San Diego San Diego entrepreneur David Perez loves to talk about his good deeds: last month, he got reams of local and national publicity after he rounded up airplanes to fly evacuees out of hurricane-battered southern states. But he refuses to discuss how one of his companies that went down in flames became a major money drain on a hedge fund that's been charged with fleecing investors of $65 million.
Perez told the media during the Katrina rescue that God has blessed him financially. But Perez doesn't want to discuss how those investing money with him -- particularly one of the indicted hedge-fund principals -- were not so blessed.
The gist of the story is spelled out in the report by the receiver who's probing a San Diego Ponzi scheme allegedly perpetrated by Global Money Management and its general partner, LF Global. Managing the combined operation were Marvin Friedman and Paul Levy. They have been cited for securities fraud by the Securities and Exchange Commission and have been charged criminally with mail and wire fraud, money laundering, and conspiracy by the U.S. attorney's office.
Friedman and Levy have pleaded not guilty and are blaming each other for the fund's collapse, says Faith A. Devine, who is prosecuting the criminal case for the U.S. attorney's office.
Friedman ran an exotic options trading program. Levy was to look for emerging companies to invest in. Friedman had been disciplined four times and barred from the investment business by the National Association of Securities Dealers, but customers didn't know that, according to the report by court-appointed receiver Charles La Bella. Many of these details are also in the criminal indictment and the complaint by the Securities and Exchange Commission.
Investors put in $109.8 million. They lost $65 million, according to the most recent estimate, which is likely to be reduced. Some investors pulled out a lot of money before the crash. LF Global misappropriated $20 million and Levy pulled out almost $19 million, according to the receiver's September 23 report. This spring, U.S. District Court, citing "ill-gotten funds" from the adventure, imposed an asset freeze on Levy's estate.
Global Money Management began as a hedge fund, but at some point became a Ponzi scheme, in which early investors are paid off with funds from new investors, says La Bella. "Global Money Management failed when LF Global could not raise new investor money fast enough to cover the combined cash drain of withdrawing investors, investment losses, and its own mismanagement and perfidy."
Friedman told investors he was making a 30 percent annual profit. Actually, he was losing 50 percent a year, says the receiver's report.
One of the worst investments involved David Perez. In 1994, he had formed a company, Com2001, a developer of communications software. According to La Bella's report, both Levy personally and LF Global were trading in Com2001, which in its later years became known as alexis communications. "Paul Levy owned or controlled several million shares of alexis and was actively trading during the same time period that LF Global was buying shares," says the receiver report. (There is an ethical question whether Levy should have owned and traded shares personally while the hedge fund he co-controlled was also buying.) LF Global invested a total of $2.89 million and "ultimately received $7,906 from its bankruptcy estate," says the receiver.
That was an almost total wipeout. However, the receiver was wrong: Com2001/alexis didn't actually go bankrupt. It was dissolved in 2002. "The common shareholders got no money out of the deal," says Richard Kipperman of La Mesa's Corporate Management, who handled the dissolution. "Creditors got very little if anything at all." In addition to buying stock, LF Global had advanced the company a loan of $1.15 million, says Kipperman.
He suspects the company failed because its technology didn't measure up. Peter S. Buswell, who was chief operating officer in the company's waning days, says that the company's major customers "filed bankruptcy in the dot-com crash." And after 9/11, "venture capital funding dried up instantaneously."
In the summer of 2001, a venture capitalist put around $10 million into the company, says Buswell. The venture investor became chief executive, replacing Perez, who stayed on as second in command. When the business failed, the assets went to the venture capitalist, but Kipperman doubts they had much value.
There are distinct footprints in this story. An investment banking firm, Granite Financial Group, "maintained its headquarters in the same office suite" with Global Management and LF Global on El Camino Real in Carmel Valley, says the receiver. The hedge fund did some of its business through Granite. Over four years, $7.08 million went into the Global account at Granite, generating a negative return of 90 percent, says the receiver.
Granite also managed accounts for Friedman's family, and there is "some evidence" that Friedman at day's end gave winning trades to his family and the others to Global, according to the report. This practice, called "cherry-picking" on Wall Street, has led to fraud convictions in other cases. The receiver has entered claims against Granite.
Perez's Com2001/alexis communications was in the same building complex as Granite and LF Global. Perez spent a lot of time at Granite, according to Darren Caris, a former Granite official who left to form his own firm. Others say that Granite Financial personnel invested in Com2001/alexis.
When Perez announced his Katrina relief effort, the first sponsor he named was Granite Financial Group.
Charles Goldberg, attorney for Friedman, says Levy and Perez had a "personal relationship," but Friedman didn't know Perez. "To my knowledge they [Levy and Perez] did know each other but did not have an ongoing business relationship," says Tom Connelly, one of Levy's attorneys. He says that Friedman was close to Granite, and it's logical to assume that Levy met Perez and got into Com2001 through Granite, with Friedman making the introductions. Neither Devine nor the receiver's office knows the details of the Perez/Levy/ Com2001 association.
Late last year, Perez became chairman and chief operating officer of San Diego's Surge Global Energy, which is trying to develop oil and gas in Canada, Argentina, and Texas. Until 2003, it had been a tobacco company named Havana Group. Within two months of Perez's appointment, the stock shot from $2 to $4, but it has since nestled back to $1.55. He has options to purchase 4 million shares for 65 cents each and has a $250,000 base annual salary.
The company's website talks glowingly of oil and gas prospects, but its government filings are not upbeat. The company has not yet produced any revenue from operations. It has a cumulative deficit of $12.3 million and lost $1.6 million in its most recent quarter. It has only four employees. Because of limited capital resources, it pays its nonemployee service providers in company stock. Its auditor says that because the company is having difficulty generating sufficient cash flow to fund operations, there is "substantial doubt about its ability to continue as a going concern."
Surge's stock trades on the over-the-counter bulletin board, which is not part of Nasdaq, and is speculative by its very nature. And the fact that it's an oil-and-gas issue can make it even more speculative, says David Allen of North County's Palomar Equity Research. The company admits that it could have a hard time raising capital and that its stock could be "extremely volatile."
The company's project in Alberta, Canada, "does hold potential," says Allen, but oil there is "very thick, a molasseslike substance which does not flow easily."
Neither Perez nor Daniel Schreiber, chief executive of Granite, returned repeated phone calls and e-mails. I initially called and e-mailed both on October 4 and October 5. Although not responding to my call or queries, Perez appeared on a Society of Professional Journalists panel at San Diego State on October 5 and gave journalists a report card of A for covering Katrina but F for being "predators."