In 1994, Susan Lanzano began receiving reparation payments from the German government for property in Berlin that the Nazis had confiscated from her Jewish grandfather just before World War II. The money came as an unexpected windfall for Lanzano, who was then working as an editorial manager for Oxford University Press and living in Westchester County, New York, with her husband, Michael, and their teenage son. The Lanzanos used some of it to enroll Michael Jr. in Milton Academy, an elite Massachusetts prep school, and to buy a small summer house in Montauk, Long Island.
They also sought professional investment advice. By early 2000 they had begun working with Michael Capul, a senior financial adviser at Chase Investment Services Corp., then a division of Chase Manhattan Bank and now part of J.P. Morgan Chase & Co. At Capul's urging, the Lanzanos invested in Sterling Watters Group, a long-short equities hedge fund run by a Greek-American manager named Angelo Haligiannis. According to the Lanzanos, Capul -- once Haligiannis's boss at Merrill Lynch & Co. -- praised the 27-year-old as a brilliant investor whose fund had consistently beaten the Standard & Poor's 500 index since its inception in 1996. From 2000 through 2003, the Lanzanos sank a total of $875,000 (about two thirds of their savings) into Sterling Watters.
By June 2004 the money was all gone.
On July 30 of that year, federal agents arrested Haligiannis, now 32, on criminal charges that he had defrauded some 80 investors of tens of millions of dollars in what the U.S. Attorney's Office for the Southern District of New York describes as a long-running Ponzi scheme. Haligiannis allegedly used new contributions, such as the money that the Lanzanos gave him, to make distributions to existing limited partners and to finance withdrawals made for his own personal use. He also incurred massive trading losses on the money he actually put to work in the markets: According to charges filed by the U.S. Attorney's Office, he lost $17 million in 2000 alone. As recently as the third quarter of 2003, according to the U.S. attorney, Haligiannis distributed promotional materials reporting that Sterling Watters had achieved a compounded investment return of 1,565 percent since inception in 1996 and had $180 million in assets under management. In fact, it had less than $150,000, say federal authorities. By June of last year, Sterling Watters was insolvent, with less than $2,000 in its coffers. Haligiannis has been indicted by a federal grand jury on two counts of criminal mail fraud and is awaiting trial in October. He is also facing civil charges filed by the Securities and Exchange Commission alleging that he violated securities laws, as well as several investor lawsuits.
His lawyer, Maranda Fritz, describes the charges as unfounded. "Angelo's case is not a case of theft," she says. "The reality is that Sterling Watters' funds were hurt very, very badly in early 2000 when the Internet bubble burst, and that is when the bulk of the losses occurred."
Capul -- who left Chase and joined Sterling Watters in September 2003 as a full-time marketer -- was not named in either the SEC's complaint or the federal grand jury's criminal indictment. But the Lanzanos, along with two other couples who invested in Sterling Watters, filed a claim in May with NASD, formerly the National Association of Securities Dealers, accusing Chase Investment Services Corp. and Capul -- who was an investor in the fund in addition to raising money for it -- of gross negligence and fiduciary misconduct. The three couples are now seeking restitution of the $3.5 million they suffered in out-of-pocket losses, plus statutory interest, for a total of $5 million in damages.
"Chase has a slogan, 'The right relationship is everything,'" says Susan Lanzano. The irony of that line is not lost on the 58-year-old editor as she sits in the cool silence of her lawyer's mid-Manhattan conference room on a sunny afternoon in June, recalling the moment she learned the truth about Sterling Watters. She shakes her head in disbelief as tears fill her brown eyes. "We really thought we had that with Michael," she says, wiping her eyes with her fingertips. "We had such faith in what we were being told. Who could have ever imagined that the advice we were getting was illegitimate?"
Officials at J.P. Morgan, which was acquired by Chase in 2001 (Chase took J.P. Morgan's name), declined to address any of the allegations in the NASD claim. At his deposition in June in the federal action against Haligiannis and Sterling Watters, Capul pleaded the Fifth Amendment and refused to answer any questions; his lawyer, Allen Morganstern, of Garden City, New Yorkbased Morganstern & Quatela, declined to comment for this article.
The Sterling Watters debacle is a cautionary tale both for investors contemplating sinking their savings into hedge funds and for the financial institutions that aggressively promote these investment partnerships to their wealthy clients. As recently as February 2003, NASD sent out a notice warning that its own review of hedge fund sales practices across the industry had raised concerns and reminding its members that they had "a heightened responsibility to investigate the hedge funds and funds of hedge funds that they recommend to customers." NASD-advised measures included investigating the backgrounds of individual managers, reviewing offering documents, checking references and examining the relative performance of funds.
