writing" strategy. That means buying stocks, and then generating extra income by selling financial derivatives linked to those stocks.

There is nothing wrong with such a strategy.

But if investors want to take advantage of it, there are a number of regulated, publicly available investment funds that will do the same thing, with far less worry.

And that is true of almost any clever investment idea that someone recommends to you on a golf course. There's a public investment fund that will do the same thing with a lot less risk.

The Gateway Fund (GATEX), for example, is a respectable mutual fund with more than $3 billion in assets that has been using a covered-all strategy for 20 years. It is regulated and files financial accounts that anyone can check. Had Mr. La Madrid's investors put $31 million into Gateway four years ago, today they would have $41 million -- as well as eight hours' unbroken sleep per night.

Write to Brett Arends at brett.arends@wsj.com