Waterford success story Buddy Fletcher accused of fraud
Waterford native Alphonse "Buddy" Fletcher Jr., once listed by Forbes magazine as one of the 20 wealthiest blacks in America and dubbed a "wizard" on Wall Street for achieving spectacular returns on hedge funds, is being likened these days to Bernie Madoff and is fighting to restore his financial reputation.
The main investment fund for Fletcher Asset Management is insolvent and in Chapter 11 bankruptcy, and the firm is under investigation by the Securities and Exchange Commission and the U.S. Justice Department, according to a Nov. 25 report issued by court-appointed bankruptcy trustee Richard J. Davis.
Three Louisiana pension funds and the Massachusetts Bay Transportation Authority retirement fund are seeking to recover more than $125 million they invested with Fletcher's firm based on the promise of high annual returns. The bankruptcy trustee's report indicates that in managing the hedge funds, Fletcher and other firm executives exhibited "a pattern of inadequate cash, inflated valuations, misuse of investor money, and flouting of fiduciary obligations."
"In many ways, the fraud here has many of the characteristics of a Ponzi scheme, where, absent new investor money coming in, the overall structure would collapse," according to the trustee's report.
Fletcher, 48, who has most recently been living in San Francisco with his wife and young daughter, is expected to dispute the trustee's report next week from the witness stand in U.S. Bankruptcy Court in Manhattan.
"It's really the first chance the Fletcher side has ever had in all these years to kind of tell their own story," said Warren Martin, an attorney representing Soundview Elite LTD, one of the debtors involved in the bankruptcy case, during a phone interview Thursday.
In an affidavit submitted to the court Wednesday, Fletcher vehemently disputes the trustee's conclusions and says the Louisiana pension funds would have more than doubled their money if they had not rushed to liquidate their investments upon receiving what he contends was false and defamatory information about his financial status. He also says he wants to help the clients resolve the bankruptcy claim to their advantage.
"I have never supervised anything even remotely resembling a Ponzi," Fletcher said in the affidavit. "I am not the black Madoff."
A recent story in the New York Post about the trustee's report said Fletcher "is looking more and more like Bernie Madoff." Madoff was convicted of operating possibly the largest financial fraud in U.S. history.
The trustee's report also indicates that Fletcher diverted some $35 million for his own use, including $8 million to fund a movie, "Violet and Daisy," that was being made by his brother, screenwriter and director Geoffrey S. Fletcher.
Additionally, the Internal Revenue Service has placed a $1.4 million federal tax lien on Fletcher for nonpayment of back taxes from 2010.
'Outstanding' Waterford kid
The Fletcher family name is associated in Waterford and throughout southeastern Connecticut with success, generosity and commitment to education. Fletcher's mother, Bettye Fletcher Comer, taught social studies and English in Ledyard before becoming a reading teacher and then a school social worker in New London. She also served as dean of students at New London Junior High School and principal of Winthrop Elementary School. She later was a principal and administrator in the Stamford school system, retiring in 1996. Fletcher's father, the late Alphonse Fletcher Sr., was a technician at Electric Boat.
During a brief phone conversation on Thursday, Fletcher's mother politely declined to comment on her son's financial problems.
"It's hard not to say anything," she said.
Fletcher, the oldest of three boys, was the class president of the Class of 1983 at Waterford High School and went to Harvard University on an Air Force ROTC scholarship. He majored in applied mathematics and during his senior year was elected First Marshal, which is Harvard's equivalent of class president. He served as an Air Force reservist for eight years and was honorably discharged as a first lieutenant in 1995.
Fletcher's younger brothers, Geoffrey and Todd, also graduated from Harvard. Geoffrey Fletcher, the screenwriter, won an Oscar in 2010 for the movie "Precious." Todd Fletcher is a musician and composer who founded PluralArts International, a nonprofit organization that encourages mutual understanding among people of diverse experiences through the arts.
Buddy Fletcher attended high school with the son of Waterford Police Chief Murray "Bud" Pendleton.
"I remember the young man being in Richard's class," Pendleton said. "He had an excellent reputation. He got a scholarship to Harvard and was one of those outstanding Waterford kids."
Pendleton was surprised to hear about the content of the bankruptcy trustee's report.
"Everything I know about the young man is pretty good, pretty positive," the police chief said. "It would be really unfortunate if this was even close to being true."
Other contemporaries of Fletcher's in southeastern Connecticut who were contacted for this story declined to comment, some saying he was a friend.
After graduation, Fletcher headed for Wall Street, where he worked for Bear Stearns and Kidder Peabody and quickly started making millions for his clients and employers. Fletcher left Kidder Peabody and sued the company for racial discrimination, saying the firm failed to pay him a promised $5 million bonus after the portfolio he managed realized a $25 million profit. The lawsuit was eventually settled for $1.26 million.
Fletcher founded his investment firm in 1991 and over the years shared the fruits of his success with various educational charities, giving away or pledging tens of millions. In 1993, he created the Fletcher Foundation with the purpose of helping "develop a more just society with more equal opportunities for more of the population."
