The myth-maker: Part 2, the disappearance of wealth

December 27, 2012 | Alphonse Fletcher, Apartments, Co-ops, Ferengi Rules of Acquisition, Income verification, Litigation, Money management, New York City

[Continued from yesterday's Part 1.]

 

By:David A. Smith

 

Yesterday’s post, using a prurient-interest story from Fortune (October 25, 2012) that played up the nasty allegations and played down the financial improprieties, chronicled the rise of Alphonse ‘Buddy’ Fletcher to an apparent pinnacle of social and financial success, a mountain he climbed, I believe, actually expecting to be a financial genius.  But reality did not cooperate, and when that happened, Mr. Fletcher’s personal facade cracked:

 

Fletcher’s mom, Bettye, who kept an office at Fletcher Asset Management, tried to explain away her son’s absences and smoothed things over with the staff. Says an employee who logged four years under Buddy Fletcher: “It’s not a pleasant place or a good culture. There was a lot of turnover as it dawned on people that they had left good jobs only to be abused.”

 

Mr. Fletcher and his mother, Bettye

 

Perhaps Mr. Fletcher genuinely thought he could produce those superior returns; perhaps he had come to believe he had produced them before (such as the power of rationalization) and been denied his just desserts – so when he hired people to produce spectacular returns, and they failed, then they must be at fault.

 

Checking wealth leads to questioning wealth

 

In the context of psychology, wealth works like double-entry bookkeeping – if there is big spending, there must be big earning.  Mustn’t there?  Certainly Mr. Fletcher conveyed that impression:

 

You think they’d let a con man be a commencement speaker?

 

Despite his constant presence in San Francisco [Where his new wife and child lived – Ed.], Fletcher had New York on his mind, specifically his home at the Dakota. Already the owner of four units there, Fletcher applied to buy a two-bedroom apartment in the tony building in April 2010.

 

The following month the Dakota board denied his application, prompting Fletcher to sue for racial discrimination.

 

Once again, I will steer clear of the flash-point issue — whether the charge of racism is hurled pre-emptively, to prevent legitimate inquiry – because for our purposes it absolutely doesn’t matter.  What does matter is how the Dakota’s board defended itself, and how the board brilliantly changed the game.  Though most people have an expectation of privacy, when it comes to buying a co-operative, people willingly subject themselves to probing by the income-verification police, and the Dakota’s board

 

The Dakota questioned:

 

[1] Whether the amount Mr. Fletcher’s firm said it managed — $492 million — was vastly overstated, with some assets counted twice.

 

Remember:

 

12) Anything worth selling is worth selling twice.

Ferengi Rules of Acquisition

 

Twice is the minimum

 

When you plan to con someone, always provide specificity of things that are unverifiable – it gives the aura of knowledge to what is mere claim.

 

[2] Whether the financial statements he submitted were objective, since they seemed to have been produced by people who worked for him.

[3] Whether his income — his 2007 and 2008 tax returns showed adjusted gross income of about $700,000 a year — was enough to meet his obligations.

 

We’re not discriminating, said the Dakota, we’re reading the numbers – and you can read them for yourselves.

 

Questioning wealth leads to doubting wealth

 

266) When in doubt, lie.

Ferengi Rules of Acquisition

 

Would I lie to you?

 

Questioning his wealth was the one thing Mr. Fletcher’s finances could not stand, for questioning leads to doubts.  As Boston Magazine put it in February:

 

The board came back with an answer Fletcher did not expect: no. Fletcher, the board said, could not afford to buy another apartment. In fact, it couldn’t say for sure how he was paying for the other four.

 

Doubt is epidemic – because of the double-entry bookkeeping of personal finances.  If Mr. Fletcher was making payments untraceable to his income, where was the cash coming from?  The only thing left was client accounts.

 

Buddy Fletcher, according to his neighbors in the Dakota, wasn’t the wealthy investor he appeared to be, but the head of a financially opaque hedge fund who was struggling to pay his bills.  The news traveled fast to Cambridge, where the question was nervously asked: Was one of Harvard’s highest-profile philanthropists not what he seemed?

 

Doubt is easily refuted – just return the money (even though it violates Ferengi Rule of Acquisition 1).

 

1) Once you have their money, never give it back.

Ferengi Rules of Acquisition

 

One of Mr. Fletcher’s larger investors asked just that:

 

Following the Dakota’s incendiary allegations, three Louisiana pension funds requested money from their investment in a Fletcher vehicle called the FIA Leveraged Fund, which was registered in the Cayman Islands. At first they wanted to take some profits off the table. Eventually they redeemed their entire investments.  

 

Mr. Fletcher’s response was a masterpiece of lordly disdain:

 

Fletcher issued an IOU, saying that the assets weren’t liquid.

 

It’s an illiquid vehicle

 

Shades of Mr. Micawber:

 

Someone else’s money will always turn up

 

‘Madam, you do us a great deal of honour,’ he rejoined. He then referred to a memorandum. ‘With respect to the pecuniary assistance enabling us to launch our frail canoe on the ocean of enterprise, I have reconsidered that important business-point; and would beg to propose my notes of hand – drawn, it is needless to stipulate, on stamps of the amounts respectively required by the various Acts of Parliament applying to such securities – at eighteen, twenty-four, and thirty months. The proposition I originally submitted, was twelve, eighteen, and twenty-four; but I am apprehensive that such an arrangement might not allow sufficient time for the requisite amount of – Something – to turn up.’

