FBI arrests hedge fund manager James M. Nicholson
FBI arrests hedge fund manager James M. Nicholson
By MEGAN V. WINSLOW
Daily News Staff Writer
Friday, February 27, 2009
The vigilance of Madoff-wary investors has helped bring about the arrest of another part-time Palm Beach resident, the manager of an unregistered hedge fund accused of swindling an estimated $900 million from clients since 2004.
The FBI on Wednesday arrested James M. Nicholson, 42, owner of a penthouse in the Dunster House condominium complex, on charges of securities fraud and bank fraud. Also on Wednesday, the Securities and Exchange Commission filed a federal complaint against Nicholson and his company, Westgate Capital Management LLC of Pearl River, N.Y., seeking relief for the fraud and an injunction to stop it.
A telephone call to Nicholson's primary residence in Saddle River, N.J., was not returned by press time. A telephone line listed for Nicholson's multi-million dollar Dunster House penthouse was disconnected.
According to the complaint, the fraud includes providing prospective investors with materially false and misleading sales material and oral statements about returns, concealing Westgate's true financial condition through a fictitious accounting firm called Havener and Havener, and providing investors with fake audited financial statements from the fake firm.
Nicholson told investors his company had assets under management ranging from $600 million to $900 million when, in fact, the true value was "materially less." He set up the fake accounting firm with his own telephone numbers and driver's license through a virtual office arrangement, according to the complaint.
The investigation into Nicholson and his business dealings began in December, after Westgate investors heard about alleged Ponzi mastermind Bernard Madoff's $50 billion scheme and began trying to redeem their own investments in 11 different Westgate hedge funds, according to a statement from federal prosecutors.
Attempts by about two dozen Westgate investors ultimately resulted in nearly $5 million in checks bouncing. Other investors have unsuccessfully attempted to collect additional funds totaling more than $10 million, according to the statement. Neither Westgate nor its principal is registered with the SEC, and what is now called the Financial Industry Regulatory Authority permanently barred Nicholson from being a registered representative in 2001, according to the SEC.
On Wednesday, a judge for the U.S. District Court in the Southern District of New York granted the SEC's emergency request to freeze the defendants' assets.
Also on Wednesday, Nicholson's defense attorney Ira Sorkin, who also represents Madoff, requested Nicholson remain under house arrest in New Jersey. A federal magistrate granted the request and set Nicholson's bail at $10 million.
Calls to Westgate Capital Management during normal business hours Friday went straight to voice mail.
"You've reached Westgate Capital Management," a recorded female voice said. "We are currently out of the office."
A Dunster House resident who declined to give her name said she, like many of her neighbors, was shocked to hear about Nicholson's arrest.
She said Nicholson seemed to be a very private man who seldom visited his penthouse. She said he is married and has three children.
That the Madoff scheme encouraged Westgate clients to question their investments is no surprise to Lunelle Siegel, executive director of the Association for Fraud Recovery and Prevention in Tampa.
Before Madoff's arrest, Siegel's group would hear about the unraveling of maybe one investment fraud case a week. Now there are two or three breaking each day nationwide, she said.
"It's going to get worse before it gets better," Siegel said.
In addition to Nicholson, federal authorities on Wednesday arrested three investment professionals in two separate New York cases on securities fraud charges involving millions of dollars, the Associated Press reported.
The combination of the economy and Madoff has made many investors nervous, especially those with money in alternative investments such as hedge funds, which can promise high returns but carry greater risk than traditional investments such as stocks, bonds and cash, said Michael J. Dixon, a CPA with local Carl Domino Inc.
"It's totally alarmed everyone, even people who are not in deals like (Madoff's)," Dixon said. "They want to know if their money is safe."
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