• Being Diligent

Case 006: WG Trading


Paul Greenwood and Stephen Walsh’s 13-year Ponzi scheme collapsed in Feb 2009 when NFA conducted the first visit since the SEC’s 1995 examination. WG Trading’s equity index arbitrage program successfully raised over a billion dollars through prominent institutional investors while Greenwood and Walsh used WG Trading as their own piggy bank account to support their luxurious lifestyles. Was it possible for a prospective investor to find any sign of their misconduct?

Case Profile:


In 1996, Paul Greenwood (“Greenwood”) and Stephen Walsh (“Walsh”) began soliciting through Westridge Capital Management, Inc.[1] (“Westridge”), a registered investment adviser, a number of institutional investors, including several educational institutions and public pension and retirement plans, by promising to invest their money in an “enhanced equity index” strategy, which involves purchasing and selling equity index futures and engaging in equity index arbitrage trading.

Westridge usually advised its investors to hold approximately 15-20% of their cash investment to support a leveraged futures position in the same amount as the investor’s cash investment. About 10% of the cash provided the required margin for the investment in the futures position and the remaining 5-10% of the cash provided an additional margin reserve. The remaining 80-85% of the investor’s cash investment was used for the enhanced index arbitrage program. Westridge’s investment goal was to generate 75 to 125 basis points in excess of whichever index is selected by the client after 0.25% annual management and 30% incentive fees.

Exhibit 1: How Does It Work?

Source: Submission by the CBS Master Trust Regarding Plan of Distribution,

SEC v. WG Trading, et al (2009), United States District Court Southern District of New York

In order to execute its equity index arbitrage program, Greenwood and Walsh established a broker-dealer called WG Trading Company LP (“WGTC”) while Westridge managed the leverage futures portfolio. Because WGTC is a broker-dealer, it could take up to 20 times leverage to generate higher returns.

Exhibit 2: Dual Structure

Source: Submission by the CBS Master Trust Regarding Plan of Distribution,

SEC v. WG Trading, et al (2009), United States District Court Southern District of New York

What was unique about this investment program was that investors were offered three different options to participate:

  1. An investor could directly purchase a limited partnership interest in WGTC;

  2. An investor could purchase a promissory note from WG Trading Investors, L.P. (“WGTI”), another Westridge entity which was a limited partner of WGTC, which paid interest at a rate tied to the performance of WGTC; or

  3. An investor could purchase shares in a “feeder” fund, which in turn would purchase a promissory note from WGTI.

Exhibit 3: Three Options to Participate

Source: the author, created based on publicly available information

Through January 2009, Greenwood and Walsh raised over a billion dollars from large institutional clients, including pension and endowment funds, and Westridge’s AUM reached $1.8 billion.

Exhibit 4: Asset Under Management

Source: SEC’s Investment Adviser Search, as of January 29, 2009

Their success was not surprising as Westridge continued delivering promised returns with low volatility. From 1997 through June 2008, Westridge’s investors generated 19.1% excess return (or 153 bps annually).

Exhibit 5: Westridge’s Successful Track Record

Source: Kern County Employees’ Retirement Association Declaration of Noel C. Cohen in Support Thereof, SEC v. WG Trading, et al (2009), United States District Court Southern District of New York; The above table and chart were reproduced by the author

Both Walsh and Greenwood enjoyed a luxurious lifestyle. They became minority owners of the New York Islanders, a professional hockey team, in the 1990s. Walsh served as a member of the Board of Governors of the National Hockey League from 1991 to 1998. In 1984, Greenwood bought Old Salem Farm, a 54-acre riding school and horse farm, from Paul Newman and his wife, and amassed a world-class collection of more than 1,300 stuffed animals.


On February 5, 2009, the National Futures Association, an independent self-regulatory organization, commenced an audit of WG Trading. It was the first audit since 1995 when the Securities and Exchange Commission conducted a broker-dealer examination. During the audit, NFA obtained financial information for the feeder fund, which purchased $325 million of promissory notes from WGTI as of December 31, 2008. NFA further requested a financial record of WGTI, which had approximately $812 million and invested only $93.8 million in WGTC.