Locally, Bettye Fletcher established a scholarship fund through the Community Foundation of Southeastern Connecticut in 1996, and she and her husband, renowned Yale child psychiatry professor James P. Comer, have added to the fund over time, according to Alison Woods, the foundation's director of gift planning. There are no outstanding pledges to the foundation from any of the Fletchers, according to Woods.
In 2006, Buddy Fletcher made a one-time contribution of $50,000 to the Dr. Martin Luther King Jr. Scholarship Trust Fund to jumpstart the fund's endowment, according to a spokesman for the board of trustees. There are no outstanding pledges from Fletcher to the fund.
Though Fletcher contends in his affidavit to the bankruptcy court that he has "never welshed on a charitable contribution," Harvard University might never see the $4.5 million he pledged to endow a chair in African-American studies called the Alphonse Fletcher Jr. University Professorship. According to court documents, Fletcher pledged shares of a company, Calgene, to fund the chair, but the company is now worthless.
Fletcher, in the bankruptcy court affidavit, maintains that Harvard was one of his first major clients at Fletcher Asset Management and that as a result of his investment strategies, the university has realized tens of millions of dollars in profits over the years.
'Overextended, highly leveraged'
The bankruptcy trustee's report indicates that the Fletcher funds have been in trouble since 2008, but the first indication that there might be financial problems came in 2010, when he attempted to buy a fifth co-op apartment in New York City's fabled Dakota apartment building. Best known as the home of former Beatle John Lennon, and the site of his murder in 1980, the Dakota, overlooking Central Park on the Upper West Side of Manhattan, is pricey and prestigious.
According to documents on file in New York's Supreme Court, Fletcher, who has owned apartments in the Dakota since the early 1990s and purchased a unit for his mother that was formerly owned by conductor Leonard Bernstein, applied to the co-op board to buy a neighboring apartment after the 101-year-old owner died. He planned to connect the apartment to his existing apartment, creating more space for his family.
When the board denied his application, he sued for discrimination and defamation. The court filings say that the board turned Fletcher down after determining he was "overextended, highly leveraged and at risk of needing to sell one or more of his Dakota apartments in a distressed situation that would adversely affect the value of Dakota apartments."
Fletcher had submitted to the board a financial statement that estimated his net worth at $80 million, but included only $50,000 in cash and indicated he had $20.8 million in debt, which the board determined was more than twice his income in each of the years 2007, 2008 and 2009. Fletcher had served on the co-op board for years, and his mother was on the board when he applied for the apartment.
The board contended Fletcher's business has been losing money and he had been funding his debt by making withdrawals from Fletcher Asset Management, including $1.8 million in 2007, $6.4 million in 2008 and $5.3 million in 2009.
In August, Fletcher listed one of his several properties, a castle in Cornwall, Conn., for sale for $8.85 million.
An unregulated industry
Osman Kilic, director of the Alternative Investments Institute at Quinnipiac University and an expert on hedge funds, said the fraud alleged in the bankruptcy trustee's report is small compared to the Madoff case, which involved billions.
"He (Fletcher) claims he's managing around $350 or $400 million, which is pocket change in the hedge fund industry," Kilic said.
Hedge funds, privately managed funds whose main investors are wealthy individuals and institutions, is a "mainly unregulated industry," Kilic said, and fund managers can move money offshore with the push of a button. Several of the Fletcher funds were based in the Cayman Islands. Unhappy with the Cayman Islands court proceedings in the bankruptcy case, Fletcher is now fighting to have the U.S. bankruptcy court resolve the pension funds' claims.
"The assumption here is that these are sophisticated investors who have the resources to do their due diligence," Kilic said. "They should know the risk they are getting into."
Fletcher contends in his statements to the bankruptcy court that the pension funds fully understood the risk they were undertaking and that had they not rushed to liquidate their funds, they would have doubled their money. The pension funds invested only a small percentage of their holdings with Fletcher, according to the court filings.
Fletcher also contends that the bankruptcy trustee did not fully understand the investment vehicles, which he says create "asymmetric risk exposure."
"This means that losses may occur frequently but are moderated or hedged, whereas gains, when they occur, can be extraordinary," says the affidavit.
Fletcher says his company's funds are driven by investor needs and structured by experts. He uses the example of a woman who owns two houses in an average beach neighborhood. As a major storm is brewing, he buys the first house from her for $300,000, paying her $50,000 more than the house is worth for the right to purchase the woman's other home at any time over the next 10 years at today's market price of $250,000. He also buys insurance on the house, to protect his $250,000 investment, thereby "hedging" his downside.
If the neighborhood becomes "hot" any time over the next 10 years, the value of the right to buy the house could be extraordinary. But if the neighborhood never improves, he's lost only the $50,000 that he overpaid on the first house.
"With 10 different neighborhoods and 10 such purchases, you have our portfolio in simplistic terms," he says in the affidavit.
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