Tale of undercover trader

Sitting in a Minneapolis mansion and listening to a charismatic investment manager describe a currency trading system that kept earning handsome returns year after year, Arthur F. Schlobohm IV was certain he had stumbled onto a Ponzi scheme.

A longtime trader who started running tickets on the floor of the New York Stock Exchange as a teenager, Schlobohm, known as Ty, knew that Minneapolis, his home for nine years, was too small a town for a $4.4 billion investment fund to have escaped his notice.

It had taken him just a few Google searches to discover that the fund’s manager, Trevor G. Cook, had been suspended twice by the National Futures Association and been fined $25,000 for using false information to open a trading account for a customer. Calls to contacts in Switzerland and Kuwait also raised doubts about Cook’s boasts about deal-making abroad.

Yet Schlobohm later found himself back in Cook’s mansion, surrounded by a room full of his neighbours, many of whom were about to hand their life savings to a charlatan.

“If I could have just leaned over and whispered in someone’s ear, ‘Don’t invest in this! Just trust me!,’ there would be a family out there now with kids that could go to college,” Schlobohm recalls of the meeting.

But he couldn’t do that. At the time, Schlobohm, now 37, was working as an informant for the Federal Bureau of Investigation. Wired to record Cook’s sales pitches and carrying a hidden camera, Schlobohm gathered evidence for at least four months as the Justice Department zeroed in on the scheme.

Cook pleaded guilty to mail and tax fraud last summer and was sentenced to 25 years in prison for orchestrating what ultimately became a $160 million swindle.

That the authorities brought Cook to justice is undoubtedly a positive outcome. But Schlobohm’s journey as a whistle-blower, and some of the financial losses that still occurred even though authorities were closely monitoring Cook, also underscore the limitations of the system.

During the period when Schlobohm helped the FBI to gather evidence, from April through July 2009, at least $16 million flowed into Cook’s fund – and disappeared. From the time securities regulators first had credible information that he was engaged in a fraud and when the authorities shut down his fund, December 2008 to July 2009, some $35 million flowed into his coffers – funds that afforded Cook a lifestyle that included an expensive gambling habit, a collection of Faberge eggs, fancy cars and the construction of a casino in Panama.

“There was a tremendous amount of guilt being there,” watching Cook lure investors, said Schlobohm in an interview, the first in which he has spoken publicly about how he helped put Cook behind bars. “Knowing this was a fraud with the highest degree of certitude, and having to watch people in the process of losing their life savings, was extremely difficult.”

The U.S. attorney for Minnesota prosecuted the case against Cook, and the Commodity Futures Trading Commission and the Securities and Exchange Commission are both pursuing civil suits against Cook and helped with the federal investigation. For all of the Justice Department’s efforts, though, only about 5 percent of the $160 million invested in Cook’s scheme has been recovered.

Before Schlobohm’s involvement there had been others who had raised questions about Trevor Cook. The Commodity Futures Trading Commission, a federal agency that regulates commodity markets and monitors foreign currency trading, got a full report on Cook’s suspension in 2006.

Then, in April 2008, Duke Thietje, a Florida investor, filed a lawsuit in a Minnesota state court against Cook and his firm, Universal Brokerage Services, contending that Cook lost $450,000 he had turned over to him in 2005 to invest in foreign currencies.

Thietje abandoned his lawsuit in the fall of 2008. But around that time, his lawyer turned over copies of his filings to the CFTC, providing that agency with its second warning about Cook.

After examining Thietje’s allegations, the CFTC decided that it lacked the jurisdiction to do anything about Cook, it wasn’t until March 2009, when Schlobohm contacted both the CFTC and the U.S. attorney in Minneapolis with his information about Cook, that the CFTC began to connect the dots.

That was made more difficult because Cook’s ventures went by an ever-changing lineup of names: Universal Brokerage Services, UBS Diversified, Oxford Global, Market Shot, the Basel Group, Crown Forex.

None of them, however, were registered with either the Commodity Futures Trading Commission or the SEC. So even after Schlobohm provided his own research pointing to a Ponzi scheme, regulators said they had limited options as to how they could act.

According to two senior regulatory officials speaking on the condition of anonymity because the civil cases are still in court, the agencies could not simply walk in and demand to see the firms’ books and records without running the risk that the group would fold up shop and disappear with investors’ money.

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