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Here's a follow-up from the NYTimes (courtesy of Walter Lake of another list). Martin has been making veiled comments about the authorities in Japan and the US out to get "legitimate" information providers etc. for quite some time now
http://www.nytimes.com/library/world/asia/091499japan-fund.html
September 14, 1999
Investment Manager Faces U.S. Charges of Bilking Japanese By GRETCHEN MORGENSON
s a global investment manager, Martin A. Armstrong had little trouble selling himself to sophisticated clients overseas. On the strength of a stellar performance record, an impressive Web site and his claims of running one of the world's largest economics advisory firms, he raised more than $3 billion from Japanese companies eager for American-style gains in their portfolios.
Now those companies are facing giant losses and probably ruing the day they heard of Armstrong's investing techniques.
Armstrong, 49, chairman of Princeton Economics International Ltd. and its Hong Kong brokerage subsidiary Cresvale International Ltd., surrendered late Monday to federal authorities in Trenton, N.J., and was charged with engaging in an enormous securities fraud that has resulted in more than $500 million in losses to investors.
According to a complaint unsealed Monday by Mary Jo White, the U.S. attorney for the Southern District of New York, Armstrong lied about returns he was generating in his customers' accounts and illegally pooled their money, essentially using funds raised from new investors to pay off older customers.
The fraud appeared to be a desperate attempt to hide massive trading losses. Indeed, Armstrong owes some $1 billion to investors, but prosecutors say only $46 million in assets remains in the accounts.
The alleged fraud occurred in accounts held by Republic New York Securities Corp., a subsidiary of Republic New York Corp., which also owns Republic National Bank of New York.
As the case is sorted out, Republic's planned merger with HSBC of London has been delayed. The bank is conducting an internal investigation into the management of its futures division, operated out of Philadelphia, where the accounts of Princeton Economics clients were held. The shareholder meeting to vote on the proposed merger has been postponed until Oct. 12.
Karen Ng, a spokeswoman for HSBC in London, declined to comment on whether the new developments would affect the planned merger. A spokeswoman for Republic New York declined to comment. The bank was not charged with any wrongdoing and has suspended two top officials of the securities subsidiary.
The lawyer representing Armstrong, Marc Durant, a partner at Durant & Durant in Philadelphia, said his client vigorously disputed the allegations and maintained his innocence.
"He definitely will fight this," Durant said. "He disputes how the fiduciary, which was Republic New York Securities, handled the funds and the accounts. He believes he's being made a scapegoat for honest, noncriminal trading losses." Although Armstrong concedes that there were substantial losses in the accounts, he disputes prosecutors' figure of $500 million.
The arrest of Armstrong is the latest piece of a puzzle that began to emerge in May when the Financial Supervisory Agency, Japan's securities regulator, surprised management of Cresvale's Tokyo offices with an audit of its accounts. Cresvale, which also has offices in London, New York and Sydney, Australia, was acquired by Princeton Economics International in 1995.
According to prosecutors, Cresvale raised $3 billion from investors on the strength of Armstrong's fictitious record as a money manager. An April 1998 announcement of a new hedge fund started by Armstrong, for example, put his firm's investment returns at more than 28 percent a year since 1992. Instead, prosecutors say, Armstrong lost hundreds of millions trading.
To hide his losses, Armstrong paid old investors with the proceeds raised by newer clients, a venerable type of fraud known as a Ponzi scheme. It was named for Charles Ponzi, an Italian immigrant to the United States, who swindled $15 million from 40,000 people after World War I. The people thought they were investing in postal reply coupons, but Ponzi actually pocketed most of the money, paying early investors with cash from new investors.
Armstrong, of Maple Shade, N.J., was released on $5 million bond on his signature. He did not return a telephone call to his office seeking comment. A secretary at Princeton Economics International in Princeton said no one was at the office late Monday afternoon to comment on the charges.