 

Unsurprisingly, the fund’s found the substitution of a Fletcher note for cash unacceptable:

 

Few people notice

 

The funds rejected the note.

 

By the end of 2011, neither Fletcher nor the Louisiana pension funds could agree on an acceptable payment. The relationship between them deteriorated, and after an unsatisfactory meeting with Fletcher in December, the investors filed a petition in the Cayman Islands to liquidate the Leveraged Fund and get their money back.

 

Doubting wealth leads to disproving wealth

 

By now the Louisiana pension funds must have suspected that their money was long gone, spent on Mr. Fletcher’s farm, his Dakota apartments, his cars, his lifestyle, and his lawsuits charging racism.  Their suspicions probably turned to certainties when this came to light:

 

At the same time, Fletcher’s situation with his Cayman Islands-based fund turned grim. A Feb. 27, 2012 affidavit by a Fletcher employee revealed that the FIA Leveraged Fund hadn’t filed an audited financial report since 2008, and that Fletcher’s main fund hadn’t filed audited financials since 2009.

 

As I’ve previously written, innumeracy precedes insolvency, and opacity is great cover for theft.  Mr. Fletcher, ever inventive, then tried another gambit:

 

Unsound, but provocative

 

What’s more, Fletcher attempted to repay the Louisiana pension funds in a manner reminiscent of his Calgene maneuver with Harvard years earlier.

 

Instead of cash, Fletcher offered the pension funds warrants to buy shares in United Community Bank, according to court documents.

 

Presumably Mr. Fletcher’s fund already owned the warrants – this could have been one of the many things FAM was buying with investors’ money, when it was seeking those triple-digit returns.

 

239) Never be afraid to mislabel a product.

Ferengi Rules of Acquisition

 

And if they were sold for what Mr. Fletcher claimed them to  be worth, hen they would have been as good as cash – at least to him.

 

But Fletcher and United Community disagreed about the value of the warrants; a judge in the Cayman Islands in April ruled that the stock warrants were an unacceptable payment — in fact they could be less than worthless. When Judge Anthony Smellie used United Community’s assumptions, the warrants would actually create a $22.6 million loss for the pension funds. He ordered the liquidation of the Cayman-based fund.

 

In other words, the bank that sold Mr. Fletcher’s fund the warrants thought they had little value – and when they were rejected, in July some truth finally surfaced:

 

A hedge fund managed by the investment firm of Alphonse “Buddy” Fletcher Jr. has filed for bankruptcy protection in Manhattan, as the firm faces a mounting legal challenge.

 

The Chapter 11 filing comes after a Cayman Islands judge in April appointed liquidators from Ernst & Young to wind up another fund run by New York-based Fletcher Asset Management.

 

Observe the cascade, and the litany of due-diligence failures that preceded it.

 

It was always some other guys doing the diligence

 

46) Labor camps are full of people who trusted the wrong person.

Ferengi Rules of Acquisition

 

The team appointed by the court to liquidate Fletcher’s Cayman Islands fund has raised questions about the handling of investors’ money, saying the fund’s complicated structure “allowed fees to be drawn … at multiple levels, without any benefit to investors.”

 

That may well be where Mr. Fletcher’s spending money came from.

 

The liquidators also noted that a firm affiliated with Fletcher had been paid $3.3 million in fees by the Leveraged Fund, unbeknown to the investors. On June 29, Fletcher halted the liquidation process by having part of his firm file for voluntary bankruptcy.

 

Fletcher hoped to maintain control of the process, but the court had other ideas. Over Fletcher’s wishes, the bankruptcy judge appointed Richard J. Davis as the trustee overseeing the process. Davis, who specializes in white-collar crime, is best known for his work as an assistant special prosecutor in the Watergate trials.

 

It’s both the crime and the coverup

 

“The central issue in this case concerns corporate governance,” Tracy Davis, the U.S. Trustee overseeing the district bankruptcy courts, says in a filing.

 

More recently (October 28, 2012), Mr. Fletcher’s law firm resigned its representation of him:

 

The major-league litigation firm hired to pursue the co-op has asked to withdraw from the case, citing unpaid legal fees.

 

In a filing Friday, Kasowitz Benson Torres & Friedman LLP asked to withdraw from the case, citing “non-payment of very substantial legal fees” by Alphonse Fletcher Jr. and his hedge-fund firm, Fletcher Asset Management.

 

At the end of June, a major Fletcher fund, Fletcher International Ltd., filed for bankruptcy-court protection in Manhattan. Control of the fund has been turned over to a court-appointed trustee.

That bankruptcy-court filing in June lists the Kasowitz firm as the fifth-largest creditor of Fletcher International Ltd., with a claim of $293,517.

 

Mr. Fletcher’s world is imploding. 

 

There goes the collateral

 

The amazing thing is how long he kept it going. 

 

2) You can’t cheat an honest customer, but it never hurts to try.

Ferengi Rules of Acquisition

 

And it all began when a housing co-operative’s board read the financial statements, and reported what it found.

 

Where it all began unraveling

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