The One With A Cascade of Bad Choices

Rusty Tweed may have been trying to make good investments for his clients. He knew a guy that had a new quantitative trading strategy for blue chip stocks. Rusty raised money form his clients to invest with the quant manager.

Problems started right at the beginning, according the complaints filed by FINRA and the Securities and Exchange Commission.

Tweed could not open the brokerage account because of financial arbitration complaints against him. Instead of opening the account, he created a feeder fund to invest in a master fund that would be invested by the quant manager.

Tweed raised $1,635,000 from 23 of this clients. However, the PPM for the fundraising failed to disclose the fees charged by the quant manager. FINRA also decided that Tweed should have disclosed that he had to set up the feeder/master structure because of the disciplinary problems. I guess that it did not work in the real world.

The quant manager’s strategy apparently didn’t work and Tweed withdrew the money. That quant strategy was theoretical and based on backtested performance. The strategy was still in the testing mode when Tweed made the investment.

After the quant strategy, Tweed sent the cash to QAMF as a replacement master fund. Tweed failed to update the PPM to describe this new strategy and apparently failed to tell his existing investors about the change. QAMF was also more expensive, taking a 3.5% annual fee and 20% of the profits.

Six months later, Tweed felt that QAMF was under-performing and asked for a return of capital. QAMF was willing to return 2/3 of the capital, but 1/3 was invested in an illiquid asset. That turned out to be an investment in a gold venture in Ghana. Rather than being honest with investors, Tweed merely told them that the “the money was locked up for another year.” QAMF transferred the investment directly to Tweed’s fund.

Tweed failed to write down the value of the Ghana gold for two years and then only partially. Tweed has not recovered anything from that investment.

A year later, still stuck with gold investment, the principal behind QAMF was arrested for bank fraud charges and plead guilty.

Of the 2/3 returned to Tweed’s fund, he caused $200,000 to be invested in a software company owned by a friend that was to pay 18% interest quarterly. None of the interest was paid, nor was the loan re-paid before the software company went into bankruptcy. Tweed never disclosed the bankruptcy filing to fund investors.

Tweed had issued financial statements to investors that showed positive returns. Tweed allowed investor redemptions at the inflated values. One of those was Tweed’s profit sharing plan, benefiting Tweed and his employees. Tweed began to prioritize redemptions over others, allowing his family members to redeem.

Tweed was hit by a state regulator with a deficiency letter for failing to issue audited financial statements.

The SEC commenced an examination of the investment advisory firm that Tweed was associated with. During the exam, the IA’s CCO discovered Tweed’s misconduct. The CCO ordered corrective action be taken. According to the SEC’s complaint, that corrective action was incomplete and failed to fully disclose the problems.

That is a long list of poor decisions and misconduct piled on top of poor decisions and misconduct.