A dark privatised social security story: Astarra, the missing money

and how examining a fund manager owned by Joe Biden’s family led
to substantial regulatory action in Australia

by John Hempton

In Mid September I wrote a letter to Australian regulators which detailed my concerns about a fund
manager in Australia known as the Astarra Strategic Fund – formerly known as Absolute Alpha. This
letter resulted in regulatory action against a cluster of related funds (almost twenty), however my letter
was almost entirely about only one fund in the group. I did not make any major suggestions in the
letter about other funds in the Astarra complex. My involvement was detailed today in the Sydney
Morning Herald (see stories here, here and here, with the first story on the front page below the
fold). There was no genius in my letter – everything could be found (fairly easily) on the internet –
and the original tip-off came from a reader of my blog – who noticed links with a story I wrote up in
March 2009.

For reasons I will explain below this fund collapse is qualitatively different and more serious than any
previous fund collapse in Australia and that the Australian press have not yet detailed why this one is
important.

The letter argued that it was possible that the Alpha Strategic fund was a fraud. I did not have the
ultimate proof of that so I did not make my letter public and will not do so yet. However there is a way
of proving that a fund isnot a Ponzi – and that is to “show us the money”. If the assets are really there
then it should be possible to convince regulators of that fact by showing them the assets. If Bernie
Madoff had been asked to prove the existence of all the money he supposedly managed then he
would have been caught because he could not comply. An honest fund should be able to comply
fairly quickly – sometimes within 20 minutes – but almost certainly within a week.

The Australian regulator asked Astarra to show them the money – and to date that has not
happened. That does not mean that the money is not there. It is however suggestive, especially as
approximately three months have elapsed whilst regulators and fund administrators have tried to
“value” the fund assets. Indeed the difficulty of valuing assets was sufficient for the regulator to
cancel licenses and to place the funds in the hands of administrators.

At a meeting last week the (regulator appointed) administrator Neil Singleton said that with respect to
one fund the only proof of assets they have is a letter from a Virgin Islands company stating that the
fund (presumably the Strategic Fund) held 118 million in interests in other hedge funds. This letter did
not detail any interests held and gave no mechanism for confirming that statement. However the
administrator has not stated that the assets are not there – so – like the regulator and the
administrator I too will leave that question open. The press simply says the details as to the $118
million are “sketchy”.

Background to the Australian privatised social security system and where various Astarra
entities fit in to that system

Australia has a privatised social security system. Much of the money is with large honest players run
in a nearly index manner and which have cut fees to relatively low amounts. Those funds are run by
Australia’s otherwise dying trade unions. Privatised social security (which Australians call
“superannuation”) has been the saviour of the union movement in Australia – and – through their
control of funds the unions now are within a breath of control (though generally do not vote their
control) of a large proportion of Australia’s industry.

The money that is not with the union funds is in a rag-tag of funds run by large banks (for
example Colonial’s wraps owned by Commonwealth Bank) or with independents and/or self-managed
funds. The money in those funds (wraps) is let to a large number of sub-funds – sometimes large,
sometimes boutique funds managers who live off the large and mandated fund flows from our
“superannuation system”.
The boutique funds range from very good to awful and shonky. Indeed I think the best no load mutual
available anywhere in the world is in Australia (I used to work for the manager). But there have been
some flea-bitten dogs sold to Australians. One thing is for sure – you cannot do privatised social
security without very good fraud protection because that amount of money from unsophisticated
investors is a truly massive honey-pot for scammers and flim-flam artists. As an aside, possibly the
worst thing about George W’s privatised social security proposals was that they would be supervised
by Cox’s toothless and supine Securities and Exchange Commission.

Trio Capital (the “mother-ship” of the Astarra entities) is a “wrap provider” – meaning a financial
planner might use Trio to invest all their client’s retirement money. The Astarra Strategic Fund is an
individual fund under that wrap. My letter was about the Strategic Fund – and the collapse of the
Strategic Fund would not be qualitatively different from the collapse of any of about six funds that
collapsed during the financial crisis. The financial planner might have put her clients in six (or more)
funds – and the loss of one of them is a blow – but in no way imperils the system.

