Investment Manager Principal of WG Trading Company LP and WG Trading Investors Pleads Guilty in Manhattan Federal Court to Role in Several-Hundred-Million-Dollar Fraud Scheme
Preet Bharara, the United States Attorney for the Southern District of New York, announced that Stephen Walsh, an investment manager and principal of WG Trading Company LP (WG Trading Company) and WG Trading Investors, pled guilty today in Manhattan federal court to securities fraud. Walsh and his partner Paul Greenwood ran a fraudulent commodities trading and investment advisory scheme that raised billions of dollars, misappropriated hundreds of millions of those dollars for their own personal benefit, and then created false promissory notes and account statements to conceal their theft. Walsh was originally charged in February 2009, and he pled guilty today before United States Magistrate Judge Kevin Nathaniel Fox.
Manhattan U.S. Attorney Preet Bharara said, “Stephen Walsh and his partner Paul Greenwood ran an investment operation that was a veritable money-making machine—for them. Their purported investing strategy wasn’t nearly as effective as their fraudulent sales pitch to investors. Walsh personally pocketed tens of millions in stolen investor dollars. He will soon surrender his money and himself to answer for this fraud.”
According to the indictment, other documents filed in Manhattan federal court, and statements made during court proceedings:
From at least 1996 through February 2009, Walsh and Greenwood solicited $7.6 billion in investor funds on the understanding that they would invest the funds in a program called “equity index arbitrage,” which they represented 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 and retirement and pension plans—invested billions of dollars. Investors either became limited partners in WG Trading Company or received promissory notes issued by WG Trading Investors that Walsh and Greenwood represented would pay interest at a rate equal to the investment returns earned by a limited partner of WG Trading Company.
Contrary to their representations to investors, Walsh and Greenwood misappropriated hundreds of millions of dollars in investor funds for their own personal use and to satisfy obligations on investments that were unrelated to the “equity index arbitrage” trading business. Among other things, Walsh used the funds to finance his lifestyle, to make payments to his ex-wife totaling millions of dollars pursuant to their divorce settlement, and to finance business ventures of his children.
Walsh and Greenwood executed promissory notes in favor of WG Trading Investors, partly to conceal trading losses and their misappropriation of investor funds. These promissory notes totaled approximately $554 million, of which approximately $261 million were payable by Walsh to WG Trading Investors. These notes materially misstated the financial condition of WG Trading Company and misled investors. Walsh and Greenwood also created and caused others to create false account statements that were sent to clients to reflect fictitious returns consistent with the returns that had been promised to those clients.
Walsh, 69, of Sands Point, New York, pled guilty to count two of the indictment, which charges him with securities fraud. This charge carries a maximum penalty of 20 years in prison. Pursuant to a plea agreement, Walsh agreed to entry of a forfeiture order in the amount of $50,743,779, which represents the amount of funds that Walsh misappropriated and by which he personally profited from the fraud. The maximum potential sentence is prescribed by Congress and is provided here for informational purposes only, as any sentencing of the defendant will be determined by the judge.
On July 21, 2009, Deborah Duffy, the former chief compliance office of WG Trading Company, pled guilty to conspiracy, securities fraud, and money laundering for her role in the fraud scheme. On July 28, 2010, Greenwood, a managing general partner of WG Trading Company, pled guilty to conspiracy, securities fraud, commodities fraud, wire fraud, and money laundering for his role in the fraud scheme. Sentencing dates for Duffy and Greenwood have not yet been set.
Mr. Bharara praised the work of the Federal Bureau of Investigation and thanked the United States Securities and Exchange Commission, the United States Commodity Futures Trading Commission, and the National Futures Association for their assistance.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys John J. O’Donnell, Jessica A. Masella, and Benjamin A. Naftalis are in charge of the prosecution.