As demand for hedge funds has grown over the past five years, that due diligence has become increasingly important. Since December 2000 the total number of single-manager hedge funds -- new funds, not investment advisers -- has blossomed from an estimated 4,400 to 6,075, and the assets under their purview have swelled from $400 billion to more than $1 trillion, according to Tremont Capital Management. Along with the opportunity to profit has come the temptation to defraud. Reports of hedge fundrelated crimes are on the rise: In the past 12 months to April 1, the SEC's enforcement division has filed 24 actions involving hedge funds; the agency reportedly initiated just 51 actions against hedge funds over the past five years.
Hedge funds are receiving more scrutiny for the simple reason that they are no longer the domain of the superrich; among the clients from whom Haligiannis and Capul raised at least $63 million -- and possibly as much as $78 million, according to documents seized by the U.S. Attorney's Office, copies of which were reviewed by Institutional Investor -- were real estate developers, construction contractors, restaurant owners, pharmacists, lawyers and teachers. Their vulnerability underscores the concerns of former SEC chairman William Donaldson, who stepped down on June 30 after pushing for increased regulation and oversight of the hedge fund industry: Qualified as these individuals may be to participate in such partnerships, few appear to have the ability to gauge the accuracy of hedge fund managers' assertions -- or to protect themselves against fraud.
The supreme irony of the Sterling Watters fiasco is that one of the most senior officials at the SEC itself was drawn into the mess: Peter Derby, Donaldson's right-hand man and head of operations for the agency, entrusted $1 million of his own money to Sterling Watters in March 2002 on the recommendation of a boyhood friend from Queens. Derby, who made a fortune in Russia in the 1990s (where he helped start DialogBank, the first private Russian bank to receive an international banking license, and founded one of the first Russian investment firms, Troika Dialog), was not a victim, however. According to copies of documents seized by the U.S. Attorney's Office from Sterling Watters and reviewed by II, Derby made a profit of $185,644 when he redeemed his entire investment slightly more than one year later, in July 2003. Derby did not return repeated phone calls from II seeking comment.
The investors who came out ahead are being sued by Jerry Drenis, the co-owner of a Brooklyn heating oil company. Drenis and several family members have filed a complaint accusing Haligiannis and Sterling Watters of fraud and charging Derby and all 26 other investors who allegedly made money in the hedge fund of taking false profits. Derby's lawyer, Gary Kushner of Forchelli, Curto, Schwartz, Mineo, Carlino and Cohn, declined to comment on the case except to say that he had filed a motion to dismiss the charges. Drenis and his family, collectively and through their assorted businesses, invested $7.78 million in Sterling Watters between August 2000 and February 2004 and lost all but $732,500.
From Drenis's perspective, investors who reaped "profits" from Sterling Watters were essentially getting paid with his family's hard-earned millions -- and he wants some of that money back.
"Why should Angelo have the ability to play God and decide who gets that money?" Drenis says. "Based on what? His opinion of them?"
AS THE BARRIERS TO ENTRY HAVE FALLEN, WOULD-BE hedge fund managers are having an easier time than ever setting up their own shops. In 2004 alone an estimated 300 new investment advisers -- actual partnerships, not new funds -- were created. At the time Haligiannis founded Sterling Watters, in December 1995, there were an estimated 1,205 such firms in existence, according to Tremont. That Haligiannis, who lacked any real investment experience, was able to start a fund and attract investors remains astonishing.
Raised in the midst of a close-knit community of Greek immigrants in Astoria, Queens, Haligiannis enrolled in New York University in September 1990 but never graduated, according to NYU's Office of the Registrar, which confirms that he dropped out in the fall of 1993 without declaring a major. Haligiannis then worked -- just as his father had before him, Drenis says -- at a local restaurant on Queens Boulevard, Pasta Lovers, whose owner, Gus Karayiannis, was a family friend.
The young Haligiannis aspired to more than just slinging plates of rigatoni, and in 1994, according to the SEC complaint, he landed a job as a clerical assistant in a Manhattan branch office of Merrill Lynch. By Wall Street standards, it wasn't much, but the job gave him a taste for finance -- and introduced him to Capul, his future mentor. An economics graduate of St. John's University in Queens, New York, Capul had joined Merrill Lynch in 1990 as a broker; Haligiannis reported directly to him, according to the investors' claim filed with NASD.