But (somewhat surprisingly) the entire Trio edifice has been placed with administrators – which
means that the end-beneficiary has had their entire retirement savings blocked. In some funds there
is not even enough cash to pay pensions to retired people for the month of January. Some
pensioners are not having their current payments blocked but there are doubts about future
payments. [Details as to who will receive pensions for the month of January can be found on Trio’s
website.] This is qualitatively different from earlier fund failures because it is a failure of every
fund that a person might have invested – a failure of the core asset protection mechanism in the
Australian system. [I cannot work out why the otherwise sensationalist Murdoch press has not written
a single story on this yet. All they need to do is find a cluster of pensioners who will not receive their
pension this month and who will have no idea as to why.]

How I came to write my letter to regulators

Six months ago a reader pointed me to a fund of hedge funds (called Absolute Alpha) based in
Australia.

I looked – and within forty minutes I became very concerned – but could not prove harm to the fund’s
investors. I tipped off the Sydney Morning Herald.

The journalists at the Herald worked hard at the story but alas they too could not prove harm. Indeed
a major bank misled them as to whether the assets were in (their) safe custody. The bank
confirmed the assets were in custody – a statement they have now withdrawn. Obviously with a
reputable third party vouching for the assets any hypothesis of harm was going to be hard to
sustain. The Herald published nothing.

I however remained suspicious – but could not easily do anything. For there to be something
desperately wrong either the bank had to be a party or grossly negligent as to their custody of the
assets.

Absolute Alpha was a boutique fund manager loosely associated with – and partly owned – by a
superannuation wrap provider called Astarra. Astarra is now called Trio. The wrap provider did all
the superannuation compliance and in turn (claimed to) invest funds with other fund managers –
mostly reputable managers. The relationship between Trio and some of the funds in which they were
supposed to invest is complex.

The amount of money in Absolute Alpha was probably under 100 million. There were plenty of things
that did not look right – but I did not think there was much I could do about it.

So I let it go – though I did not forget about it.

Later I tried to log into Absolute Alpha’s website and it was dead.* This (falsely) indicated my worst
fear.
Again I alerted the Herald.

Alas it was not so simple. Absolute Alpha it seems had taken over the funds management of all the
money in the Astarra wrap. They had renamed themselves Astarra. Astarra later renamed
itself Trio. Astarra’s website boasted of a billion dollars in funds under management.

This was potentially very bad news. Australia is about a twentieth the size economically of the United
States – so $1 billion in funds under management was the equivalent economically of $20 billion in
the US. If my bad-case was true we had a Madoff (at least proportionately) in the making. [Now the
funds have been taken into administration the official numbers are about 40 percent of the numbers
boasted on the website. The danger was not quite as big as I thought it was.]

Anyway I wrote a letter to the Australian Securities regulator (ASIC) laying out all my concerns and
(implicitly) the method for testing my concerns were false. [I sincerely hoped I was wrong – and
hoped the regulator would prove me incorrect by identifying and valuing the assets. I still sincerely
hope all the money turns up in the British Virgin Islands.]

I have heard lots of criticism of the Australian Securities regulator. However on this important matter
their actions were exemplary. They did what the SEC could not do and act on a “Markopolos letter”
within weeks. They did what the SEC should have done when they investigated Madoff – and
attempted to confirm the existence and value of the assets.

Three weeks later ASIC put a stop on all Astarra funds – prohibiting new money going in or any
moneys going out. They acted to protect investors. This showed responsiveness that Mary Schapiro
and American regulators can only aspire too. The Sydney Morning Herald finally published a cryptic
story on the front page. The Sydney Morning Herald article did not suggest – and I did not reasonably
think – that the problems extended further in the Trio edifice.

