Hedge fund founder used phony firm, returns: authorities

Date: Thursday, February 26, 2009
Author: Grant McCool, Reuters.com

A hedge fund manager overstated values by hundreds of millions of dollars, set up a phony accounting firm and showed uniformly positive returns for nine years to defraud investors, U.S. authorities said on Wednesday.

James Nicholson, 42, founder of Westgate Capital Management LLC of New York, was arrested and criminally charged with securities fraud and bank fraud in causing losses of as much as $100 million since 2004, prosecutors and the FBI said.

He appeared in U.S. Magistrate's Court in Manhattan where a judge set bail of $10 million secured by five co-signors and three properties. The judge ordered Nicholson released when he meets those conditions, but he would be under house arrest with electronic monitoring.

Prosecutor Joshua Klein told the court the purported fraud could effect 372 investors. "There is a potential additional hundreds of millions of dollars involved and we have no idea where that money is," Klein said.

Nicholson's attorney Ira Sorkin said in court that his client was not a risk of flight and that home detention was sufficient to ensure court appearances.

Sorkin, a veteran securities attorney, represents Bernard Madoff, the once-respected Wall Street trader and investment manager arrested and charged in December with a purported $50 billion global fraud.

Investigators say they have uncovered several frauds across the United States in recent months following the market meltdown.

"In December 2008, triggered in large measure by the disclosure of charges against Bernard Madoff, numerous investors in funds controlled by Westgate Capital began seeking to redeem their investments," a statement by the U.S. Attorney in Manhattan and the FBI said.

It said nearly two dozen investors received checks collectively totaling nearly $5 million, but all of those checks were returned for insufficient funds. Other investors have unsuccessfully sought to redeem funds of more than $10 million.

No one at Westgate was available to comment.

In a separate civil complaint, the U.S. Securities and Exchange Commission said it was seeking a court order to freeze the assets of Nicholson and the firm based in Pearl River, New York, which was not registered with the regulator.

Nicholson "sought to further his fraud by creating a fictitious accounting firm and providing some investors with bogus audited financial statements" the SEC said.

It said he named the impostor accounting firm Havener and Havener through a "virtual office" arrangement using his own telephone number and driver's license.

The criminal complaint alleged that Nicholson told investors that Westgate Capital had assets under management from $600 million to $900 million when the true value was much less.

A marketing brochure for one fund showed that except for September 2001, it had uniformly positive returns every month from October 1999 through December 2007.

(Additional reporting by Christine Kearney; Editing by Phil Berlowitz and Tim Dobbyn)