In an indictment filed June 14 in the U.S. District Court for the Northern District of Ohio, Lay is charged with three counts of fraud and one count of aiding and abetting. If convicted, Lay could face up to 20 years in prison and could be ordered to pay millions in fines – up to two times the losses incurred as a result of his alleged crimes.
“Those entrusted to manage public funds owe the public a duty of good faith, loyalty and fair dealing,” U.S. Attorney Gregory White said. “When that trust is violated, offenders must be held accountable.”
Lay is the founder, chairman, co-chief executive and chief investment strategist of Pittsburgh-based MDL Capital Management Inc., which Ohio BWC hired in 1998 as a fixed-income investment manager. Between May 1998 and July 2003, according to the indictment, Ohio BWC gave Lay $355 million of its $19 billion portfolio to invest.
For his services, the agency paid Lay $3.8 million in management fees – nearly $1.8 million of which was for his management of an offshore fund that lost $216 million of Ohio BWC's money.
The indictment also seeks to recover the $1.8 million from Lay.
Lay Set up a Risky Fund in Bermuda
According to the indictment, things went south – literally and figuratively – when Lay in 2002 set up an investment fund in Bermuda called the MDL Active Duration Fund Ltd. Ohio BWC, which invested $225 million, was the only client that Lay was able to convince to buy into the fund.
The advisory agreement presented to Ohio BWC stipulated that Lay only could leverage up to 150 percent of the fund's assets at the time of investment. (Leveraging, according to the Department of Justice, is a high-risk strategy that allows a firm to invest in assets that have the potential to generate high returns. If the investment does not pay off as expected, the firm still has to pay back the debt and interest.)
The indictment alleges that Lay ultimately leveraged more than 4,500 percent of the Active Duration Fund's assets, violating the advisory agreement and “his fiduciary role as an investment adviser to act in the best interest of his client, [Ohio BWC].”
When Ohio BWC officials in spring 2004 first questioned Lay about large losses incurred by the fund, Lay allegedly concealed the fact that he had leveraged the fund well-above the 150 percent limit stipulated in the advisory agreement.
“At no time did Lay reveal to [Ohio BWC] that the losses were magnified or caused by overleveraging, even though Lay then well-knew that he routinely had exceed the 150 percent limit,” the indictment alleges.
In September 2004, Ohio BWC officials met with Lay to discuss the abysmal performance of the fund, which had lost $143 million of the $200 million Ohio BWC had invested at the time. During that meeting, Lay allegedly admitted overleveraging the fund but, according to the indictment, falsely told Ohio BWC officials that he had leveraged approximately 900 percent of the fund's assets when he knew that he had exceeded more than 4,500 percent.
Later in September 2004, Lay convinced Ohio BWC to invest an additional $25 million – bringing the agency's total to $225 million – “to avoid the imminent loss of all of its remaining investment” in the fund.
To date, Ohio BWC only has been able to recover $9 million of its $225 million investment in the Active Duration Fund.
Latest Chapter in Ohio BWC Saga
The Lay indictment merely is the latest chapter in the Ohio BWC saga. Over the past few years, the bureau has been racked by high-profile investment losses, scandals, indictments and convictions.
In November, coin dealer and disgraced Republican fund-raiser Tom Noe of Toledo, Ohio, was sentenced to 18 years in state prison and ordered to pay fines and restitution after being convicted of swindling millions of dollars from Ohio BWC's $50 million rare-coin fund. In 1998, former Ohio BWC Chief Financial Officer Terry Gasper tapped Noe to manage the rare-coin fund on behalf of Ohio BWC, and Noe looted the fund to pay his personal debts and finance a lavish lifestyle.
Noe's sentence will begin after he completes a 27-month federal sentence – imposed in September in the U.S. District Court for the Northern District of Ohio – for making $45,400 in illegal campaign contributions to President Bush's 2004 re-election campaign.
On May 10, Gasper was sentenced to 5 years in prison and was fined $60,405 after pleading guilty to accepting bribes from investment brokers. Gasper, in a plea agreement, admitted that two investment brokers bought him a Florida condominium to persuade Gasper to steer Ohio BWC investment business their way.