Prosecutors say that Cresvale sold what it called "Princeton Notes," backed by Princeton Economics International, to Japanese companies promising returns of at least 4 percent and the potential for much more. With interest rates in Japan far lower, the 4 percent returns were attractive. No one outside Japan, nor any individuals are known to have invested with Cresvale.
As of late August, there were 113 accounts managed by Princeton. Among the companies that had invested money with Princeton were Alps Electric Co., Chudenko Electronics Co. and Gun Ei Chemical Industry Co.
Bloomberg News reported Monday that Alps Electric said it might lose as much as $185 million in the current fiscal year because of its investment with Princeton. Shares of these companies and others that invested in Princeton Notes have fallen in Japanese trading in recent days.
Armstrong published journals and newsletters on financial subjects, giving him the patina of an intellectual. He was quoted in numerous publications, including The New York Times, on subjects ranging from projections on interest rates to the trading of foreign currencies and other commodities. He was a critic of the European monetary union, and commented on the silver market when Warren Buffett was buying silver last year.
In April 1998, he joined Magnum Global Investments to form a hedge fund offering institutions and wealthy investors access to what he called his market-forecasting expertise.
A promotion for the hedge fund stated that Princeton Economics could forecast trends on markets more accurately than other managers because of its economic model, "which provides specific forecasting on more than 30,000 economic and financial statistics worldwide." The model predicted the 1987 stock-market crash, the 1994 bond crash and the demise of the yen since mid-1995, according to the sales material.
But Armstrong had had run-ins with regulators before. In 1985, the Commodity Futures Trading Commission filed a complaint against Armstrong and three consulting companies that he ran for failing to register as commodity trading advisers and for not maintaining proper records.
Two years later, the commission filed a second complaint charging that Armstrong's company, Economic Consultants of Princeton, misrepresented hypothetical performance results and omitted a required disclaimer in its advertisements.
When he filed to overturn the commission's findings in U.S. appeals court, Armstrong claimed to have begun working at a coin and stamp dealership at age 13. He was a millionaire at 15, according to court documents, and opened his own collectors' store when he was 21.
In 1973 he began publishing commodity market predictions as a hobby. The appeals court upheld the commission's ruling. On a further appeal, the Supreme Court declined to hear his case.
Armstrong's link to Republic Securities appears to be James Curley, a director of Cresvale International, who was chairman of Republic Securities from March 1994 through June 1996. Since 1994, James Sweeney has been president of Republic Securities. On Sept. 1, he and William H. Rogers, president of the firm's futures division, were suspended by the bank pending the outcome of its investigation. The bank is cooperating with federal authorities.
According to prosecutors, the futures division of Republic Securities was dominated by Armstrong's trading, accounting for 90 percent of its business. Princeton may have opened accounts at Republic as early as 1995.
Prosecutors say that Armstrong conducted his fraud with the help of letters on Republic New York Securities stationery from Rogers; the letters inflated the values of customers' accounts. Authorities allege that when a customer wanted confirmation of his account's value, Armstrong would figure how much the client should have earned under its agreement with Princeton, and then request that Republic Securities issue a letter confirming that amount. Rogers would then provide Princeton with that letter.
If the actual balance in the investor's account was less than the figure supplied by Princeton, funds from other accounts were generally transferred to cover the shortfall, prosecutors said.
In addition to the criminal charges, the Securities and Exchange Commission filed a civil suit Monday against Armstrong and Princeton Economics International alleging securities fraud. The judge in the case froze the assets of both Armstrong and Princeton Economics International and appointed a receiver for the company.
The Commodity Futures Trading Commission also filed a complaint alleging that Armstrong defrauded customers through material misrepresentations. Neither Armstrong nor his firm was registered as a commodity trading adviser, as is required.
Ms. White said, in a statement: "This case should send the clear and concise message that those who commit securities fraud in the United States, even if they use offshore entities and victimize foreign investors, cannot escape responsibility for their actions.
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