A fund manager who protested too much

Date: Friday, March 6, 2009
Author: Paul Waldie, Globe and Mail

An outraged Mark Bloom claimed a hedge fund stole from his investors. Prosecutors believe he did, to.

When Mark Bloom was arrested last week in New York for allegedly bilking clients of North Hills Fund, the case marked a new low in the hedge fund world.

Not just because Mr. Bloom had allegedly stolen $13.2-million (U.S.) from investors, sent false financial statements and lied repeatedly about the fund's holdings. What really galled prosecutors was that Mr. Bloom had secretly invested client money in a Canadian-based hedge fund and then bitterly complained to regulators when the fund manager was charged with stealing money from investors, sending false financial statements and lying about the fund's holdings.

Then, when a court-appointed receiver recovered the bulk of the money Mr. Bloom had invested in the Canadian fund, he managed to divert most of the money to himself.

"This action demonstrates the length to which unscrupulous individuals will go to defraud investors," said Stephen Obie, acting director of enforcement of the Commodity Futures Trading Commission (CFTC), which filed charges against Mr. Bloom along with the U.S. Attorney's Office in New York.

"Here, proceeds that were recovered from another fraud were recovered for the benefit of North Hills investors and appear to have been misappropriated a second time by Bloom."

Mr. Bloom has been in the hedge fund business since 1992, when he joined W.G. Trading Co. There he worked with co-founders Stephen Walsh and Paul Greenwood, a former economics professor at Toronto's York University, Ohio State University and UCLA. Mr. Walsh and Mr. Greenwood were also arrested last week in a separate case involving an alleged $553-million fraud at W.G. Trading.

The W.G. Trading partners were famous for generating consistently strong returns - they never reported a negative month from 1995 to 2008 - and enjoying lavish lifestyles. Mr. Bloom had homes in Manhattan, New Jersey and Florida and owned a fleet of luxury cars. Mr. Walsh and Mr. Greenwood were once co-owners of the New York Islanders and Mr. Greenwood allegedly used investors' cash to buy a 26-hectare farm from Paul Newman and to amass a collection of Steiff teddy bears worth $80,000.

Mr. Bloom left W.G. Trading in 2001 to manage North Hills, which he had launched in 1995. He changed it from an index fund to a "fund of funds" and told investors the new strategy would generate 12 per cent in annual returns with minimal risk. He vowed to put the money in six different hedge funds, with no fund receiving more than 25 per cent of North Hills' money.

North Hills attracted about 50 investors who put in a total of $40-million, including $13.5-million from a Nevada-based charity. Mr. Bloom sent regular statements purportedly showing healthy returns from the various funds.

But according to allegations filed in court, Mr. Bloom put more than half of the assets into a commodity fund run by Philadelphia Alternative Asset Management, or PAAM. That fund was run out of Oakville, Ont., by Paul Eustace, who started out in Philadelphia and kept some operations there.

Mr. Bloom didn't tell investors about the holding in PAAM and, according to court filings, he didn't mention that he received referral fees from Mr. Eustace totalling $1.6-million. He also made no mention of money he allegedly took from North Hills totalling $13.2-million, which he and his wife used to buy apartments and cars.

In June, 2005, the CFTC charged Mr. Eustace with defrauding PAAM clients out of more than $250-million. The commission alleged he had sent false statements to clients and taken millions of dollars out of PAAM, using some for personal investments and to pay for his girlfriend's breast augmentation surgery.

The CFTC action against PAAM forced Mr. Bloom to disclose North Hills' holding. He quickly went on the offensive, hiring lawyers to recover the money and condemning the conduct of Mr. Eustace, whom he told investors was certain to go to jail. "We not only want to pursue full recovery of our investment, we want to be compensated for the loss of use of our money and other damages flowing from the conduct of Eustace and others," he said in a letter to clients.

Mr. Bloom even testified against Mr. Eustace. During questioning by CFTC lawyers, Mr. Bloom was asked whether he would have expected Mr. Eustace to disclose any personal withdrawals from PAAM. "Yes. And it would have been alarming," he replied, according to a transcript filed in court. "If I was told that this fund was investing in the private accounts of the manager ... I would never have invested in this fund."

When North Hills investors demanded their money back after learning about PAAM, Mr. Bloom fended them off, claiming all their PAAM money would be recovered. The Nevada charity then discovered money was taken out of North Hills by Mr. Bloom. When confronted, he said they were loans.

The CFTC alleged that it moved on Mr. Bloom last week because he appeared to be drumming up new investors to pay off existing ones. In a letter to clients dated Feb. 11, 2009, Mr. Bloom said: "I am in the process of securing funds which should allow me to return the full amount of your investment balance. My hope is that it can all be worked out in the next month. I ask for you patience, as my success in that endeavour offers you the greatest chance for the best possible return of your investment."