A few months have passed and eventually all major Trio entities were placed in administration by
thesuperannuation regulator. They will probably be liquidated. The funds have been passed to
(reputable) private sector “forensic accountants” – the choice of accountants being made by the
securities and superannuation regulators. They are the sort of liquidators you use when (as stated by
the regulator in their press release) you are not “able to satisfy concerns regarding the valuation of
superannuation assets”.

The whole mess will be explored by the accountants - and if the assets are not there then the matter
will played in court – at which point I will publish my “Markopolos letter” analysing what I got right and
wrong.

But for the moment I will leave you with what attracted me to Absolute Alpha in the first case. It was
the CV’s of the principal players. Here they are:

Shawn Richard - Chief Executive Officer

Shawn is the founder of Absolute Alpha and a key member of the investment team. Prior to founding
Absolute Alpha, Shawn has held and continues to hold, various senior positions, including
directorships of companies both in Australia and overseas.

Shawn has been involved in financial markets since 1996 and had been specialising in alternative
investments for more than 8 years, both offshore and in Australia. Over this time, Shawn has
established relationships with some of the most exclusive hedge fund managers around the globe.

Shawn’s offshore experience in alternative investments includes among others, structuring and
analysis of derivative instruments with some of the largest private hedge funds in the United States.
Shawn was also part of a small team of professionals providing risk management services to Asian
institutions and regional banks in relations to their exposure in equities.
Shawn holds a bachelors degree in Finance from the University of Moncton.

Eugene Liu -Chief Investment Strategist

Eugene is the Chief Investment Strategist of Absolute Alpha. As Chief Investment Strategist, Eugene
is involved in the development and evaluation of asset strategic plans, development and modelling of
analytic tools, reviewing and analysing investment data to formulate investment strategies, and the
investment risk management process. Prior to joining Absolute Alpha, Eugene worked with the Asset
Management team of Pacific Continental Securities and World Financial Capital Markets in the US
and Asia. In these roles, Eugene performed extensive financial modelling and valuation analyses of
various hedge fund strategies. Eugene also led a team of arbitrage specialists who provided
structured product deal flow to many of the largest hedge funds in the industry.

Eugene holds a degree in economics from Trenton State College in New Jersey.

Charles Provini (US) - Asset Consultant

Charles has been involved in hedge funds for more than 20 years and is a senior asset consultant
and member of Absolute Alpha’s investment committee. Currently, he is the President of Paradigm
Global Advisors, a well established hedge fund manager based in NY and he is also the Chairman of
C.R. Provini & Co., Inc., a financial services firm, founded in 1991. Prior to this, Charles held various
senior positions, including, President of Ladenburg Thalmann Asset Management, Director at
Ladenburg Thalmann, Inc., one of the oldest members of the New York Stock Exchange, President of
Laidlaw Asset Management, Chairman and Chief Investment Officer of Howe & Rusling, Laidlaw’s
Management Advisory Group, President of Rodman and Renshaw’s Advisory Services, and President
of LaSalle Street Corporation, a wholly-owned subsidiary of Donaldson, Lufkin & Jenrette.

Charles has been a leadership instructor at the U.S. Naval Academy, Chairman of the U.S. Naval
Academy’s Honour Board and is a former Marine Corp. officer. He is frequent speaker at financial
seminars and has appeared on “The Today Show” and “Good Morning America” discussing financial
markets.

Charles is a graduate of the U.S. Naval Academy and has an MBA from the University of Oklahoma.

Now the first CV – Shawn Richard – is notable only for what it does not say. It does not mention a
single firm that Shawn ever worked for – and hence reduces the possibility of doing due-diligence.

Eugene Liu’s CV is not so careful mentioning two firms, Pacific Continental Securities and World
Financial Capital Markets. Pacific Continental is easy to find – it was a bucket shop of enormous
proportions in the UK. Essentially the firm found hapless victims and steadily moved their life savings
into soon-to-be worthless scam stocks for huge commissions. This was explored widely in the UK
press including beautiful articles about a salesman’s time as scam artists. World Financial Capital
Markets is a little harder to trace as a firm. Several firms have had that name – but one firm by that
name met an unfortunate end involving fraud and the principals reappeared at Pacific Continental.

