Paradise Lost (Along With More Than $200 Million) in FloridaThe full article (which originally ran in the New York Times) appears here.
By Julie Creswell
The New York Times
August 15, 2005
On Feb. 24, Ronald Kochman hurried out of the elevator onto the 17th floor of an office tower in Florida that KL Group, a hedge fund advisory firm, called home. Normally bustling with activity, the place was eerily quiet that morning as Kochman strode past the elegant conference rooms toward his destination, the corner office of Won Sok Lee, one of the principals. Two days earlier, officials of the U.S. Securities and Exchange Commission had unexpectedly visited KL's offices, demanding to see documents. Now some employees were reporting that Lee was missing, along with nearly all the money in the firm's accounts.
Kochman, a prominent local trust and estate lawyer, had much to lose. Not only had he sunk his savings, about $4 million, into the funds; he also had put his reputation on the line by urging his own clients to invest with KL, where he had become a principal in early 2004. So when someone with keys to Lee's office asked him why he wanted to go in that morning, a tearful Kochman collapsed on his knees and said, "It's gone, it's all gone," according to a person who witnessed the event. "The money is missing, and Won has jumped ship."
Investigators now say they believe that more than $200 million of investors' money has vanished, possibly making this one of the largest hedge fund frauds ever. In March, the SEC sued Lee and two brothers, John and Yung Bae Kim, accusing them of securities fraud. Lee and Yung Kim have disappeared, and John Kim, who is cooperating with the investigation, denies any knowledge of wrongdoing.
The SEC, the Justice Department and a court-appointed receiver are still trying to unravel what happened. While the funds' managers blinded investors with records showing supposedly eye-popping returns, the money was actually being frittered away in bad trades or simply stolen, according to the court-appointed receiver, the law firm Lewis Tein. "These guys were slick," said Guy Lewis, a partner at Lewis Tein who was a federal prosecutor in southern Florida until 2002. "This wasn't just a straight fraud. It was hocus-pocus, smoke and mirrors."
This much is known: Three years ago, Lee and the Kim brothers opened a hedge fund advisory business in Palm Beach, Florida, one of the wealthiest enclaves in the United States. The three principals, all Americans in their mid-30s who were born in South Korea, befriended people who provided them with access to society functions and introductions to the wealthy.
The three drove flashy cars and led lavish lives. The aura of success and exclusivity around the firm was so strong that investors often begged to be let into its funds, some of which were said to have had astounding annualized returns of 125 percent for several years. Among the funds' 225 investors, according to people who have seen the lists, were some of Palm Beach's elite, including Jerome Fisher, founder of Nine West, a chain of shoe stores; Carlos Morrison, an heir to the Fisher Body automotive fortune; and the golf pros Nick Price and Raymond Floyd.
While Palm Beach is still abuzz about the collapse of KL, few investors want to acknowledge that they were caught up in the frenzy. The entrepreneur Donald Trump, who owns several properties in the area, said in an interview that he had been contacted about investing in the fund but had not, because he thought the returns were too good to be true. "These guys duped a lot of people down in Palm Beach, smart people with lots of money," Trump said. "These people feel they were conned, and they're embarrassed. They just don't want to talk about it."
A web of bank accounts has muddied the inquiry. What is clear, though, is that scores of well-heeled investors missed signs that things were not quite right at KL. It turns out, for example, that the fund's principals had little experience in the securities industry, and there was never a formal independent audit to verify whether the remarkable returns reported by the funds were real.
"Even if the guy running the hedge fund has a sterling 20-year reputation on Wall Street, a sophisticated investor who's going to put $20 million in that fund wants to see those safeguards in place," said Lewis Brown, counsel to a Palm Beach accounting firm that performed some services for one of the smaller KL hedge funds. "That didn't happen here."
Labels: Department of Justice