Children’s charity victim of Ponzi scheme, SEC says
When a District-based children’s charity was trying to shelter its endowment from the stock market turmoil of 2008, Garfield Taylor offered what seemed to his prospective clients like a can’t-lose proposition.
Taylor and his firm, Gibraltar Asset Management Group, pitched a complex investment strategy that would generate an annual return of 20 percent without jeopardizing the money invested, according to Hillcrest Children’s Center.
“The beautiful thing about our equity option trading strategy is that we totally control our downside risk,” Hillcrest alleges that Gibraltar said in a slide presentation. The charity’s principal, one of the slides allegedly promised, “will stay intact.”
But by mid-2009, Hillcrest made a startling discovery. As it said in a court filing, the vast majority of the $8 million it had invested with Taylor was gone.
Hillcrest was one of about 130 investors in what the Securities and Exchange Commission now alleges was “a classic Ponzi scheme” – a financial scam built on illusion. Last week, the SEC sued Taylor for fraud, saying that he blew clients’ money on risky trades and misappropriated millions.
Hillcrest’s plan to build a larger facility ground to a halt, and its ability to aid troubled D.C. families faced new limits.
“I was devastated,” Juanita Price, Hillcrest’s executive director, recalled in an interview this week.
Hillcrest has survived its financial setback, but the money it lost would have enabled it to do more to help people in need, said Price, who joined the nonprofit after it had decided to invest with Taylor.
Founded two centuries ago to care for orphans, Hillcrest provides mental health and other social services. On the eve of Thanksgiving, staff members were delivering holiday food baskets to needy families, Price said.
Hillcrest put its story on the public record in January, when it sued Taylor for fraud. By then, of the $8 million it had invested with Taylor -- about half of its endowment -- only $200 remained, according to the lawsuit.
Two months ago, a court clerk declared Taylor in default in the Hillcrest suit, saying he apparently had not defended himself in the litigation. According to court records, mail sent to Gibraltar Asset Management Group was returned as undeliverable.
No one answered the door Friday at the North Bethesda address listed for Taylor in the Hillcrest and SEC lawsuits. Someone retrieved a note The Washington Post left there, but no one responded.
An upset client told the SEC about the possible scam a year ago, according to a lawyer and a financial adviser assisting the investor. The SEC’s civil complaint against Taylor and his firm gives no indication that any new investors were drawn in since then. The fraud, which was under way by 2005, collapsed in fall 2010, the SEC said.
SEC official Stephen L. Cohen said the case serves as a reminder to investors.
“There really isn’t any such thing as . . . an investment that has zero risk with a high reward,” Cohen said.
The Hillcrest board, whose members had no special experience managing institutional investments, identified potential investment advisers through personal acquaintances, the nonprofit group’s lawsuit said. One member of the board had invested with Taylor.
A marketing document that Gibraltar Asset Management Group gave Hillcrest said its advisory board included Barron H. Harvey, dean of the business school at Howard University.
In an interview this week, Harvey said his name was used without his permission. He said he was approached to be a member of the advisory board and attended a meeting and a dinner but then told Taylor that he wasn’t interested.
The marketing document also cited Taylor’s experience at Fannie Mae, the mortgage funding company that is now a ward of the government. As short-term funding manager at Fannie Mae, Taylor “was responsible for issuing approximately one trillion dollar [sic] in short term debt annually,” the document said.
In an e-mail, a Fannie Mae spokeswoman declined to comment on Taylor’s employment.
In presentations to Hillcrest’s board in 2008, Taylor and his associates said they used “a proprietary trading strategy,” the suit said.
“Gibraltar managers make money trading equity options in UP, DOWN or SIDEWAYS markets,” one of their PowerPoint slides allegedly said.
Hillcrest’s lawsuit says board members “asked probing questions” -- for example, how could Gibraltar produce such favorable returns in the weak financial markets of mid-2008, and if Gibraltar’s strategy was so good, why weren’t other investment advisers using it?
Taylor responded that the “covered call” strategy was very complicated, the suit said.
Reassured by Taylor’s talk of thorough market research and trading devices such as stop-loss mechanisms, the Hillcrest board decided to make a trial investment – a loan of $1.2 million, the suit said.
As Hillcrest viewed it, Gibraltar paid the monthly interest and passed the test. In hindsight, Hillcrest describes the trial period as a ploy to win its trust.
In early 2009, the suit said, Hillcrest made a series of payments increasing its investment to $8 million. The new payments were made via a “convoluted and complicated investment structure” Gibraltar had proposed involving three companies set up specifically for the purpose, and Hillcrest paid the final installment around May 13, 2009, the suit said.
But by April 2009, even before it put in the final $1 million, Hillcrest was concerned. The nonprofit had not received any monthly statements for the new account, and Taylor was refusing to provide them, the suit said.
When he finally complied in June 2009, the suit said, the statements showed that Taylor and Gibraltar had made wire transfers removing millions of dollars from the account.
“Perhaps I am not fully understanding what is going on here,” Hillcrest board member Elaine Crider wrote in a July 2009 e-mail to her colleagues, “however, why would our fund ever be below 8 million?”
“If our funds have gone below 8 million,” she added, “ it seems something is terribly wrong.”
In a July 2009 memo to the Hillcrest board, Taylor “admitted . . . to making numerous payments to himself and Gibraltar from the Trading Account as profits,” the suit said.
“Taylor closed the memorandum by stating, ‘we are confident that we can bring the account back to the $8,000,000 within the next 60 to 90 days,’” and he promised that Hillcrest’s money “will be paid back,” the suit said.