Exhibit 6: Missing $718 mm

Source: created by the author based on NFA’s Notice of Member Responsibility Action

Under NFA Compliance Rule 3-15. NFA Case No. 09-MRA-002

Deborah Duffy (“Duffy”), CCO of WGTC, told NFA auditors that WGTI’s assets include a $292.8 million “note receivable” from Greenwood and a $260.7 million “note receivable” from Walsh. Duffy also represented that another $147 million of the assets are investments in two entities owned by Walsh and Greenwood.

On February 25, 2009, the Commodity Futures Trading Commission and SEC announced that they charged Walsh and Greenwood with misappropriating at least $553 million with entities they owned and controlled, including Westridge, WGTI and WGTC. According to the investigation, both Walsh and Greenwood used the scheme as their personal bank accounts to pay for their personal expenses. They also made several unauthorized investments in companies, such as Signal Apparel Company, through the entities controlled by them. Deborah Duffy, 54, worked for 18 years for Walsh and Greenwood, was also charged as Duffy took $292,000 of investors’ money for herself and approved the money being transferred “to my bosses’ benefit as loans” and caused investors to receive false information, which I knew was against the law.”

Robb Evans & Associates, LLC was appointed as a receiver by the court and all assets held by Westridge, WGTI, WGTC and other entities were liquidated. On March 21, 2011, the first distribution of $815 million was approved and another distribution of $40 million is expected in 2012. For the total net investments of $960 million of all victims, the expected returns are -15.06%.

Exhibit 7: Net Investments and Distributions

Source: Author, the above table was created based on Notice of Motion and Motion for

Order Approving Second Distribution on Allowed Investor Claims: Memorandum of Points and Authorities in Support Thereof; and Declaration of Brick Kane in Support Thereof, March 8, 2012, CFTC v. Westridge Capital Management, et al. (2009) and SEC v. WG Trading Investors, L.P., et al.

Exhibit 8: Victims in the WG Trading scheme

Source: Various court and media documents


Stringent review of the valuation process is required especially if the investment strategy is involved with a promissory note.

  • While promissory notes can be legitimate investments, these that are marketed broadly to investors often turn out to be scams. Since it is a privately negotiated instrument, it is extremely difficult to verify its value for investors.

  • WG Trading’s scheme to use a promissory note, instead of direct purchase of partnership interests is unusual and unjustifiable for hedge funds.

Exhibit 9: Actual Promissory Note Issued for the University of Pittsburgh

Source: University of Pittsburgh’s Investor Proposal For Distribution, Oct 22, 2010,

CFTC v. Westridge Capital Management, et al. (2009) and SEC v. WG Trading Investors, L.P., et al.

Avoid investing in a scheme not monitored by a third-party agent

  • There is no evidence showing that any administrator was hired for WG Trading’s scheme.

  • The usage of a promissory note as a way to participate in the program probably helped Westridge to avoid using an administrator

Always confirm that an annual audit by a reputable audit firm has been conducted on the entity in which you are invested

  • There is no evidence showing that any annual audit was conducted for WGTI or other feeder funds. WGTC, a broker-dealer, was the only entity with an actual audit record by Deloitte.

  • There were certain issues with the annual audit conducted by Deloitte, but investors should have avoided investing or lending money to the entities, which do not provide verifiable financial information. Some investors in WGTI agreed to purchase the promissory notes relying on the audit on WGTC.

Fully understand the implication shown on financial statements

  • As a broker-dealer, WGTC is required to file its financial information and its annual reports are available on the EDGAR from 2001 to 2007.

  • WGTC’s financial statements show extremely high leverage, which should be regarded as a yellow flag for potential investors.

Exhibit 10: WGTC’s High Leverage

Source: the author, the above chart was created based on WGTC’s financial statements filed with the SEC

  • As a regular customer of a brokerage firm, an investor should be subject to Regulation T, which restricts the degree of leverage the brokerage firm can extend up to 50% (See http://en.wikipedia.org/wiki/Regulation_T). WGTC effectively allowed its customers to bypass this regulation as the customers became limited partners of the firm.

