HEDGE-FUND HOLD-UP By CHRISTOPHER BYRON
August 25, 2003 -- UNTIL now, most of the money lost in the collapse of Park Avenue's Lancer hedge fund empire was thought to have come from wealthy individuals such as pop tart Britney Spears and real estate magnate A. Alfred Taubman.
But the Post's continuing review of public records in the case shows that perhaps as much as $10 million has also been lost by none other than Connecticut's state pension fund, through investments in Lancer-controlled companies - via yet another hedge fund.
It's just one more sobering reminder of how little the public - or the regulators - really know about what goes on in this secrecy-shrouded world.
Hedge funds comprise the largest - and most rapidly growing - pool of unregulated capital on earth, and the collapse of the Lancer operation peels back the covers for the first time on what this business is actually all about: secrecy and deceit.
At a time when the thrust of public policy is to open up Wall Street to greater "transparency" so that everyday people can see what the pros are doing with their money, the hedge funds of Wall Street keep insisting - so far, successfully - that their business is somehow "different."
They insist on secrecy regarding what they buy, what they sell, and who their investors are. They say that because the law requires their investors to have net worths approaching $1 million before they are permitted to write a check, they obviously know enough about money to look out for themselves.
Really? How many of these genius investors know that, more likely than not, there is a fine-print clause in their investment contracts giving the fund's manager the right - should he decide to exercise it - to ignore the market value of what he has invested their money in?
When it comes time to report performance results, a fund manager can rely on the boilerplate language now routinely added to most hedge fund contracts, and simply dream up and report whatever numbers he wants.
What confidence can an investor have that his fund manager isn't doing this already? Can he rely on the fact that his fund's prime broker is a prestigious outfit like Bank of America Securities, or its auditor a white-shoe firm like PricewaterhouseCoopers?
These were the very institutions that stood guard to protect investors in the Lancer affair. Yet pie-in-the-sky valuations, made up by the head of the Lancer group, Michael Lauer, somehow managed to slip right by them. Somehow, for reasons that it still refuses to explain, PricewaterhouseCoopers looked right at a portfolio filled almost entirely with worthless penny stocks and pronounced it, astoundingly enough, to be worth $1 billion.
NOW, the Connecticut pension fund case shows how everyday people, who don't have anything even approaching a million dollars to their names, can nonetheless have their hard-earned money plucked from them as well.
The Lancer group, which claimed to have roughly $1 billion of assets under management at the start of this year, was shut down last month by the Securities and Exchange Commission after evidence surfaced that the funds' portfolios consisted almost entirely of collapsed and worthless penny stocks.
Court records and other documents show that two of those stocks - both tied to a twice-convicted organized crime figure named Abraham Salaman - attracted large investments of Connecticut state pension fund money, beginning in 1998, by way of yet another and seemingly unrelated hedge fund: Pioneer Ventures Associates.
Details of the Pioneer investments were first reported by the Hartford Courant newspaper in late 1999. But Pioneer's connection to Salaman and the Lancer fund, through a penny-stock promoter named John Ferraro, is only now becoming apparent.
Ferraro, who once ran a Toronto-based company called Stampede Investments that held stakes in a variety of doubtful penny stocks, launched a penny-stock investment firm called Pioneer Capital Corp. in Connecticut in 1988. Through Pioneer, Ferraro - along with the Lancer funds and their managing director, Michael Lauer - soon became involved in stocks tied to Salaman.
SEC documents show that Salaman is a major investor in Wall Street's crime-infested penny-stock market, operating through at least five identity-hiding front companies: Cherry Hill Inc., Meadowbrook Investments, Mountain Ranch Partners, Robsal Inc., and Trinity American Corp.
Court documents in Miami show that the entire claimed value of the Lancer funds amounted to roughly $600 million of worthless penny stocks when the funds collapsed this spring - and that much of that claimed value traced back to companies in which Salaman was an early investor. SEC records show that until this May, Ferraro was a director of the most overvalued asset in the Lancer portfolio: a Maryland shell company called Fidelity First Financial Corp.
THE Lancer Group itself was launched in 1994 by Lauer, a Ukrainian refugee-émigré to the United States by way of Poland. According to land records, Lauer maintains a residence in the town of Greenwich, Conn. - but he hasn't been seen in the area recently and is believed to be in Poland.
SEC filings and court documents show that both Lauer, through the Lancer funds, and Ferraro, through Pioneer Ventures, were early investors in a Salaman-controlled penny stock called NeuroCorp Ltd.
NeuroCorp's odd business strategy involved opening up a nationwide network of walk-in clinics to treat schizophrenia and other mental disorders. But few clinics were ever opened, and NeuroCorp's stock quickly became a plaything of the international penny-stock underworld.
Records show that Ferraro's Pioneer Capital venture fund, which raised a reported $37.7 million by selling a limited partnership stake in itself to the Connecticut State Pension Fund, poured $3 million of the money into NeuroCorp, even as the company's stock price was collapsing from $9 to 56 cents. NeuroCorp ceased filing financial reports to shareholders nearly three years ago.
Another early Lancer deal linked to Salaman - involving a company called American Interactive Media Inc. - sucked in even more Connecticut pension fund money via Ferraro.
American Interactive's ambitious goal was to launch the equivalent of a TV network over the Internet. But this, too, never got off the ground, and the company scarcely got going before it went out of business. Yet during that brief window of opportunity, Ferraro's operation was able to invest a reported $6.2 million more of Connecticut state pension fund money in American Interactive.
According to press reports, roughly $21 million of Connecticut state pension fund money wound up getting funneled by Pioneer into four separate penny stocks that collapsed in the wake of receiving the money.
A $21 million loss is obviously nothing to worry about in a more than $20 billion pension fund. But how many more - and perhaps bigger - losses are out there, waiting to erupt, not just in the pension fund of the State of Connecticut but in those of states, cities and corporations all across the country?
This is a situation that simply cannot be permitted to continue. The capital markets of this nation are too valuable - and the lifetime dreams and retirement plans of too many millions of people dependent on them - to leave them to the unsupervised marauding of white-collar felons and penny-stock hustlers.
America's markets do not belong to the hedge funds; they belong to everyone. Full and timely disclosure - of who actually owns and controls these funds, and what it is that they actually invest in - should be the minimum acceptable price for being permitted to invest in America at all.
* Please send e-mail to: cbyron@nypost.com |