In April 1995, Haligiannis quit after just 13 months, determined to run his own hedge fund. On November 20, 1995, he registered Sterling Watters Group with the Office of the Secretary of State in Delaware. He also created two separate legal entities: Sterling Watters Capital Management, the administrative general partner of Sterling Watters, and Sterling Watters Capital Advisors, the general partner responsible for the fund's investment portfolio. (All of these entities were named as defendants in the SEC's complaint.) Under Sterling Watters' banner he established a variety of accounts with Banc of America Securities and Chase and with HSBC in the Cayman Islands, according to the complaint filed by the SEC.
Haligiannis distributed his first set of offering documents in December 1995 and began raising capital. His first backer was a local doctor; his former boss, Karayiannis, was the second man in. The minimum investment to get into the fund, according to Sterling Watters' marketing materials, was $500,000; the fund charged investors a 2 percent management fee and a 20 percent incentive fee on investment gains. The partnership agreement assured investors that they would receive audited financial statements certified by independent accountants and that, after an initial six-month lockup period, they could with 30 days written notice withdraw all or part of their investment at the end of any calendar quarter.
Although he did not outline the fund's investment approach in the partnership agreement itself, Haligiannis did provide some detail in his marketing materials, where he described Sterling Watters as "a top-down aggressive capital appreciation fund whose multifaceted approach is geared at achieving superior risk-adjusted returns primarily in highly liquid U.S. equities." The hedge fund's edge, he asserted, would come from combining "macroeconomic analysis with fundamental research and exhaustive quantitative proprietary modeling."
Haligiannis, according to both the SEC complaint and the marketing materials he distributed for the fund, began trading sometime in the first quarter of 1996. Initially, Haligiannis rented space in a day-trading company at 110 Wall Street called Worldco, says a former Worldco trader, Joel Radvanyi, who sat near him. The day-trading enterprise has since gone out of business, but in the heady '90s, the company was whirring. Radvanyi was struck by Haligiannis's energetic, almost frenetic style and befriended the short, stocky, chain-smoking hedge fund manager. "The guy is probably one of the most charismatic people you'll ever meet," says Radvanyi, "and he is very motivated when he gets something into his head."
Haligiannis was certainly motivated to make his own business a success. In that first year, 1996, Sterling Watters reported a net return to investors of 53.93 percent; by comparison, the S&P 500 gained just 22.96 percent. In 1997, Sterling Watters boasted a net return of a whopping 76.04 percent, while the S&P returned just 33.36 percent. In 1998 -- a surprisingly modest year -- the hedge fund purportedly returned 24.28 percent net to investors, somewhat less than the S&P's 28.58 percent. But the hedge fund's performance seemed to roar back in 1999, when Sterling Watters reported a net return of 87 percent, compared with the overheated S&P's mere 21 percent.
Unlike many hedge fund managers, Haligiannis did not attribute gains or losses to specific positions in his quarterly letters to investors; he didn't provide any information about his investments at all. He simply used the letters to describe general market conditions and offer his opinions about sectors of interest. In a letter dated April 12, 2000 -- just weeks after the Internet bubble burst -- Haligiannis boasted of returning 61.8 percent net to investors, "the best quarterly performance for the fund since its inception," he wrote.
"So how did we do it?" he asked rhetorically. "How did we produce such a handsome return in a market we are seemingly so cynical about? We isolated a number of promising companies in the broadband infrastructure industry that not only have real businesses but phenomenal growth potential. We got involved with these issues before the rest of Wall Street identified them, built large positions and had the confidence to let them run. Technology is still the driving force behind this economy."
With Sterling Watters' seeming success, Haligiannis soon found more comfortable quarters, moving uptown and leasing space in the Citigroup Center on East 53rd Street and Lexington Avenue. His offices on the 55th floor were, according to one investor, tidy and organized but not luxurious.
Sterling Watters gained renown for posting phenomenal returns in the months after the Internet meltdown. Drenis, disillusioned by the losses his own portfolio was sustaining, heard about Haligiannis's spectacular results from his friend Karayiannis at Pasta Lovers. Drenis sank his first $500,000 into Sterling Watters on August 17, 2000, and an additional $800,000 just a few months later, on November 7. That year Sterling Watters reported to investors that the fund had earned 41.45 percent net; a heady number indeed given that the S&P ended the year down 9.10 percent.
