Paul Greenwood pled guilty in Manhattan federal court this week to six charges, including conspiracy, securities fraud, commodities fraud, wire fraud, and money laundering for misappropriating $554 million in client funds in a fraudulent commodities trading and investment advisory scheme while a principal of WG Trading Company and WG Trading Investors. He faces up to 85 years in prison for all six counts. In addition, Greenwood agreed to forfeit at least $331 million.
According to reports, Greenwood is cooperating with prosecutors against former partner Stephen Walsh. Walsh also has been charged with conspiracy, securities fraud, commodities fraud, wire fraud, and money laundering for his role in orchestrating and perpetrating the scheme.
If you are keeping score at home, when he is sentenced on December 1, Greenwood will likely become at least the third former owner of the New York Islanders hockey team to go to prison. Walsh was also part of the same Islanders ownership group.
According to the government, from 1996 through February 2009, Greenwood and others solicited $7.6 billion from investors promising to invest it in a program called equity index arbitrage, which they claimed was a conservative trading strategy that had outperformed the results of the S&P 500 Index for more than 10 years.
As a result, several institutional investors including charitable and university foundations, retirement and pension plans, and other institutions invested billions of dollars with the firm, according to the government.
At the time of Greenwood and Walsh's arrest, the New York Times said the Iowa Public Employees Retirement System invested $339 million with the pair. Bloomberg reported the University of Pittsburgh invested $21.3 million with Greenwood and Walsh less than three weeks before they were arrested in February 2009. Altogether, the universitys endowment had $65 million with the pair. Carnegie Mellon had $49 million with Greenwood and Walsh.
In any case, the government elaborated that investors either became limited partners in WG Trading or received promissory notes issued by WG Trading Investors, which Greenwood and Walsh promised would pay interest at a rate equal to the investment returns earned by a limited partner of WG Trading.
Little did the investors know that instead, Greenwood and others misappropriated at least $331 million in investor funds. Greenwood used the money to construct his home, purchase expensive collectible items, and operate a horse farm. According to Bloomberg, in 1984, Greenwood bought Old Salem Farm, a 54-acre riding school and horse farm, from actor Paul Newman and his wife, Joanne Woodward. Greenwood subsequently bought the farm.
Walsh allegedly used investor funds for himself and to make large cash payments to his ex-wife. Greenwood and his cohorts also allegedly diverted investor funds to satisfy obligations on investments that were unrelated to the equity index arbitrage trading business.
The government says Greenwood and others executed promissory notes to, among other things, conceal trading losses and their misappropriation of investor funds. These promissory notes totaled about $554 million, of which $293 million was Greenwoods.
The $331 million that Greenwood agreed to forfeit represents the amount of funds that he and others personally misappropriated and diverted to make an investment in Signal Apparel Co., which was not disclosed to investors. Greenwood also agreed to pay the government an $83.5 million judgment, representing the amount of money he personally obtained as a result of the fraud, according to Bloomberg.
On July 21, 2009, Deborah Duffy, the former Chief Compliance Officer of WG Trading, pled guilty to conspiracy, securities fraud, and money laundering, for her role in the scheme.