$138M in ND investments frozen by fraud case

Federal authorities have frozen $138 million in North Dakota’s state pension and workers compensation funds, records show. They were invested in a management company whose majority owners have been charged with fraud.

Steve Cochrane, director of North Dakota’s Retirement and Investment Office, said Monday the funds could lose $14 million or more of the money, which was held by Westridge Capital Management Inc. of Santa Barbara, Calif.

The frozen amount makes up less than 3 percent of the state retirement office’s portfolio. Cochrane said the mishap would not affect the office’s investment procedures or its ability to make benefit payments.

Federal court and regulatory documents list Westridge Capital as one of several companies controlled by two men who were arrested last week on charges of conspiracy, wire fraud and securities fraud, filed by federal prosecutors in Manhattan.

Stephen Walsh, 64, of Sands Point, N.Y., and Paul Greenwood, 61, a resident of North Salem, N.Y. and supervisor of the town’s governing council, are both free on $7 million bond. Documents list the two men as owners of Westridge Capital Management and WG Trading Co. LP, based in Greenwich, Conn.

Federal prosecutors accuse the two men of taking $554 million of $668 million invested by charities, foundations and pension plans. A Securities and Exchange Commission complaint says the money was spent on multimillion-dollar homes, a horse farm, cars and collectible teddy bears.

North Dakota’s retirement office first hired Westridge Capital in 2000, after having the company vetted by a consulting firm and hearing praise for its work from a California county pension manager.

The retirement office’s annual report says it has paid Westridge more than $3.2 million in management fees in the last five years.

“Until now, we’ve never had any indication there was any impropriety whatsoever,” Cochrane said.

The Retirement and Investment Office oversees two large pension funds for North Dakota state employees and public school teachers, and smaller funds for Job Service North Dakota, Bismarck police officers and municipal workers in Bismarck and Fargo. The funds were valued at $3.47 billion last Sept. 30.

A separate insurance trust invests money for more than a dozen funds, from Workforce Safety and Insurance’s benefit fund to a fund set aside for cleaning up leaks from underground fuel tanks. It was valued at $1.44 billion on Sept. 30.

On Jan. 31, North Dakota’s pension and insurance investments with Westridge were valued at $161.3 million, said Connie Flanagan, a fiscal officer for the state retirement office.

Cochrane said the state demanded that Westridge return its holdings in cash on Feb. 18, after North Dakota officials learned of potential problems at the company. Only $23.3 million was returned.

The remaining $138 million was frozen, Cochrane said. He is unsure when, or if, the state will regain access to it.

“At this point, concrete information is not really available,” he said Monday.

Westridge ran an “enhanced indexing” fund that attempted to squeeze out better financial returns than funds that track the Standard & Poor’s group of 500 stocks.

The company attempted to profit from the difference in prices of the stocks themselves, versus the price of contracts to buy them in the future.

“The investment strategy itself is very sound, easy to understand and transparent,” Cochrane said. “If fraud did occur, it would be a case of stealing.”

The problems of Walsh and Greenwood began coming to light Feb. 12, when the National Futures Association, an industry group that regulates futures trading, suspended the two men and forbade them to solicit new customers.

NFA auditors discovered millions of dollars’ worth of the assets of companies controlled by the two men were promissory notes they had signed, an association compliance manager said in a sworn statement.

Two Pittsburgh universities, Carnegie Mellon and the University of Pittsburgh, sued Greenwood, Walsh and other defendants in federal court in Pittsburgh on Feb. 20 after learning of the NFA’s action, court documents say.

Carnegie Mellon had invested more than $49 million with the Westridge companies, and the University of Pittsburgh had invested more than $65 million, including $21.25 million the university had sent a week before its lawsuit was filed.

Last Wednesday, U.S. District Judge Terrence McVerry granted the two universities’ request for a temporary restraining order, freezing most of the assets of Walsh, Greenwood and the Westridge companies.

The Securities and Exchange Commission and the Commodity Futures Trading Commission followed up with civil lawsuits of their own in New York. Last Wednesday, U.S. District Judge George Daniels put a receiver in charge of the companies and the two men’s assets.