It turns out that Shawn Richard was a manager with Pacific Continental in Taiwan.

The third CV is of Charles Provini who used to be the CEO of Paradigm Global and who was (falsely)
claimed to remain in that position. When I copied these CVs off the Absolute Alpha website Provini
had not worked for Paradigm for about two years. Some of the rest of Mr Provini’s CV is raised my
eyebrows too – for instance he worked as the President of Laidlaw Asset Management. A firm of that
name was cited by the UK securities regulator (the FSA) for cold-calling and selling scam funds to UK
investors.

The link to Paradigm Global was what raised my eyebrows. Paradigm is an asset manager (for funds
of hedge funds) owned by Hunter Biden and James Biden. These are the Vice President’s son and
brother respectively. I have written about Paradigm extensively before as it has an unfortunate habit
of being associated with scams. Absolute Alpha was not difficult to do due diligence on. It took me
only 40 minutes to work out that they were needing very close scrutiny. It does not speak well to the
due-diligence of a fund of hedge funds (which is what Paradigm claims to be) that they keep being
associated with cases like this.

The Biden connection was what prompted me to look at Absolute Alpha and hence what led me to
write my “Markopolos letter” to ASIC and hence what rapidly led to the closure of Astarra and Trio. It
is worth asking how deep that connection is.

Are Absolute Alpha/Astarra really associated with the Biden’s firm?

At first glance the links between Astarra and the Bidens’ firm are weak. Provini could have been
marketing “vapourware” with no real association.

All that is certain is that Provini was cited on the Absolute Alpha website as an asset consultant and
President of Paradigm for at least two years after he was sacked from Paradigm. Provini is now
running inconsequential penny stock companies.

But the links run deeper than that. Absolute Alpha also used to cite other staff members who worked
at Paradigm – indeed the original “managing partner” was also a staff member at Paradigm.

Absolute Alpha used to publish a process diagram as to how they identified funds to invest in. I have
reproduced that diagram below:

It mentions two things which link Absolute Alpha (now called Astarra) to Paradigm global. These are
the use of the Park Score (named after James Park – the founder of Paradigm) and the PASS
database – the core database of hedge funds from which Paradigm claims to make its investment
decisions.
 Still, this could all have been ripped off Paradigm without Paradigm knowing.

Alas Paradigm does not get off so lightly. The boys from Absolute Alpha went to New York and co-
marketed with people from Paradigm. Indeed I know someone who thought that Absolute Alpha were
OK because staff at Paradigm had vouched for them. Whether Paradigm knew that Shawn and
Eugene in Australia were using “Paradigm inspired” marketing material however is unknown.

Paradigm – the Biden’s firm – had unwittingly got involved in another funds management firm which
has been closed by regulators or been exposed as Ponzis. That is four I know of now – and I have
yet another one that I suspect of being unsound.

A plea to Michelle Malkin

So much of what is published by the conservative blogosphere is non-fact based muckraking. And
yet – sitting here has been my observation that the fund of hedge funds associated with the Vice
President’s family has an unnerving habit of association with scams and other funds closed by
regulators. Surely a competent muckraking conservative blogger can actually do some digging rather
than pontificating from the sidelines.

It makes me think of conspiracy theories. Maybe conservatives in the US do not want to do this sort
of financial digging because most the fraudsters and scamsters are part of the Republican movement
and do not like regulators because – well – they might catch them.

But there must be honest Republicans out there. It is time for Michelle Malkin to do some honest
work. So I will plead with her – can you please do some digging into Paradigm or find some other
muck-raking conservative to do it for me.

I for one want to get back to making money honestly.

John

*Incidentally – I was attempting to log into the Absolute Alpha website because I was discussing the
whole matter with a reader from Talking Points Memo. You know you you are. Thank you.

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