As word spread, Sterling Watters' clients began referring their friends, relatives and business colleagues to the hedge fund. Demetrios (Jimmy) Ziosis, the owner of Linon Home Decor Products, a furniture importer in Mineola, New York, introduced Derby, a boyhood friend, to Haligiannis. Derby had just returned to New York from Russia in 2001 after selling DialogBank and was testing the political waters by serving as an elected member of the board of trustees for his home village of Irvington-on-Hudson, New York.
The first meeting between Haligiannis and Derby took place in March 2002, a year before Derby joined the SEC in April 2003 as managing executive for operations and management. In a copy of an e-mail II obtained dated March 18, 2002, Haligiannis wrote to Ziosis about his recent interaction with Derby: "The man is very impressive," Haligiannis said. "It's not news that he spoke very highly of you. He left a check that I will deposit at the beginning of April. Thank you very much, Jimmy, for the referral and the vote of confidence."
Haligiannis also had help recruiting new clients from his former boss: Capul had left Merrill in 1995 to work as a senior financial adviser for Chase Investment Services. Splitting his time between a Manhattan branch office on Fifth Avenue and Chase's flagship office at 270 Park Avenue near 48th Street, Capul spent his days advising wealthy clients how to invest.
Sterling Watters' satisfied clients may have counted themselves lucky to have found such a powerful force for protecting and growing their wealth in difficult markets, but in retrospect, there were warning signs that went unheeded. According to the SEC complaint, the hedge fund never provided certified, audited financial statements over its eight-year life span, despite the promise set out in the partnership agreement. Nor was the partnership itself in good legal standing: According to a certified statement filed by the secretary of the state of Delaware, Harriet Smith Windsor, the partnership was dissolved two years after its founding, on June 1, 1998, for its "neglect, refusal or failure to pay its annual taxes." From June 1998 onward Sterling Watters Group did not exist as a legal entity.
MEHMET GOKTEKIN, A TURKISH-BORN PHARMACY owner, was introduced to Sterling Watters through a chance meeting with Capul in the fall of 1996. The pharmacology Ph.D. was then running a successful business in Sydney, Australia, but wanted to move his family to the U.S. so that his two young daughters, Nilay and Seray, would be well prepared to attend U.S. colleges. (Nilay, the elder, was then in the Australian equivalent of middle school.)
Goktekin wanted advice about buying a house in the New York area and while in New York on his way back from a pharmaceuticals conference, walked into Chase's headquarters on Park Avenue one afternoon to ask for assistance. The Chase representative at the information desk referred him to Capul. Because the Goktekins did not have a credit history in the U.S., Capul, they say, advised them to open an account at Chase and transfer some money to it in anticipation of buying a home. Capul went so far, the Goktekins say, as to recommend that they shop for a house in his own Long Island neighborhood, Manhasset Hills.
Less than a year later, Goktekin bought a house that Capul himself had pointed out to him: a modest two-story brick dwelling set back about 25 feet from a tree-lined street. His wife, Nurten, had never seen it before she arrived with the girls in 1997, but she liked it well enough. The Goktekins say that they placed tremendous trust in Capul -- so much that when he advised them to invest in Sterling Watters in early 1998, they did so without hesitation.
Over the next five years, the Goktekins made several additional investments in Sterling Watters. Under the impression that their assets were growing at a phenomenal rate, they decided to sell their pharmacy in Sydney, Mehmet Kubilay Goktekin Day and Night Chemist, and move all of the money to the U.S. in anticipation of buying another business. Capul, the Goktekins say, encouraged them to transfer all the profits from the sale directly into their Sterling Watters account.
Sitting in the sparsely furnished living room of the family's Manhasset Hills house, Nurten Goktekin -- a slight, dark-haired 47-year-old with sparkling brown eyes behind wire-frame glasses -- twists her hands in her lap. "Michael said, 'If you want to make more money than [with] Chase, you should put it in there,'" she recalls. "He said, 'Do you like money?' Of course we said yes." She lapses into silence. The room is stifling on a hot Saturday in June because the Goktekins have turned off the air conditioner to save on electricity bills.
Although she speaks English fluently and has a Ph.D. in anatomy from Hacettepe University in Ankara, Turkey, Nurten Goktekin's command of the language still falters when she becomes upset. Her daughter Nilay, 21, leans forward attentively in her chair, ready to help, as her mother searches for words.
