Vision of Business Glory Collapses in Securities Fraud Indictment
"The old fundamentals must be thrown out the window."
For decades, Martin A. Armstrong sold himself to investors as expert on anything of precious value, from coins minted by the Egyptian pharaohs to turn-of-the-century U.S. stamps, not to mention current-day markets for stocks, bonds, commodities and currencies.
Now, Mr. Armstrong, arrested in New York on Monday, stands accused in a federal indictment of using this market-wizard image to conduct one of the most common frauds in the history of finance: making big promises to investors that he couldn't deliver. Mr. Armstrong, out on $5 million bail, finds himself accused of securities fraud after allegedly trying to cover up millions of dollars in bets on the yen and other markets that went horribly wrong.
It is certainly not the outcome that the 49-year-old Mr. Armstrong envisioned when he fell in love with business as a boy. It was a love that turned him into an active stamp dealer at just 13 years old, only to be kicked out of the stamp world's most elite fraternity as a young man in 1972 amid accusations of selling extremely rare stamps that he didn't own and couldn't deliver.
Undaunted, he fought back and became a stamps authority -- and eventually an authority on the far-more-sophisticated financial markets on which he was widely quoted. The self-confident forecasting style made him a hit in Japan, where Mr. Armstrong is now accused of bilking investors out of $950 million.
U.S. authorities accuse Mr. Armstrong of using his two companies, advisory firm Princeton Economics International Ltd. -- which has nothing to do with Princeton University but merely is based, like the university, in Princeton, N.J. -- and brokerage firm Cresvale International Ltd. of Asia, to sell Japanese investors securities with the promise of hefty returns.
Documents he used to sell his investments show that he promised buyers of his securities that a yield of 4% was guaranteed on the fixed-rate instrument, a strong selling point in a country where interest rates on government bonds are less than half that. Moreover, the securities were designed to offer further returns as high as 25%, depending on market conditions.
But one of the most controversial products he offered, according to officials in Tokyo, promised corporations that they could earn back the paper losses that have been sitting on their books since the crash in Japanese asset values earlier this decade. Mr. Armstrong held repeated conferences over the past four years at the Imperial Hotel in Tokyo, in which hundreds of Japanese corporate chieftans heard his market views; the talks whipped up interest in his products.
As proof of his acumen, he showed investors the returns he had delivered to earlier investors in his securities. He had delivered these returns, he told investors, by moving money around the world in a series of investments in stocks, bonds, currencies and commodities. What he didn't tell investors, federal prosecutors say, was that in recent months, the performance he boasted of was false.
Mr. Armstrong's bets on the markets increasingly began turning against him. The Securities and Exchange Commission says that from late 1997, Mr. Armstrong began to rack up increasingly big losses on large investments he made in currencies and options. Between November 1997 and August 1999, for example, SEC officials say Mr. Armstrong lost $295 million in trading the yen alone -- all money that belonged to clients. "In the wake of the discovery of the fraud," the SEC said in its civil complaint filed Monday, "Armstrong has transferred millions of dollars from Princeton Global accounts into foreign-bank accounts he controls." SEC officials declined Tuesday to disclose how much money Mr. Armstrong allegedly transferred overseas, or to what countries.
Officials at the Commodity Futures Trading Commission, which brought their own civil action against Mr. Armstrong, along with the SEC's, say Mr. Armstrong was trading in yen, crude-oil and precious-metals futures from a trading account segregated from various customer subaccounts. In August, he pulled money from the individual accounts to cover losses in the trading pool, says Daniel Nathan, CFTC deputy enforcement director.
"To the extent that the trading losses were passed along, the value of the individual collateral accounts was vastly overstated," says Mr. Nathan.
Yet all during the time when his alleged misdeeds took place, Mr. Armstrong continued to confidently sell himself as a forecaster of market trends, often in language in which he mocked others' mistakes. "The hedge-fund community has suffered huge losses this year in their futile attempt to sell the dollar against the Japanese yen," Mr. Armstrong wrote on his Web site (www.pei-intl.com) on May 13, 1999. "The old fundamentals must simply be thrown out the window."
The Japanese ate it up -- to their later regret. More than 80 Japanese companies are owed money by Mr. Armstrong, and whether they will ever be repaid is now in doubt. "He was very famous and his investment theory was coherent," said Kohichi Kiuchi, head of the accounting division at Amada Co., which invested in Princeton products. "But now, my impression on him is totally different."
What gave these investments added cachet was the fact that an official at the securities unit of Republic New York Corp., serving as custodian for Mr. Armstrong's trading accounts, issued letters that appeared to confirm huge profits on earlier investments. Mr. Armstrong, in turn, passed those letters on to Japanese clients as evidence of the huge returns on his products.
Attorneys for Republic told investigators that the head of the securities unit's futures division, William Rogers, based his confirmation of net asset values simply on Mr. Armstrong's instructions. Mr. Rogers "did not generally confirm the accuracy of the confirmation letters" by checking the accounts, according to the criminal complaint filed by federal prosecutors in New York. Mr. Rogers, one of two Republic employees suspended over the matter, couldn't be reached for comment. The SEC is now trying to determine who else at Republic was aware of the scheme, according to a person familiar with the investigation.
