The FBI is investigating three men connected to Milwaukee and Madison financial firms, alleging they misled investors and manipulated the appraisals of gems and minerals to increase the amount of cash they could withdraw from a private investment fund.
The bureau was tipped off to the alleged scheme after the SEC completed an audit of a Madison-based investment advisory firm that serves institutional investors, public pensions, unions, universities, retirement plans, endowments, nonprofits and affluent individuals and another Madison investment management firm.
The FBI executed search warrants in March on three Milwaukee properties tied to a third firm, specializing in financial services, that, along with the Madison investment manager, were collecting management and incentive fees from the fund. Officials seized gems, stones, minerals, computer files, hard drives, business records and other company documents.
The affidavit filed in the U.S. District Court for Eastern Wisconsin in support of the search warrant says the Milwaukee financial services firm and the Madison investment manager had removed more than $5.85 million in cash from the fund between early 2014 and the end of 2015, with “the vast majority” coming directly from approximately $40 million in investor contributions. An additional $6.5 million had also been allocated to the two firms on paper, leaving room for additional cash withdrawals.
The affidavit details the alleged actions and identities of the companies involved. BizTimes is not naming the individuals or companies because no charges have been filed.
The SEC told the FBI the advisory firm had provided documents during the audit that raised questions about the operation of funds created by the management firm. Those questions included significant unrealized gains claimed as profits, incentive fees allocated to the funds managed members and appraisals with insufficient detail.
According to the affidavit, investors were told the fund would invest in multi-family real estate, gems and precious metals. Investors were also told the fund would primarily be investing in distressed housing assets.
Instead, the affidavit says the fund’s managers primarily invested in “purportedly rare gems and minerals whose valuations are more easily manipulated.”
The fund purchased gems and minerals through a holding company. That company used replacement value appraisals to determine the value of the stones, although it told investors it would use fair value appraisals. The affidavit says the fund reported roughly $310,000 in net realized gain from its inception in 2013 until the end of 2015. During the same period, the fund had $43.2 million in net unrealized gains, with the mineral holding company accounting for $38 million.
The affidavit cites an independent appraiser in Houston that’s previously worked with the government as saying the valuations were “extraordinary” and she wouldn’t expect to see those increases over such a short period of time.
The affidavit also says the FBI talked to an insurance agent who said the former chief financial officer of the holding gem company told her he left “due to unethical and possible illegal activities.”