"So everything, everything was with Angelo," Nurten Goktekin says. "In 2000 everything we had we put in there -- even our retirement money from Australia. And we collected money from our relatives in Turkey and put that money in, too." She stares at the red carpet. "I feel so sad," she says at last. "Why did we trust too much?"
Over the five years that they worked with Capul, the Goktekins invested a total of $2.07 million in Sterling Watters. During that time they received distribution payments of $1.2 million on the profits Sterling Watters reported on their investment -- money they lived on and used for their daughters' tuition payments, because they believed they were wealthy. Their net loss was $864,439.
In their claim to NASD, the Goktekins and the other Chase clients allege that Chase failed in its duty to perform "substantial due diligence" on Sterling Watters, not least because the hedge fund never produced any audited financial statements. "Not only did Chase violate its obligation to conduct due diligence as to the suitability of the hedge fund," the claim alleges, "but Chase employees also aided and profited from this fraudulent, criminal scheme."
As an investor, Capul personally received disbursements totaling $970,000 on a $300,000 investment, according to records seized from Sterling Watters by the U.S. Attorney's Office and entered as evidence in the claim filed with NASD. Capul was also apparently earning a finder's fee. Among the evidence seized by the U.S. Attorney's Office, copies of which were reviewed by II, is a note Haligiannis wrote regarding fourth-quarter 1999 fund expenses to his then-accountant, Robert Kaufmann of Kaufmann, Gallucci & Co. (now Kaufmann, Gallucci & Grumer); in it he stated that the hedge fund had "an ongoing relationship with Capul," whereby Capul was to be paid a 2 percent "management fee referral" on any accounts he referred to Sterling Watters. In 1999 alone, according to a cash disbursements journal page sent to Kaufmann and reviewed by II, Capul earned $27,327 for such referrals.
During the course of 2003, Haligiannis pushed Capul to help him raise more money. In one e-mail obtained by II and dated April 30, 2003, Haligiannis sent Capul a list of potential clients and wrote, "Let's use some strategy to try and close some business for a change, instead of this laid back casual shit we've been doing that has gotten us nothing but redemptions. I seriously don't know what's going on lately, bro, but it isn't this hard to close business. It used to be good that we hitched our carts to eachy [sic] others [sic] horses, but this shit is getting tired. I want a strategy in place here on how we're goiung [sic] to go forward . . . if we can't then just say so and I'll stop hassling you."
In August 2003, according to a deposition by a former Chase colleague, Capul convinced a firefighter's widow to invest $850,000 in Sterling Watters. The widow had received most of this money from the New York State World Trade Center Relief Fund after her husband's death on 9/11. Just weeks later, in September 2003, Capul left Chase and went to work for Sterling Watters, marketing the hedge fund full-time. As recently as the spring of 2004, the Goktekins say, Capul was pressuring them to put more money into Sterling Watters. Both he and Haligiannis visited the family's home on several occasions to try to talk them into investing more of their assets.
"We told them we gave everything," Nurten Goktekin says. "And they said, 'Well, recommend the fund to your friends.'"
The Goktekins, who wanted to free up some of their capital to buy another business in the spring of 2004, became concerned when they made several attempts to withdraw their money from Sterling Watters and were unable to do so. Because they lived so close to Capul, they even went and knocked on his door to try and enlist their neighbor's help. They say Capul put them off with assurances that they would get their money. For months they waited, expecting a check to arrive.
Eventually, Nurten Goktekin became so concerned that she secretly recorded subsequent conversations with both Capul and Haligiannis, concealing a tape recorder in her pocket during their meetings (she later turned over the tapes to the SEC). But the damage to the Goktekins' savings had already been done.
Last November, Mehmet Goktekin returned to Australia, where he is still a licensed pharmacist, to work. He has not seen his family for eight months and missed his eldest daughter's graduation from NYU in May. Nurten Goktekin -- who is not licensed as a pharmacist in the U.S. -- is currently working as a pharmacy technician, making about $500 a week, before taxes, at a local Rite Aid drugstore.
Nilay, who majored in philosophy and was a premed student at NYU, is scheduled to start medical school in the fall. Her first tuition payment is due at the end of July. The Goktekins are considering taking out a loan against their home equity to try and help their daughter cover the cost, but the thought of borrowing money makes Nurten Goktekin wince.
"I don't want to owe anything to anyone," she says. "I have been working really hard, and the manager is very good at Rite Aid. I said to him, 'I want to work. Let me work, so I can pay.'"