Meanwhile, law-enforcement authorities accuse Mr. Armstrong of running what is known as a Ponzi scheme: He "fraudulently used monies obtained from more recent" securities to "pay principal and interest due on older" securities, according to the complaint. Mr. Armstrong's lawyer, Marc Durant, won't comment on specifics, but says Mr. Armstrong is being made a "scapegoat" for wrongdoing at Republic's securities unit. Officials at Republic declined to comment.
Britain's HSBC Holding PLC said its plans to acquire Republic, announced earlier this year, may be delayed because of the affair with Mr. Armstrong.
Mr. Armstrong's reams of investing treatises, many posted on his Web site, range from the monetary history of Persia to the "panic cycle in global capital flows." The historical database maintained by Princeton Economic International has been used by many media outlets.
The "first and most important rule about investing is to 'Know what you are buying and why!' " he warned in a July 1997 report headlined, "What the Press Doesn't Tell You About This Bull Market in Stocks."
But several analysts say they were hesitant to follow Mr. Armstrong's analysis because of his heavy trading in the markets he covered. (Among other things, he is one of the biggest silver traders on the New York Mercantile Exchange's Comex division.)
"I basically would ignore him because I knew he had an inherent conflict of interest," says Gil Atzmon, portfolio manager for U.S. Global Investors.
In January 1998, when silver was rising sharply, Mr. Armstrong told the media he was contacted by a plaintiffs' lawyer pursuing a civil price-manipulation lawsuit involving that market. The rumors of the lawsuit slammed silver prices for a 3% one-day loss. At the time, Mr. Armstrong said his firm had a trading position that would rise in value as the price of the metal declined. Silver prices bounced back, and the lawsuit was eventually filed by silver-market investors and dismissed.
"We were asked our opinion if the market was being manipulated or not and is there probable cause to go ahead" with a suit, Mr. Armstrong told Dow Jones Newswires at the time. "Based on the evidence I have seen and research that we have done, the answer is yes." The CFTC investigated the silver-price spike in general but didn't bring a case.
On two previous instances, Mr. Armstrong did face CFTC scrutiny. In 1985, the agency lodged a complaint against him for allegedly not registering and maintaining proper investment records. Then in June 1987, the agency fined Mr. Armstrong $10,000 and suspended his trading privileges for a year for improper risk disclosure and misrepresentation of his trading returns; part of the complaint was related to advertising in a Princeton newsletter.
Geoffrey F. Aronow, a former CFTC enforcement chief, says the substance of the latest charges against Mr. Armstrong aren't unusual at the CFTC. Only the amount of money is.
Unlike other market participants Tuesday, Mr. Aronow wasn't shocked that such a small firm was allegedly involved in manipulating so much money. "If people are holding onto their positions in [a fund like Princeton], then it becomes like a bank and there's no event to call attention to fraud," Mr. Aronow says. "In that case, I'd almost reverse the question. How could anyone know?"
Mr. Armstrong's current troubles were foreshadowed 30 years ago. Barely out of his teens, the avid stamp collector in 1969 published an ad in a stamp journal claiming he had rare and valuable stamps for sale, including two 1904 stamps. "These were extremely rare stamps," Ken Lawrence, an authority on stamp collecting, says now.
A few months later, another stamp collector ran his own ad saying he had those same stamps in his collection, not Mr. Armstrong. The case remained a mystery for years until the second collector's stamps came on the market in 1996, revealing that the second collector had the stamps and not Mr. Armstrong. "One of the strangest episodes in the history of the stamp hobby may finally be put to rest," said an article in the January 1997 edition American Philatelist, a stamp-collectors' journal. Mr. Armstrong's attorney declined to comment on the matter Tuesday.
Despite the problem, and his eventual dismissal from the American Philatelic Society in 1972, Mr. Armstrong in subsequent years wrote and published three books on stamp collecting that would become authoritative texts for collectors. Now out of print, those three editions are themselves sold as collectors' items at stamp auctions.
Over the years, Mr. Armstrong has had his accurate calls on more-conventional investments. Until 1995, his prediction about the movement in various Japanese financial indexes proved fairly accurate, which helped fuel sales by his staff of eight employees at the Cresvale brokerage branch in Tokyo. He wasn't shy about promotion, jumping at the chance to have his picture taken with heavyweights in any market in which he was playing. Princeton Economics' Web site, which is filled with Mr. Armstrong's essays on the markets, shows a photo of Mr. Armstrong with former United Kingdom Prime Minister Margaret Thatcher at one of the firm's conferences in 1996.
Meanwhile, on the investment-lecture circuit, there apparently had been little inkling of Mr. Armstrong's impending arrest. Mr. Armstrong is scheduled to be one of the two keynote speakers at the Canadian Society of Technical Analysts conference Oct. 16-19. Larry Berman, president of the society and head of fixed-income research for CIBC World Markets, says he never has met Mr. Armstrong but has sometimes seen the Princeton Economics research.
"I've been told he is an excellent speaker, and he certainly has a wealth of knowledge," Mr. Berman said Tuesday. Mr. Armstrong will probably withdraw from the conference now, but if he decides to go through with it, Mr. Berman said, "That's great. If he comes, in my mind these are all allegations. Nothing has been proven."
The Wall Street Journal, Sept. 15, 1999 |