  • A SEC examiner testified that “The registrant has clients invest directly in an affiliated broker-dealer as limited partners which is one of the oddest arrangements I’ve ever seen. They do this to avoid Reg. T, also very odd.” (Source: SEC Report of Investigation. Case No. OIG-533)

Do not underestimate “red flag” findings

  • Wilshire Associates, Inc., a well-known consulting firm for institutional investors, conducted due diligence on WG Trading for its client Kern County Employees’ Retirement Association.

  • Despite those concerning findings, approximately one year later, on October 14, 1998, Wilshire recommended in writing that its client should increase its investment in WG Trading.

  • It is difficult to know the actual reason why Wilshire failed to conduct further review, there were at least several visible concerns for WG Trading’s operations as early as 1997. It is not always easy to act on the red flags, but Wilshire’s further investigation could help its client to minimize its exposure to WG Trading.

On or about October 29, 1997, after a “due diligence visit” at WG Trading’s offices, Wilshire identified areas of concerns, including – “The firm does not possess the same substance as the other investment advisors;”

  • “The firm has limited staff and the spread-out nature of the offices is difficult to understand;”

  • “The firm is low key and managed in a lean manner which may be interpreted as a lack of professionalism;”

  • “WG Trading has been reluctant to disclose the names of the organization that provide capital to the firm;”

  • “Lack of monthly reporting from the custodian;”


“Ex-North Salem Supervisor Paul Greenwood indicted in $554M investment fraud”, The Journal News, July 25, 2009, http://www.robbevans.com/pdf/wgtradingtjournal072509.pdf

“Ex-WG Compliance Chief Duffy Pleads Guilty in Fraud”, Bloomberg, July 21, 2009, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aBB54VFyLv9Q

“BUSINESS PEOPLE; Outsider Is Brought In To Run Signal Apparel”, New York Times, May 2, 1990, http://www.nytimes.com/1990/05/02/business/business-people-outsider-is-brought-in-to-run-signal-apparel.html

“Deloitte & Touche Sued in New York Over WG Trading Fraud”, Bloomberg, Mar 23, 2012, http://www.bloomberg.com/news/2012-03-23/deloitte-touche-sued-in-new-york-over-wg-trading-fraud-1-.html

“Ex-WG Trading employee pleads guilty in NY court”, Reuters, Jul 21, 2009, http://www.reuters.com/article/2009/07/21/us-wgtrading-plea-idUSTRE56K4ZI20090721

“Scrum over $815 million grows more intense”, Pensions & Investments, Jun 27, 2011, http://m.pionline.com/article/20110627/PRINTSUB/306279975

Robb Evans & Associates LLC, “Report of Temporary Receiver’s Activities February 25, 2009 Through May 22, 2009”, May 27, 2009, http://www.robbevans.com/pdf/wgtradingreport01.pdf

Robb Evans & Associates LLC, “Report of Receiver’s Activities May 25, 2009 Through May 28, 2010”, June 3, 2010, http://www.robbevans.com/pdf/wgtradingreport02.pdf

National Futures Association, Notice of Member Responsibility Action Under NFA Compliance Rule 3-15, NFA Case No. 09-MRA-002. http://www.nfa.futures.org/BasicNet/CaseDocument.aspx?seqnum=1854

U.S. Securities and Exchange Commission v. WG Trading Investors, L.P., WG Trading Company, Limited Partnership, Westridge Capital Management, Inc., Paul Greenwood and Stephen Walsh (2009). U.S. District Court for the Southern District of New York

Commodity Futures Trading Commission v. Stephen Walsh, Paul Greenwood, Westridge Capital Management, Inc., WG Trading Investors, LP, WGIA, LLC (2009). U.S. District Court for the Southern District of New York

Iowa Public Employees’ Retirement System v. Deloitte & Touche LLP (2012), U.S. District Court for the Southern District of New York

[1] Westridge Capital Management, Inc. was formed as a Delaware corporation in October 1983 by Greenwood, Walsh, and James Carder (“Carder”). Stock ownership was distributed 51% to Greenwood and Walsh and 49% to Carder. In January 2000, Greenwood and Walsh resigned as directors of the company, although the ownership percentages did not change.

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