FOR THE GOKTEKINS AND OTHER DISAPPOINTED investors, the memory of the moment that they realized something was amiss at Sterling Watters still burns. And for those investors who suspected -- but could not prove -- wrongdoing, the weeks and months leading up to that realization were marked by increasingly frenetic attempts to retrieve their capital. Sterling Watters investor Drenis, who made one last, massive contribution of $4.89 million to the hedge fund in February 2004, began to regret his decision just days later, when Haligiannis -- who had been calling him daily, urging him to invest more -- stopped returning his phone calls. "I knew in my gut something was wrong," Drenis says. "I tried calling Angelo, but I couldn't get through to him."
Drenis, a burly, barrel-chested father of three, runs a Sunset Park, Brooklyn, heating oil company with sturdy determination, his receptionist ensconced behind bulletproof Plexiglas. He drives a shining black Cadillac Escalade, which he parks in the garage below the second-floor office. He is used to getting answers when he asks questions and did not take Haligiannis's silence lightly: Over the following days and weeks, he began nagging Haligiannis on a near-daily basis, demanding that the hedge fund manager tell him what was going on. Drenis suspected the worst, but he liked Haligiannis and wanted to give him the benefit of the doubt.
"I begged Angelo, 'Just tell me you lost the money,'" he says. "'Tell me you invested the money and that you got completely burned and lost it all. Just don't tell me you stole the money.' And Angelo looked me right in the face and said, 'Jerry, the money is there. I did not lose it.'" Drenis sighs, resigned. "What am I to believe?"
Drenis gave himself a deadline, after which he vowed to go to the feds -- and he stuck to his plan. On July 29, after months of wrangling with Haligiannis, he packed up his files and headed into Manhattan to the U.S. Attorney's Office. "When I decided to go to the Justice Department, there was no holding me back," he says. "I had my wire transfers, I had copies of my checks, I had everything. And then when I got there, I realized that Richard Krause, the criminal investigator, knew exactly who I was talking about. It was apparent [to me] that there was an investigation under way."
According to the federal indictment, investors began to have difficulty getting their requests for redemptions met in late 2003, and the trouble escalated in the spring of 2004. As his investors' demands became more urgent, Haligiannis became harder to find -- the hedge fund manager picked up and moved his office twice last summer. Sometime during that period an investigation began, but neither the SEC nor the U.S. Attorney's Office will comment on the exact timing. That summer, however, several investors, unbeknownst to each other, contacted the authorities. One wrote, unsuccessfully, to New York State Attorney General Eliot Spitzer's office. Nurten Goktekin called New York City's 411 information line, seeking a contact number for the SEC.
Drenis gave the investigators all of the documentation he had. According to Drenis's recollection of that day, Roberto Finzi, an assistant U.S. attorney for the Southern District of New York, asked him what he thought Haligiannis -- who was still in New York -- might do. Drenis says he believed that the hedge fund manager had the means (and the millions) to flee the country and told Finzi that Haligiannis was a flight risk. He was not the only one to have that suspicion: Two other investors, neither of whom would speak on the record, drove to John F. Kennedy International Airport one night, convinced that Haligiannis was about to board a flight for Greece, but they never found him.
In the course of his conversation with Finzi, Drenis offered to help the feds track down the now-elusive hedge fund manager. Drenis went out looking for Haligiannis that same evening; he drove his Escalade to the hedge fund manager's Manhattan apartment on East 53rd Street, to his brother-in-law's bar and to his in-laws' house on Long Island, asking for him at each location. When Drenis called Haligiannis the next morning on his cell phone, the hedge fund manager took the call.
Drenis asked to meet with Haligiannis in secret, man to man -- just to talk things over. Drenis recalls that Haligiannis's lawyer at the time, John Harris, got on the phone and suggested they all meet at his office at Epstein Becker & Green on Park Avenue at 46th Street. As soon as he hung up, Drenis called Krause. The veteran criminal investigator, Drenis says, told him to attend the meeting, confirm Haligiannis was present and then alert him immediately. (Harris did not respond to II's calls; Krause declined to comment.)
Drenis met Haligiannis in a conference room at Epstein Becker. Haligiannis, he says, was visibly nervous. Over the previous few weeks, the hedge fund manager told Drenis, he'd received mysterious phone calls threatening his wife and one-year-old child, and he was convinced that Drenis knew who was behind the threats.
"I told him that I hadn't threatened his family -- that I had no idea who had -- but I could guess that any one of the 80 investors might have been angry enough to make a phone call," he says. "But I told him I would personally guarantee his safety, if he'd just tell me what happened to the money. Sure enough, he starts in on the same old bullshit: 'Jerry, it's just not that easy. . . .'"
