650 5th Avenue has had an unusual and rather chequered history. The mid-town Manhattan skyscraper was built in the 1970s by the Pahlavi foundation - a non-profit charitable organisation associated with the Shah of Iran.
Now for James and Hunter Biden, the brother and son of the US Vice President Joe Biden, the 17th floor of 650 5th Avenue is proving problematic.For nearly twenty years, Paradigm, a fund of funds the Bidens’ purchased in 2006, has had its offices on the 17th floor. In 2007, Paradigm sub-let some of its office to a new tenant.
And on Monday this week, the SEC charged Ponta Negra Group - the Bidens’ tenant - with orchestrating a multi-million dollar investment fraud. In its complaint, the SEC alleges that Ponta Negra and its principal, Francesco Rusciano, misrepresented returns virtually since the fund’s inception in 2007.
At one point, says an affidavit from the regional SEC director seen by FT Alphaville, the fund was nearly completely wiped out: “But for a $73,000 deposit that month [July 2007] the account would have had a market value of zero.” At the time, Ponta Negra’s clients understood the market value of their funds to be in the tens of millions.
FT Alphaville readers might well already have seen John Hempton’s intriguing blog posting on Ponta Negra and its connections to Paradigm, which he put up on his blog, Bronte Capital, earlier this week. As he notes, there are a series of rather convoluted links between the Biden’s fund and Ponta Negra. Teasing them out makes for interesting reading.
FT Alphaville has been exploring the links on the 17th floor of 650 5th Avenue for some time too: Bronte drew our attention to them when he first published questions he had about a then-unnamed hedge fund several weeks ago.
Now, discussions about those links have sprung up in several places around the blogosphere: most notably with Felix Salmon at Reuters, Ben Smith at the Politico and Ryan Chittum at CJR.
The sub-letting of Paradigm’s office space “was and is the extent of the relationship” between Paradigm and Ponta Negra, directly, according to Marc LoPresti, a spokesperson for Paradigm.
But as a lot of digging, and further conversations with Mr LoPresti revealed, there are nevertheless other links - via some rather difficult-to-pin-down third parties.
There is a common link that ties Paradigm, Ponta Negra and even Stanford Capital Management (one of the entities in the alleged Stanford ponzi scheme): Jeffry Schneider, and the firm he runs, also from the 17th floor of 650 5th Avenue, also sub-let from the Bidens, Onyx Capital.
There is no grand conspiracy theory here - or indication of wrongdoing on the Bidens’, Paradigm’s or Schneider’s part - but there are a series of interesting relationships perhaps worthy of exploration.
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Until 2007 Jeffry Schneider was the head of marketing for the Bidens’ Paradigm funds. He and a small team under him were responsible for soliciting new investments and managing relationships with existing clients.Schneider had been with Paradigm since 2004, having previously worked at CIBC Oppenheimer and Axiom Capital Management. While still working for Paradigm as head of marketing, in 2006 he set up his own separate firm, Onyx Capital, which he also ran from the 17th floor of 650 5th.Onyx describes itself as an investment adviser, though it is not registered as one with the SEC. From what we can determine from its website (now removed from the web) it acted as a placement agent, collecting fees for matching investors to funds.FT Alphaville could not reach Mr Schneider for comment; emails sent to his Onxy Capital address bounced back.An online autobiography describes his job at Onyx as follows: Jeffry Schneider leads a team that works closely with broker/dealers, registered investment advisors, and financial planning firms as well as funds-of-funds, private banks, and family offices to help the clients of these firms find leading managers in the alternative investment space - managers who would not, without this service, be readily available to new investors. Schneider’s FINRA broker report states he is a registered broker and consultant with two other firms: Puritan Securities and IMS.
Puritan and IMS are both privately owned by unaffiliated parties.
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Via Jeffry Schneider, the Bidens, and Paradigm have two things to regret: links to Ponta Negra is one. Links to Stanford Capital Management is the other.In 2007, Schneider left Paradigm. In a “mutually agreed” arrangement, according to Paradigm spokesperson Marc LoPresti, Schneider - and Onyx Capital - were retained, however, as the marketing agents for the Paradigm funds. Other employees of Paradigm joined Schneider’s new venture.The relationship, though not exactly cosy, wasn’t exactly what you might call sequestered.Schneider and Onyx continued to operate from the Paradigm offices. They continued to be described by outsiders as Paradigm’s marketers. And they led Paradigm into relationships - albeit indirect ones - with Stanford Capital Management and Ponta Negra.It was Schneider, according to Mr LoPresti, who introduced Paradigm to the Stanford Financial companies- an introduction that would lead to the establishment of a co-branded fund, the Paradigm Stanford Capital Management Core Alternative Fund.
