Sun, Oct 10, 2010 page12

• Trader’s secret odyssey puts stop to Ponzi scheme

  • BY EDWARD WYATT / NY TIMES NEWS SERVICE, NEW YORK
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  Sitting in a mansion in Minneapolis, Minnesota, and listening to a charismatic investment manager describe a currency trading system that kept earning handsome returns year after year, Arthur Schlobohm was certain he had stumbled onto a Ponzi scheme.

  A longtime trader who started running tickets on the floor of the New York Stock Exchange as a teenager, Schlobohm, known as Ty, knew that Minneapolis, his home for nine years, was too small a town for a US$4.4 billion investment fund to have escaped his notice.

  It had taken him just a few Google searches to discover that the fund’s manager, Trevor Cook, had been suspended twice by the National Futures Association and been fined US$25,000 for using false information to open a trading account for a customer. Calls to contacts in Switzerland and Kuwait also raised doubts about Cook’s boasts about deal-making abroad.

  Yet Schlobohm later found himself back in Cook’s mansion, surrounded by a room full of his neighbors, many of whom were about to hand their life savings to a charlatan.

  “If I could have just leaned over and whispered in someone’s ear, ‘Don’t invest in this! Just trust me,’ there would be a family out there now with kids that could go to college,” Schlobohm recalled of the meeting, which took place 18 months ago.

  However, he couldn’t do that. At the time, Schlobohm, now 37, was working as an informant for the FBI. Wired to record Cook’s sales pitches and carrying a hidden camera, Schlobohm gathered evidence for at least four months as the Justice Department zeroed in on the scheme.

  Cook pleaded guilty to mail and tax fraud last summer and was sentenced to 25 years in prison for orchestrating what ultimately became a US$160 million swindle. William Mauzy, a lawyer who has represented Cook, did not respond to repeated requests for comment and for an interview with Cook.

  That the authorities brought Cook to justice is undoubtedly a positive outcome. However, Schlobohm’s journey as a whistle-blower and some of the financial losses that still occurred even though authorities were closely monitoring Cook, also underscore the limitations of the system.

  During the period when Schlobohm helped the FBI to gather evidence, from April through July last year, at least US$16 million flowed into Cook’s fund — and disappeared. From the time securities regulators first had credible information that he was engaged in a fraud and when the authorities shut down his fund, December 2008 to July last year, some US$35 million flowed into his coffers — funds that afforded Cook a lifestyle that included an expensive gambling habit, a collection of Faberge eggs, fancy cars and constructing a casino in Panama.

  The US attorney for Minnesota prosecuted the case against Cook, and the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) are both pursuing civil suits against Cook and helped with the federal investigation. Those agencies point to the Trevor Cook case as an example of the positive lessons authorities learned from the Bernard Madoff scandal and other regulatory debacles. (In the Madoff case, tipsters warned regulators for years of problems, but they did not take action until Madoff’s fund collapsed.)

  For all of the Justice Department’s efforts, though, only about 5 percent of the US$160 million invested in Cook’s scheme has been recovered.

  Before Schlobohm’s involvement there had been others who had raised questions about Trevor Cook. The CFTC, a federal agency that regulates commodity markets and monitors foreign currency trading, got a full report on Cook’s suspension in 2006.

  Then, in April 2008, Duke Thietje, a Florida investor, filed a lawsuit in a Minnesota state court against Cook and his firm, Universal Brokerage Services, contending that Cook lost US$450,000 he had turned over to him in 2005 to invest in foreign currencies.

  Thietje abandoned his -lawsuit in the fall of 2008. However, around that time, his lawyer turned over copies of his filings to the CFTC, providing that agency with its second warning about Cook.

  The CFTC would not comment on the documents, in part because its civil fraud charges against Cook and his companies are still pending.

  After examining Thietje’s allegations, the CFTC decided that it lacked the jurisdiction to do anything about Cook, according to people close to the investigation who spoke on the condition of anonymity. It wasn’t until March last year, when Schlobohm contacted both the CFTC and the US attorney in Minneapolis with his information about Cook, that the CFTC began to connect the dots.

  That was made more difficult because Cook’s ventures went by an ever-changing lineup of names: Universal Brokerage Services, UBS Diversified, Oxford Global, Market Shot, the Basel Group, Crown Forex.

  None of them, however, were registered with either the CFTC or the SEC. So even after Schlobohm provided his own research pointing to a Ponzi scheme, regulators said they had limited options as to how they could act.

  Two senior regulatory officials speaking on the condition of anonymity said the agencies could not simply walk in and demand to see the firms’ books and records without running the risk that the group would fold up shop and disappear with investors’ money.

  And the agencies thought that convincing a judge that the Cook firms’ assets should be frozen required more evidence than they had, the officials said.

  The FBI took the lead in the Cook investigation, focusing on gathering evidence for a criminal prosecution rather than on immediately shutting down the fraud and securing investors’ funds. An FBI spokesman declined to comment on the investigation.

  Unlike civil cases, criminal cases often require that investigators amass evidence of both the crime and the perpetrator’s intent before producing an indictment — usually translating into longer, more challenging investigations.

  Given those hurdles, the FBI came to rely heavily on Schlobohm to gather information for its case.

  Wearing two microphones and carrying a hidden camera, he attended at least 10 meetings in which Cook or his associates tried to raise money from investors.

  Some parts of the undercover operation didn’t go smoothly. With tape recorders strapped to him, Schlobohm was reluctant to go to the bathroom at the mansion for fear of discovery.

  “I was crossing my legs and chewing on my knuckle,” he recalled, and said that he once was forced to drive to a nearby FBI building to relieve himself.

  It wasn’t until late June last year that securities regulators got the go-ahead from prosecutors to finally subpoena the records of Cook’s companies. The next month, investors first became aware that something might be amiss in Cook’s mansion when a group of Ohio investors filed a lawsuit against Cook and his companies, contending that they had refused to let the investors withdraw their money.

  That private lawsuit — not the federal investigation — essentially shut down Cook’s operation because it caused investors to scramble for answers about their investments and to get a court order to freeze assets.

  While he has mixed feelings about how the investigation proceeded, Schlobohm has no qualms about his decision to cooperate with the authorities.

  “I was doing this, and continued to do it, for moral reasons,” he said. “I was finally in the position to maybe not make a bunch of people money, but maybe to save some people their life savings.”
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