Drenis's cell phone rang; it was Krause, he says, calling from the lobby of the building. Krause wanted to know if he'd seen Haligiannis, but Drenis demurred, still hopeful that he might get an answer out of Haligiannis in the few minutes he had left.
"I said, 'Ange, you've got to tell me. I need to call my dad, because he's really upset. Tell me where the money is.'" Haligiannis refused, so Drenis finally took out his cell phone and dialed Krause's number. "I said, 'Dad, I'm here with Angelo, and he still won't tell me where the money is,'" Drenis says. "And Krause says, 'Right! I'll be right there!'"
Haligiannis, Drenis says with satisfaction, looked shocked when Krause, flanked by two U.S. Postal Inspection Service agents, appeared on the far side of the conference room's clear glass walls several minutes later. They called Haligiannis out and read him his rights.
HALIGIANNIS'S TRIAL ON CRIMINAL MAIL-FRAUD charges is scheduled to start in October, and assistant U.S. attorney Finzi will prosecute him. If found guilty on all counts, the hedge fund manager, whose travails were first reported in Hedge Fund Alert, faces up to 25 years in prison. Although he is currently free on $1 million bail, his travel documents have been confiscated, he is prohibited from roaming beyond the boroughs of Manhattan and Brooklyn, and he is required by the court to wear an electronic-monitoring bracelet on his ankle.
Exactly what happened to the money of Haligiannis's investors remains a mystery. Part of the uncertainty has to do with a lack of clarity about how much money Haligiannis actually raised: Although the indictment alleges that Sterling Watters received deposits of at least $26 million from 1996 through 2004, subsequent information obtained by the U.S. Attorney's Office (including accounting provided by Haligiannis himself in the context of the parallel SEC investigation) has revealed that investors deposited at least $63 million -- and possibly as much as $78 million.
Documenting Haligiannis's trading losses has been somewhat easier for federal investigators. In 2000, the same banner year in which Sterling Watters reported to investors that the fund had posted a net return of 41.45 percent, the hedge fund allegedly lost $17 million, according to the criminal complaint filed by the U.S. Attorney's Office. The indictment says that Sterling Watters suffered an additional $5 million in trading losses through 2002 and early 2003. Although the indictment does not give any details about specific trades in which the hedge fund allegedly hemorrhaged capital, it states that "as a result of systematic trading losses, Sterling Watters had virtually no assets and did virtually no trading whatsoever" by January 2003.
The SEC's parallel civil complaint continues in the same vein: "Despite the fact that Sterling Watters was losing money, and was virtually insolvent as of the third quarter of 2003, Haligiannis continued to distribute account statements to Sterling investors that showed fictitious positive returns and account balances in the tens of millions of dollars." In fact, the SEC complaint alleges that as of the end of the third quarter of 2003, Sterling Watters' Banc of America account had a balance of less than $100,000. During that quarter, the complaint states, the accounts posted gains of just $8,200.
Where did investors' money go? One possibility is that apart from Sterling Watters' alleged trading losses, Haligiannis was living the high life. According to a court transcript of a hearing before Judge Richard J. Howell of the U.S. District Court of the Southern District of New York last November, Haligiannis stated that he had bought a $2 million house on Long Island. He also enjoyed going to Las Vegas. On November 20, 1999, for example, Haligiannis deposited two checks to the Sterling Watters account, made out to him from a betting-cage cashier at the Bellagio Hotel & Casino: one for $30,000 and one for $50,000. Separately, Haligiannis now faces criminal charges in Clark County, Nevada, for passing bad checks in April 2004 at two Las Vegas casinos, the Venetian Resort Hotel Casino and the Palms Casino. According to the criminal complaint, Haligiannis wrote two $50,000 checks to obtain cash and gaming chips; both checks appear to have been drawn on Sterling Watters' Chase account. A preliminary hearing in the Justice Court, Las Vegas township, is scheduled for August 9.
Drenis remains convinced that Haligiannis may have sheltered some money overseas. The SEC's complaint noted that Haligiannis had told one investor that "he sent money offshore and that he did 'some illegal things with it,'" such as setting up shell companies and transferring the money to them. Haligiannis also confided, according to the SEC complaint, "that he 'commingled' funds from Sterling Watters with the funds of other investment entities with which he is affiliated," although the complaint does not specify what those entities were. In the hearing before Judge Howell, Haligiannis stated that he had no funds left overseas to repatriate.
