It’s hard to imagine why anyone would fleece a widow or an orphan when there are so many inexperienced municipalities and dumb sports team owners to hoodwink.
Rich widows, I suppose, will always be tempting marks for con artists. But orphans? If the allegations in a recent lawsuit are true, I’d say we’ve sunk to a new low in financial roguery.
Hillcrest Children’s Center, formerly the Washington City Orphan Asylum, claims a money manager stole $8 million of the group’s $17 million endowment, according to a complaint filed last month in U.S. District Court for the District of Columbia.
Hillcrest, founded in Washington as an orphanage in 1815 to help children left homeless by the War of 1812, in its more recent history has tended to the mental-health needs of local children and families. In 2008, its board of directors retained Gibraltar Asset Management Group Inc., which represented itself as a prominent Washington wealth adviser, according to the complaint.
If the allegations are true, Hillcrest would have been better off stashing its money in a safe and leaving the door open.
Gibraltar prides itself on the firm’s “availability to our clients,” according to the company website. Rallying anyone these days at Gibraltar is not so easy.
Gibraltar’s three telephone numbers have been disconnected. Jeffrey A. King, the firm’s president and chief operating officer, did not respond to an e-mail. A woman answering the telephone at his home on Feb. 7 acknowledged that he was a defendant in the lawsuit and said she would ask him to return my call; he didn’t.
Maurice Taylor, a defendant who is the firm’s chief investment officer and executive vice president, told me in a brief telephone interview on Feb. 7 that he would get answers to my questions and get back to me, but I haven’t heard from him since.
Stuart H. Gary, a lawyer at Bailey/Gary in Washington who worked on the Hillcrest account and also was named in the suit, did not respond to telephone calls or an e-mail. I asked Maurice Taylor for the phone number of Gibraltar’s chief executive, Garfield Taylor, one of six individual defendants, and he offered me a disconnected number I already had tried.
Not-for-profits that busy themselves with the work of promoting ‘’the well-being and spiritual development of all children and youth” as Hillcrest describes its mission, are not typically staffed with bosses adept at discerning a Bernie Madoff from a Warren Buffett.
While Hillcrest’s version of events is only an allegation, the organization says that an $8 million investment made in February 2009 had shriveled to $25,000 in 13 months. By the time the suit was filed, $200 remained.
As the lawsuit describes it, in the summer of 2008, Gibraltar persuaded Hillcrest to let it manage $1.2 million using a so-called covered call strategy in which the money managers would purchase stock while simultaneously selling a call option on the shares.
“Like an endowment, your principal will stay intact,” said a Gibraltar Power Point slide during a presentation to Hillcrest, according to the suit. Indeed, the Gibraltar guys described themselves as nothing less than stock market geniuses: “Gibraltar managers make money trading equity options in UP, DOWN, or SIDEWAYS markets,” one slide promised. “Risk is ALWAYS LIMITED.”
Priming the Pump
And so it seemed for several months. Hillcrest executed a promissory note lending $1.2 million to Gibraltar on July 14, 2008, with Gibraltar agreeing to pay Hillcrest $20,000 every month for six months, returning the principal by January 2009. In a page taken out of a penny-stock peddler’s handbook for priming suckers, the payments in this initial transaction came in on time or early. The complaint describes Hillcrest taking the bait, and by February 2009 entrusting $8 million to Gibraltar.
Then, whoops, in March 2009, money began to be transferred out of the account. By May, the suit says $6,650,000 had been withdrawn without Hillcrest’s knowledge.
Gibraltar was teeming with red flags. It isn’t a registered investment adviser. Its marketing materials are sprinkled with typographical errors that suggest a sloppy operation. One of its advisory board members, touted as being licensed with securities regulators, had his registration revoked by the Financial Industry Regulatory Authority in April 2008.
Gibraltar’s vice president of organizational development is listed in a marketing document as a cum laude graduate of the University of Hartford. A school spokeswoman said in an e-mail that Randolph Taylor did not have the grades for cum laude status.
Hillcrest is not the only investor claiming to have lost money. In recent months, a company run by Gibraltar’s Garfield Taylor was sued for breach of contract in two cases brought by individuals who say they had promissory notes with Taylor and lost everything. None of the defendants in any of the three suits has yet filed a response.
The District of Columbia Department of Insurance, Securities and Banking has an “ongoing investigation” of Taylor and his business entities, says Stephen M. Perry, associate commissioner of enforcement and investigations.
It takes a special kind of chutzpah if, in the Hillcrest case, it’s shown that money was stolen from people who help poor kids. What happened to Hillcrest “is pretty raw” said William McLucas, one of the lawyers at WilmerHale who is working on the case pro bono. That would be the same McLucas who used to run the enforcement division of the Securities and Exchange Commission, and suffice it to say he’s a guy who’s hard to shock.
(Susan Antilla is a Bloomberg News columnist. The opinions expressed are her own.)
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