We posted about this Alphonse Fletcher Jr. character filing an discrimination suit against his co-op earlier this year, but now the Wall Street Journal has turned the magnifying lens on him, essentially accusing “Buddy” of some shady business practices!
What exactly did he do? Well to be specific, in 2008 Fletcher promised three Louisiana pension boards a 12% return on their investments through his Asset Management company’s funds. Fletcher further reassured the boards by promising that other investors could cover any loses.
Here are some details from the WSJ expose:
In an interview, Mr. Fletcher said the Income Arbitrage Fund was designed to deliver “consistent above-average results.” Its underlying investments represented a “well-hedged and consistent portfolio,” he said, and the preferred-share structure brought “even more protection” from volatility.
Mr. Fletcher acknowledged the “complexities” of his business, saying they are “an important benefit and are well disclosed.” Still, he said, he has recently sought to make things less complex. He dropped the preferred-shares arrangement for the Income Arbitrage Fund at the end of 2008. Its returns then became much less steady.
Other elements of complexity remain. The firm has about 17 funds. “Feeder funds,” some tiny, invest in the primary investment vehicle. The smaller funds also invest in one another. They can lend to one another or to the master fund.
Fletcher reported to the Securities and Exchange Commission a 2009 year-end total for assets under management of $558 million. Yet its primary investment vehicle held just $187.8 million of securities, according to the firm’s financial reports. And these made up 95% of the firm’s market investments, according to a Fletcher consultant’s report filed in a New York state court.
This would translate to a 2009 year-end total for the firm’s market investments of about $198 million, more than half of it the Louisiana pension funds’ money.
The SEC is less than crystal clear about how managers should calculate assets under management. It says to “include the securities portfolios for which you provide continuous and regular supervisory or management services.”
A lawyer who supervises Fletcher’s SEC filings said it “should be appropriate” to include the value of each feeder fund in the asset total. That is because each fund is actively managed and can invest in outside securities, said the lawyer, Rick Prins of Skadden, Arps, Slate, Meagher & Flom.
Mr. Fletcher gave an example: If investors put $2 in one Fletcher fund, and this fund borrowed $1, and then put the money in a second Fletcher fund, that would make $5 the firm managed, he said.
Mr. Fletcher said his firm is “meticulous” in reporting assets under management, complying with regulatory guidelines, and that its marketing materials explicitly disclose how it calculates. Asked for such disclosures, the firm didn’t supply any documents.
Securities lawyers who were asked for an opinion said the approach described by Messrs. Fletcher and Prins, while not unheard of, differs from common industry practice.
Some potential investors and consultants said they saw the firm’s complexity as a red flag and felt they couldn’t get a clear picture of what it does.
Mr. Fletcher, 45 years old and known as “Buddy,” opened his firm in 1991 after rising as a stock trader at Kidder Peabody, a now-defunct firm from which he won $1.3 million in an arbitration over the size of his bonus. He lost a second arbitration in which he claimed racial bias.
Questions about his finances have arisen in a suit he filed against the famed Dakota cooperative apartment complex at New York’s Central Park, where he owns several apartments.
Mr. Fletcher accused the co-op board of unfairly rejecting his request to buy an additional apartment and alleged racial discrimination. The board’s response in New York state court said documents provided by Mr. Fletcher showed his business lost money in two recent years. Mr. Fletcher said the documents didn’t adequately reflect his income.
In Louisiana, the pension boards were told there were other investors in the particular fund pitched to them, investors who had put in money and agreed to leave it there a long time. Their money could be drawn upon, if necessary, to make sure the pension boards got at least a 12% return. The other investors would be entitled to any fund returns above 18%.
In a March 2008 email to one pension executive, Denis Kiely, a former Fletcher deputy chief executive, called the 12% arrangement a “preferred return guarantee.” Asked about that, Mr. Kiely said his use of the term “guarantee” was “colloquial” and not meant within “the legal definition.”
Mr. Fletcher said it would be “incorrect to say” Fletcher offered a guarantee because the pension boards still faced some risk, just as bondholders do.
Financial statements show the Louisianans were credited with their 1%-a-month returns in 2008—even as other classes of shareholders had losses ranging from 30% to 38%.
Starting last year, the pension boards grew concerned that they hadn’t gotten a 2009 audit for their fund. Mr. Fletcher blamed the delay on a restatement of earlier years’ results and said a new auditor is working to complete the audit.
In March, two of the pension boards, which still haven’t received the 2009 audit, asked for $32 million of their money back. When the Fletcher firm instead sent them promissory notes, it said it was permitted by the terms of the fund offering to pay redemptions either in cash or “in kind.”
Charlie Fredieu, chairman of one pension fund, the Firefighters’ Retirement System of Louisiana, said he was “concerned” about this. The Municipal Employees’ Retirement System of Louisiana, which also got a promissory note, didn’t respond to a request for comment on the redemption. Meanwhile, the third pension fund, the New Orleans Firefighters’ Pension and Relief Fund, said last week it had decided to seek a withdrawal, as well.
We’re no math experts but something ain’t adding up. At the same time we always gotta remain skeptical when it comes to the media crucifyin’ a ni**a. You know how they do.