Investment Manager Was Just Waiting For The Right Time To Tell Client About The $3 Million He Stole

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It's kind of old news but today's SEC suit against MayfieldGentry Realty Advisors is still pretty amusing. Basically MayfieldGentry was a registered investment advisor with $750mm of AUM at its peak, something like $140mm of which belonged to its biggest client, the city of Detroit's Police and Fire Retirement System. You get the sense that MayfieldGentry wasn't a very good investment advisor; in particular it got the PFRS account through a massive bribery campaign directed at Detroit officials some of whom are now in prison for those and other massive bribery campaigns. Lotta bribery. But anyway against that backdrop what MayfieldGentry is now accused of doesn't seem that bad:

In early 2008, [CEO Chauncey C.] Mayfield, on behalf of MGRA, secretly stole approximately $3.1 million from the PFRS to purchase two shopping malls in California. ... Over the following months and years, as each of the other MGRA principals learned of the theft, they conspired with Mayfield to keep the theft a secret from the PFRS.

Ha well no of course that sounds bad. I mean, stealing. But actually "stole" and "theft" are perhaps slightly strong words for what happened. I can't tell exactly what's going on, and I suspect neither could anyone at MayfieldGentry, but from the complaint it sounds like they genuinely intended to invest client money in those strip malls, but were so used to being corrupt and/or inept that they couldn't get it together to do that the right way, and so ended up (1) taking PFRS money without permission and (2) owning the California strip malls themselves. And you should have seen the look on their face etc.:

In late March 2008, [CFO Blair D.] Ackman reviewed the closing documents from MGRA’s purchase of the California Properties to confirm that the closing documents reflected the appropriate ownership of the properties. ... In reviewing the closing binder, Ackman noticed that the closing documents did not indicate that the PFRS owned the California Properties. MGRA was still listed as the owner.

Ackman asked Mayfield why the PFRS was not listed as the owner – to which Mayfield responded that he “ran out of time” to get the purchase approved by the PFRS.

Ackman asked Mayfield what they were going to do, to which Mayfield replied that he was looking for high net worth investors to “take the PFRS out of the deal.” ... During the following three months, Ackman followed up with Mayfield on a monthly basis regarding the California Properties. Mayfield’s only response was that he was “working on it.”

It didn't work though, because, as the SEC puts it, "the U.S. real estate market collapsed," and California strip malls weren't worth what they used to be. So, like so many financial fraudsters before them, MayfieldGentry just got very very quiet about the missing $3.1 million and tried to find other ways to make it up. But whereas other fraudsters tend to turn to Ponzi schemes or elaborate fake bond markets to make up missing funds, MayfieldGentry went a different way. They tried nothing, basically:

From 2008 through 2011, Ackman and Mayfield discussed setting aside money or selling company assets to pay back the PFRS, but they never arrived at a successful strategy. ... The MGRA principals decided to fire the company’s travel coordinator to save money. Mayfield agreed to cut his own salary by $100,000, but he rescinded this offer after a month or two. In September 2011, despite the discussions of cost-cutting, Mayfield directed MGRA to hire his son and daughter to work at the company at annual salaries in excess of $100,000 each.

Is that not endearing? They spent three years trying to think up ways to the money they had kinda-accidentally kinda-stolen from their client, and the best they came up with was taking a pay cut for "a month or two" and replacing one employee with two overpaid family members of the CEO. A lesson here may be that nepotism is as unhelpful for financial fraudsters as it is for, like, real businesses.

Eventually, in April 2012, they confessed. By fax. They confessed by "fax[ing] an undated letter to the PFRS." Again: in 2012. I guess that's probably how I would confess to a long-running financial fraud too?

At that point it was a bit late: the money was gone, the malls were crap, they'd lied to PFRS a bunch of times over four years,1 and were on the eve of being charged with the bribery thing. The PFRS fired them and sued, all their other clients fired them, they eventually sold the strip malls and returned about $1.1mm of the $3.1mm they took, and I guess someone alerted the SEC.

Today the SEC sued, and "Mayfield and his firm agreed to settle the charges by paying back the stolen amount." Which is not typically how stealing gets resolved! You could characterize what happened here in a number of ways, ranging from "MGRA's recordkeeping and investment-approval functions were not entirely up to challenge of managing a sophisticated investment advisory business" up to "they straight-up stole $3.1 million," but the SEC's repeated characterization of the case as theft is at odds with the no-punishment settlement it agreed to:

Mayfield and his firm agreed to pay disgorgement in the amount of $3,076,365.88 and be permanently enjoined from violating Sections 206(1) and 206(2) of the Advisers Act. They neither admit nor deny the allegations in the settlement, which is subject to court approval. In a parallel criminal matter, Mayfield is awaiting sentencing in connection with his guilty plea for participation in the pay-to-play scheme.

I guess "also stole $3 million" isn't going to help Mayfield on his bribery sentencing but still. The SEC gets shit for settling cases for nine-figure fines when the defendants "neither admit nor deny" the allegations; you'd think that if they wanted to get court approval for a no-admit, no-deny, no-punishment settlement they'd tone down the rhetoric about stealing. "MayfieldGentry basically had no idea what they were doing, cut a lot of corners, and ended up losing a client $2 million and lying about it - so we're making them give it back" would probably have been fine, no?

SEC Charges Top Officials At Investment Adviser in Scheme to Hide Theft From Pension Fund of Detroit Police and Firefighters [SEC, and complaint (pdf)]

1.Each of which the SEC obsessively documents:

MGRA made its 2012 budget presentation to the PFRS board on December 15, 2011, after all of MGRA’s principals had learned of the $3.1 million theft. Mayfield, Ackman, Bass, Matthews, and Diaz all attended the meeting and participated in briefing the PFRS Board. ...

Among other things, the PFRS trustees asked questions about whether MGRA calculated a “return on investment” for each property, or for the entire PFRS portfolio. Matthews explained that MGRA calculated an “internal rate of return” (“IRR”) for the PFRS portfolio, and that it was currently 6.8%. [CIO W. Emery] Matthews explained that the portfolio had “exceeded relevant benchmarks,” such as the National Council of Real Estate Investment Fiduciaries benchmark. Neither Matthews nor any of the other MGRA principals explained that the 6.8% IRR would be materially impacted if it took into account the $3.1 million theft.

I enjoy the SEC's old-fashioned view that if you secretly steal from someone you have to mention it to them every time you see them. Imagine if they'd actually caught Bernie Madoff! "On May 13, 2004, Madoff saw ______ at a charity event. At no point during that event did Madoff mention that he'd been running a multibillion dollar Ponzi scheme. On May 14, 2004, ..." Etc.

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