Mr LoPresti told FT Alphaville that while Paradigm had no strong connections with top-level executives at Stanford, Paradigm - often via Schneider - did communicate quite regularly with Stanford brokers and spokespeople. Onyx itself was close to some Stanford brokers. One, Justin Hare, even left Stanford to start working for Onyx - managing the investments in the co-branded fund with Schneider. Onyx collected fees for the investments that were referred from Stanford clients to the co-branded fund. Jeffry Schneider and colleagues at Onyx were the exclusive marketers for the co-branded Stanford/Paradigm fund.
The Paradigm/Stanford relationship, after the Stanford financial empire was accused by the SEC of being a “massive Ponzi scheme”, would come back to burn Paradigm - even though the co-branded fund itself hadn’t lost any money.
Which is more than can be said for the Ponta Negra group. Schneider, and two other of his colleagues at Onyx, Jared Toren and Alla Babikova, also exclusively marketed investments in Ponta Negra. Via Puritan Securities, with whom Schneider and associates were registered as brokers, 15 investors poured $31.7m into Ponta Negra, according to an SEC complaint. It is not yet known how much of that money has been lost.
(In another curious, Byzantine twist, one of those 15 investors was in fact, an entity run by Stanford Capital Management. SCM Beta Partnership invested $1m in Ponta Negra, according to documents seen by FT Alphaville)
Puritan itself is not understood to have any connection to Ponta Negra, or Paradigm other than through Schneider. Puritan is registered in Connecticut and retains Schneider and his associate Alla Babikova (also of Onyx) as registered brokers with it.
How aware was Paradigm of Ponta Negra? As with Stanford, they probably would not have been at all were it not for Jeffry Schneider.
According to Mr LoPresti, “He [Schneider] introduced us to Ponta Negra because he was aware that we had some extra space at 650 5th Avenue that we wanted to sub let.”
It isn’t clear how Mr Schneider himself came across Ponta Negra, which had only just been created as a fund when Mr Schneider found it office space.
There is nothing, however, to suggest Schneider and his team were aware of any illegal conduct perpetrated by Ponta Negra. The SEC’s complaint accuses only Rusciano, Ponta Negra’s principal, of wrongdoing. And as is clear from the SEC documents, Schneider and other Onyx employees did conduct due diligence into Ponta Negra - albeit due diligence “efforts” that seemingly failed to identify issues later picked up on by the SEC.
Documents allegedly provided by Ponta Negra’s Rusciano to Schneider (and then provided by Schneider to the SEC) - including an auditor’s opinion, and statements from Ponta Negra’s brokers - look like they have been doctored. The SEC’s regional director thinks so anyway. In a sworn affidavit he says:
Schneider provided a 3-page excerpt of a purported audit report from the firm Kahan Steiger & Co PC. The purported audit report was for the period ending December 31, 2007 and was signed/dated August 31, 2008. Schneider represented to [SEC] examination staff that he obtained this excerpted audit report from Ponta Negra Funds, as part of his due diligence efforts. The excerpted pages included the purported auditor’s opinion letter and two pages containing the “Notes to Financial Statements.” No financial statements were included in the excerps. Note 4 disclosed Ponta Negra Fund’s total return for the period February 1, 2007 through December 31, 2007 as 42.99% (App. 0008). The font and positioning of this figure, as well as its value, raised suspicions with the FWRO [SEC Fort Worth Regional Office] examination staff and management.
And also:
Schneider represented to the examination staff that he obtained a custodian statement from Francesco Rusciano, the fund manager of Ponta Negra Funds, as part of his due diligence efforts. Several aspects of this document, including blacked-out information and the font of the letterhead text raised suspicions with the FWRO examination staff and managementIt seems Mr Schneider was duped.
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For the Bidens - or at least, Paradigm - this is another unwanted and - just possibly - undeserved nuisance. Ever since they bought Paradigm, there have been problems. The most recent ones are about poor PR. Being linked to Stanford was bad enough; being linked now to another shady set of dealings is worse. An individual intimately connected to Paradigm told us that the company was a “spider’s web” of different funds, relationships, investors and companies.Mr LoPresti told FT Alphaville that there are now 14 funds currently run by Paradigm, excluding feeder funds, overseen by just six staff.Owning a hedge fund is harder than it looks - especially if, like James and Hunter Biden, you’ve never been involved with one before.
By Sam Jones, Stacy-Marie Ishmael and Tracy Alloway
First published at 18:33 BST, April 30, 2009