Did Haligiannis have the time and opportunity to spirit away a few million dollars before the bust? He did assert that he had some business affiliations overseas. According to the court transcript from the hearing before Judge Howell, Haligiannis stated that from 1999 through 2001 he had managed two funds -- Equity Special Situations I and II -- for a Swiss merchant bank, Société Financière Privée (now Société Bancaire Privée). But Raphaél Hardrick, CEO of Société Bancaire, denied in an e-mail to II that Haligiannis had ever received a mandate to manage assets for either Société Financière or Société Bancaire.
At the same hearing in November, Haligiannis also stated that he had a bank account in Greece and an offshore fund, the Sterling Watters Global Fund, based in the Cayman Islands. He led the court to believe that the Cayman Island Monetary Authority had already dissolved the fund, although he added that he wasn't entirely sure of its status. He assured the judge that the fund had no remaining assets overseas but stated that he never read his own account statements. "I don't look at them," he said, according to the court transcript.
David Rosenfeld, an investigator with the SEC who was present at the hearing, took issue with Haligiannis' claim. "The only thing we know is that he is a practiced liar," Rosenfeld stated before Judge Howell. "We don't feel confident we can trust the statements he has made today. We would like some evidence there are no assets there."
His investors wanted proof, too. On July 8, Drenis says, Haligiannis assured him that he could call a Chase bank representative in Texas to confirm that $50 million was indeed present in Sterling Watters' account and that a wire transfer for a portion of those funds was en route to Drenis's account. When he called, Drenis says, the Chase rep put him on hold for several minutes and then came back on the line and "told me that indeed, the $50 million was there, and I was elated," Drenis says.
Hours later, when the wire transfer still had not shown up, Drenis says he called the Chase rep back. "She wouldn't take my calls at first, but then -- when I got angry -- she reluctantly got back on the phone and told me the funds were not really there."
The alleged help of Chase employees has Sterling Watters' investors seeing red. "I can't imagine that anybody at the higher levels of Chase would condone this, but the point is, weren't they supposed to be supervising?" says Lanzano, the former Oxford University Press editor. "When you go to a huge, reputable institution like Chase, you expect to get professional advice. It was breathtaking to me that this could have happened, but I've gone from feeling total fear -- not even wanting to wake up in the morning -- to shock and outrage."
In the months since she and her husband lost most of their savings, Susan Lanzano has picked up work as a freelance editor, and Michael Lanzano -- a former administrator of Marymount College's English as a Second Language program -- has gotten his chauffeur's license. He's been doing odd jobs, including caning chairs and laying tiles for neighbors and friends in Westchester County. Fortunately, the Lanzanos own their house, which they bought in 1973. But this is hardly the retirement they had hoped for. The little house in Montauk is gone: They say Capul convinced them to sell it, and some of the proceeds ended up at Sterling Watters.
"We still have our TIAA-CREF retirement accounts, thank God," says Susan Lanzano. "And Michael will get Social Security starting next year, which will help. And we still have about $100,000 in other investments at Chase, but that's it -- that's all we have."
"These families trusted in Chase, an established institution with a reputation for integrity," says George Hinckley, who represents the six investors who have filed a claim with NASD. "We're hopeful that once Chase has examined the facts, it will do the right thing and make these families whole."
One of the recurring regrets voiced by Sterling Watters investors is that the SEC's Derby -- who by all measures is an experienced, sophisticated investor -- didn't manage to suss out Haligiannis's misuse of funds, crack the long whip of the law and bring Sterling Watters down. Derby got out in July 2003 with his principal and profits intact. Seven months later, in February 2004, the Drenis family made its last and biggest investment, $4.89 million. Four months after that, on June 30, just weeks before Haligiannis's arrest, the 9/11 widow is said to have invested the remainder of the funds she'd received -- $1.5 million -- in Sterling Watters. She and her three young sons lost a total of $2.35 million, according to documents seized by the U.S. Attorney's Office, copies of which were reviewed by II.
Perhaps the most remarkable aspect of the whole Sterling Watters debacle is the way in which Haligiannis continued to charm and cajole his investors, even as his business crumbled around him. Right up until the moment of his arrest, he allegedly kept assuring them that he could, and would, make good on their redemptions. That sangfroid in the face of total ruin still amazes Drenis. "Angelo," he says, "has a very big ego. He thinks he is very bright. I'm sure he still believed that he was going to make it all back."
