Hedge Fund Fraud Case Study — North Hills

Abstract:

At WG Trading, Mark Bloom probably learned how to make money, not by investing, but by tricking people. This is a small but interesting fraud case in New York, which saw the collapse of an investment manager because the fraudster allegedly invested its victims’ money into another fraud scheme, PAAMCo.

Case Profile:

Background

In 2001, after spending nearly 9 years as a partner at WG Trading, a $1.3 billion hedge fund in Greenwich, Mark Evan Bloom (“Bloom”) rejoined his old nest in BDO Seidman, LLP (“BDO”) to be a part the firm’s Tax Solution Group. There he was assigned with selling innovative tax solutions to wealth clients. However, Bloom had a more important second job as a managing member of North Hills Management, LLC (“North Hills”), an unregistered investment advisor that managed North Hills, L.P. (the “Fund”), a fund of hedge funds he launched years before, in 1995. Bloom marketed the Fund as a diversified absolute return strategy with a “market neutral” return of approximately 12% per year, successfully raising about $40 million from 47 limited partners. North Hills charged a 1% annual management fee and 20% of the Fund’s annual profits, which means he can sought to generate nearly $1 million in fees, assuming he achieved the target returns.

Problems

On December 8, 2008, Alexander Dawson Foundation and Alexander Dawson Inc. (together “Alexander), a Nevada Charitable Trust that supports schools and over 1,000 students in Nevada and Colorado, filed a lawsuit against Bloom and North Hills. In January 2008, Alexander’s entities, who collectively invested $13.5 million, asked for a partial redemption from the Fund after learning that the Fund had some investments in PAAMCo, a fraudulent hedge fund shut down by the SEC and CFTC after hiding massive losses from investors. Unfortunately for Alexander, only $1 million of its total request of $4.8 million was honored.

Alexander’s representatives learned that while Bloom told his investors that the Fund’s portfolio was diversified with various managers, he effectively allocated over half of client capital, or $17–18 million, to a single manager, which turned out to be a massive fraud. Furthermore, Bloom had a secret marketing agreement with PAAMCo’s founder, Paul Eustace, in which he received kickbacks based on the money he raised for PAAMCo. He collected commissions in excess of about $355,000 over a 16-month period. Alexander was even more shocked to find that Bloom had “borrowed” $13 million of the Fund’s assets for personal use, including a 10 Gracie Square townhouse in Manhattan ($5.2 million), $750,000 in art, $600,000 in jewelry, a beach house, a 2005 Formula 330 Sun Sport boat, two Steinway pianos, and three fur coats (the list goes on). Alexander desperately filed its lawsuit but feared that all of the money had already disappeared.

On February 3, 2009, the NFA received a copy of the lawsuit filed by Alexander. After a failed attempt to contact Bloom seeking an audit, the NFA suspended its North Hill’s membership. On February 25, 2009, the SEC and the CFTC subsequently charged Bloom and North Hills with misappropriating $13 million and Bloom was arrested by the FBI. On July 30, 2009, Bloom pleaded guilty to five charges and admitted he stole millions from his investors. As part of his guilty plea, Bloom revealed that he helped sell illegal tax shelters to wealthy clients. Three other BDO Seidman executives also pleaded guilty in the expanding tax shelter case, including former Vice Chairman Charles Bee.

The total losses within the Fund was not disclosed, but is estimated at $20 million, or over 50% of the assets raised by Bloom. Unlike Paul Greenwood, his tutor at WG Trading, Bloom was able to make one good investment, his $5.2 million Upper East Side home, which he sold at $11.2 million for a healthy 115% return.

Recommendations:

Conduct a Thorough Review of Financial Statements

• Davis Graber Plotzker & Ward, a public accountant who audited the Fund’s financial conditions at least for 2001, 2002 and 2003, probably realized the existence of the “personal loan” to Bloom. However, the auditor failed to acknowledge or act upon the violation of the Fund’s mandate.
• Many if not all investors never received the financial statements until 2008. This was clearly the biggest mistake for the Fund’s investors, giving Bloom a way to hide his misconducts for over five years. It is possible that the Fund was never even audited before 2004. If so, it was a critical red flag for a potential investor.

Verify Custody of Assets

• For prospective investors, it was almost impossible to verify the custody of assets as the Fund had no administrator or custodian that would have brought a degree of assurance.
• In the pre-Madoff era, many domestic hedge funds and fund of funds were self-administered. In such case investors should have paid extra attention to verifying and confirming the existence of their assets held by the Fund. If such confirmation is not at all possible, investors ought to avoid such funds.

Avoid Conflict of Interests and Other Business Relationship

• Bloom wore many hats. Not only he was a partner at BDO, he was also Chief Marketing Officer, Managing Partner and Director of MB Investments Partners, Inc, which at one time operated at least two commodity pools, MB Absolute Fund, LLC and MB Absolute Fund, Ltd. (in turn also investors of PAAMCo). Managing a fund of funds is not a part-time job and investors should have recognized that it would be difficult if not impossible for Bloom to operate the Fund as he claimed.

Source:

“Lawyer Alleges Pryor Cashman Lawyer Aided Fraud by Fund”, The New York Law Journal, January 9, 2012

“Mark Bloom goes from jet setter to pauper”, CNNMoney, May 27, 2009

U.S. Commodity Futures Trading Commission v. Mark Evan Bloom, et al. (2009), United States District Court Southern District of New York

Securities and Exchange Commission v. North Hills Management, LLC and Mark Evan Bloom (2009), United States District Court Southern District of New York