Monday, November 9, 2009

A sociopath at the gate - Westgate that is

When one thinks of the word “sociopath”, a killer of some sort generally comes to mind. It’s someone who is completely devoid of emotion or empathy for others. Someone completely focused on his/her own needs with absolutely no regard for those around them. The definition in Wikipedia states that sociopath is often used as an alternative word for a psychopath to avoid confusion with the word “psychosis” (which is unrelated). The description is divided into two factors: “aggressive narcissism” and “socially deviant lifestyle”:

Factor1: Personality "Aggressive narcissism"

Glibness/superficial charm
Grandiose sense of self-worth
Pathological lying
Lack of remorse or guilt
Shallow affect
Callous/lack of empathy
Failure to accept responsibility for own actions

Factor2: Case history "Socially deviant lifestyle"

Need for stimulation/proneness to boredom
Parasitic lifestyle
Poor behavioral control
Promiscuous sexual behavior
Lack of realistic, long-term goals
Juvenile delinquency
Early behavior problems
Revocation of conditional release

Why are we discussing this in a financial blog you may ask? Well, it is estimated that about 1% of the population has this disorder. And the area of finance is particularly attractive for people with these special “talents”. Bernie Madoff is one of them, Marc Dreier is another. There are numerous others, and not all have such a high profile. One of them lived in a peaceful suburban community in Saddle River, NJ. His name was Jim Nicholson. Jim, in his early 40s, a father of 3 young boys, was married to Donna - his high school sweetheart. Jim coached the local little league team and was the pillar of his community. He also managed money in a hedge fund he created called Westgate Capital. He didn’t like to take in institutional money – instead he managed funds for his friends, his neighbors, and his family. His returns were rock solid and new funds just kept coming in (particularly from people closest to him).

These returns would be the envy of most money managers - steady and consistent. But it was all a fraud. It’s not clear when it became fraud, maybe 2003, maybe earlier. Investors figured this guy is not going anywhere, he's got 3 kids and is happily married. But after the Madoff news hit, many tried to redeem their money and Jim's ponzi scheme began to unravel. The check he sent to redeeming clients bounced. And the thing with the "perfect family" turned out to be, well, not so perfect after all. From

James M. Nicholson, accused of running a fraudulent hedge fund, cheated on his wife with another woman for more than a year as he continued to bilk investors out of tens of millions of dollars, according to his wife's divorce papers. Donna A. Nicholson's divorce papers, a copy of which was obtained yesterday, provided details into her husband's extramarital affair and the effects of the criminal case on her and their three children.
He's accused of stealing an estimated $163 million from his clients since 2004 through his hedge fund business, Westgate Capital Management LLC in Pearl River and Manhattan.Donna Hostomsky and James Nicholson grew up in Haverstraw and were high school sweethearts. They married on Sept. 26, 1992, and lived in Stony Point before moving to Saddle River, N.J.
Donna Nicholson's divorce papers accuse her husband of adultery with Toronto investment trader Linda Boville, starting on Feb. 1, 2008. Donna Nicholson's papers state that her husband admitted having sexual relations with Boville in New York City, New Jersey, Florida, Las Vegas, Canada and "in other locations and at other times and places too numerous to account."
Donna Nicholson accuses her husband of extreme cruelty with the adultery and alleged crimes. She also says they have irreconcilable differences. She claims his arrest "led to the seizure of all our marital assets, leaving myself and my children penniless and without any means of support."
Nicholson came under scrutiny by Rockland investigators a few months ago after nearly $5 million in redemption checks to clients bounced, county District Attorney Thomas Zugibe has said.

Unlike Madoff however, Jim didn't feel like having an accountant, even an incompetent one that Madoff had. Why bother? Just come up with a fake name, get a PO box and an answering machine - and you got yourself an "accountant". He also has been accused of doctoring financial statements and setting up a phony Manhattan accounting firm that sent out fictitious statements telling investors they were making money. He is accused of using money obtained through new investors to pay off suspicious longtime investors. Nicholson is being held on $10 million bail in the Metropolitan Detention Center in Brooklyn.

As a true sociopath, Jim had to indulge himself any way he could: Documents show he bought an interest in a multimillion-dollar private jet and a $27 million oceanfront estate in Southampton. He also bought a condo at the Time-Warner Building in Manhattan valued at $8.5 million. He also owned a $4.75 million condo in Palm Beach, Fla.

For those who are interested in more gory detail on this sociopath (which is not covered well by the media), see the full complaint below. But the moral of the story is that sociopaths like Jim make it that much tougher for honest money managers to make it. That's right, there really are honest money managers out there.

As an investor, follow the 3 simple rules:
1. Watch those returns to make sure they are realistic (they have some semblance to what markets are doing and the strategy makes sense)
2. Make sure there is a real accountant there who does the audits and knows what she is doing.
3. And watch for signs of the sociopath

Comp 20911
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