September 18, 2014

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Investment probe still on after 19 indictments

Julie Carr Smyth
The Associated Press
COLUMBUS — The indictment of the head of a money management firm that lost $215 million in state investment funds brings the total number of people indicted or convicted in the state investment scandal to 19, and investigators aren’t done yet.
“We are not completed with our investigation,” Ohio Inspector General Thomas Charles said on Friday, a day after the indictment of Mark D. Lay, founder and chief executive of MDL Capital Management in Pittsburgh.
The wide-reaching case began with the 2005 revelation that prolific Republican donor Tom Noe was investing state money in rare coins.
Lay, 43, was charged in U.S. District Court with investment advisory fraud, mail fraud and conspiracy to commit mail fraud and wire fraud. If convicted, he faces a maximum sentence of
20 years in prison.
Bill Edwards, chief deputy U.S. attorney in Cleveland, said Lay is likely to appear for an arraignment before Judge David D. Dowd Jr. within the next couple of weeks.
MDL managed a hedge fund for speculative, high-risk investments on behalf of the Ohio Bureau of Workers’ Compensation that Lay set up in Bermuda. The bureau was the sole investor in the fund, according to the indictment, and Lay is accused of repeatedly failing to tell bureau officials when questioned beginning in 2004 about the extent of the risks he was taking with the fund.
It was against bureau policy to borrow against, or leverage, a fund by more than 150 percent, yet Lay was routinely exceeding that limit, according to the indictment.
On Sept. 16, 2004, the indictment states, bureau chief financial officer Terry Gasper and chief investment officer James McLean confronted Lay about the fund’s underperformance — the $200 million they had invested was now worth $57 million.
Lay admitted during the meeting he had the fund leveraged at 900 percent, but in fact it was leveraged at 4,500 percent, according to the indictment.
It was about a week later that the bureau invested $25 million more in MDL’s hedge fund in an attempt to avoid further losses.
About five days later, on Sept. 29, the bureau asked to cash out of the fund and get its $225 million back. As of November of that year, it had been able to recover only $9 million of the original $225 million investment.
Meanwhile, for its services, the bureau paid MDL fees of nearly $1.8 million. Prosecutors are seeking that money back as part of their action against Lay. The state has filed a separate lawsuit seeking to recoup the state’s investment losses through the MDL fund.
By comparison, the money lost by MDL dwarfs that lost by Noe, serving 18 years in prison for stealing from the $50 million rare-coin investment he managed.
State investigators have said the contract with MDL was signed by Gasper, sentenced in May to five years and four months in a federal prison for accepting bribes in exchange for doling out millions of dollars in agency investment business. Gasper said he received $25,000 from Noe as a bribe in return for state business, but there is no suggestion Lay engaged in such activity, Edwards said.
Messages were left Thursday and Friday for Lay and his attorney, Barry Slotnick, seeking comment.
Slotnick said in 2005, after the loss became public, that the hedge fund’s aims were clear and based on a belief that long-term interest rates would rise.
“Unfortunately for the parties involved, they bet wrong,” he said at the time.
Records show that when McLean wanted to increase scrutiny on MDL, Gasper told him he had permission to go easy on the firm.