Wednesday, September 8, 2010

The Dénouement: Perpetrator of $190 Million Minneapolis Foreign Exchange Ponzi Scheme Sentenced

We spotted this one back in 2007. I'll re-post after the jump.
From WCCO Television:
Former Minneapolis money manager was sentenced to 25 years in prison for taking $190 million from his investors in a Ponzi scheme.

Trevor Cook was sentenced in a packed courtroom Tuesday morning. He pleaded guilty to one count of fraud and one count of tax evasion back in April. Cook is 37 and won't likely be eligible for parole until he's almost 60.

U.S. District Judge James Rosenbaum called Cook's scheme "a wretched, tawdry, cheap crime." Judge Rosenbaum also said to Cook, "You found vulnerable victims and then lied to them repeatedly."

In April, Cook admitted that he lied and misled investors as he continued to pay himself millions of dollars in commissions. He also lied on his taxes. In 2008, he reported income of $100,000 when his actual income was more than $5 million.

Cook lured many of his investors with meetings at the historic Van Dusen Mansion in Minneapolis. He purchased it for $2.8 million in 2007 and decorated it lavishly.

According to court documents made public, Cook purchased a Rolls Royce Silver Spur, a Maserati Quattroporte, a Hummer H2, a Jaguar S-Type, a Mercedes-Benz, a heavily customized Audi S8, a 60-foot houseboat (complete with a brass stripper pole), an island in Canada and a two-person submarine....MORE 
From the St. Paul Pioneer Press:
Apple Valley Ponzi schemer is behind bars -- but millions still missing
From the Minneapolis StarTribune:
Trevor Cook's loot turns up -- at Mall of America
In the stash in a mall locker: gold and platinum coins, millions of Iraqi dinars and Turkish lira. 
At long last, the government has solved the mystery of Trevor Cook's missing Iraqi dinars.
Since last summer, when Cook's $190 million Ponzi scheme collapsed, investors have pestered investigators about rumors that Cook had hidden millions of dinars, Turkish lira and gold and platinum coins.

A court-appointed receiver looked diligently for the money through crawl spaces and cubby holes at the Van Dusen mansion in Minneapolis, where Cook had his offices until the Ponzi scheme imploded last year. Searches of Cook's Apple Valley home, his island in Canada and elsewhere found no dinars.
A security guard finally found most of the missing loot during a routine locker search last month -- at the Mall of America.

The guard came across it July 24 in a black duffel bag stuffed into East Locker No. 1316, according to a sworn statement filed Friday in federal court by John Tschida, a criminal investigator with the IRS.

On Wednesday, the IRS obtained a warrant to seize 113 gold coins, eight platinum coins, 5,652,150 Iraqi dinars, 18,750,000 Turkish lira and small sums of Chinese, Canadian and Dominican currencies. It's unclear how much the money may be worth, but sources say it probably adds up to at least $100,000. At most, it's a small fraction of the millions lost by Cook's investors. One online currency converter put the value of the Iraqi dinars at about $4,800....MORE

That's a bit short of $190 mil..

From our July 5, 2007 post "Magical Markets, Enron and GE and a New Word":
I was looking for Alt/Renewable energy ideas a couple nights ago when I found a story in a middle-market newspaper that had a sentence in it that is now the front-runner for funniest line of the month:
"We protect against all losses through hedging"
Here's the set-up. Some forex guys just bought a $3 mil. historic mansion to run their business out of. They're doing some smaller scale Yen carry-trade "arbitrage" (retail min. $50K). They borrow from the BOJ at 1/2 point and say they invest at 5%. Looking at the yield curve, you have to go out seven years to get 4.99%. Borrow short-term, lend long-term.

Then they gear it up 2.7 times and are showing their investors 12% "risk free". At that point in the story I started laughing so hard my eyes were watering.

Right now the 30-day treasury yield is 4.51%. That is the risk-free rate of return. That's the number you plug into your slide-rule to do options pricing.

If someone is offering you greater than 4.51% at 1:00 pm EDT on 5Jul07 you are, by definition, taking on risk. Period.

Now don't get me wrong, risk is good. Risk allows you to die with a garage full of stuff. Like a helicopter. In the garage. On your yacht. There was one with a 3000 square foot master suite offered on ebay last year for $168 million.

The second problem with the story is: the minute you use leverage you no longer have an arbitrage. You might still have a really, really good hedge, a six-sigma hedge; but it's not an arbitrage. Remember that wonderful term of the eighties "Risk Arbitrage"?
Only one of the words was accurate.

There are three types of people who would say "We protect against all losses through hedging"

1. A fool-they don't even understand the game.

2. A moron-they may have some nifty swaps and other derivatives to hedge against the one and two standard deviation event risk, but what about the 3,4 and 5 SD risks? Last night I heard a farmer in Kansas say "We had our last once-in-a-hundred-year flood in '86". Now that guy understands, I'd bet he knows more about markets than the folks at LTCM

I'm sure the forex guys have the currency risk covered, they may even have something to cover a magnitude 9.5 Tokyo earthquake. But what if your counter-party had physical exposure you didn't even think of? Maybe their bullion vault was on the fault-line. There's no Force Majeure, only insolvency.

3. A liar.

The guys I traded with as a pup would right now be figuring out how they'd like to furnish the historic mansion in a middle-market-newspaper town that they just took from the 1, 2 or 3 above, forex guys....

...I forgot to mention the "journalist" who wrote the carry-trade story was touted as being "the author of more than 20 books on business and investing".
The mansion recently sold for $1.55 million.
Here are some pics of the house. It looks like a nice pile of stones, if you're into the Richardsonian Romanesque thing:
Colliers Turley Martin Tucker