COLUMBUS - Mark D. Lay, a Pittsburgh-based investment manager, fraudulently caused the Ohio Bureau of Workers' Compensation to lose $216 million in an offshore hedge fund he managed for the agency, federal authorities alleged yesterday in a four-count felony indictment.
The indictment, handed up by a grand jury in Cleveland, charged the 43-year-old with engaging in investment advisory fraud, mail fraud, and conspiracy to commit mail fraud and wire fraud. Prosecutors are also seeking forfeiture of $1.79 million, which is a portion of what Mr. Lay's firm collected in management fees from the bureau.
The charges stem from Mr. Lay's handling of $355 million in various investments for the state agency's insurance fund.
In 2004, Mr. Lay's MDL Capital management rapidly lost $216 million in bureau money, nearly all of the agency's $225 million placement in a Bermuda-based hedge fund.
After a two-year investigation, prosecutors accused Mr. Lay of committing fraud by overleveraging the investment well beyond what was allowed under his contract with the bureau, leading to the losses. Prosecutors also allege that Mr. Lay - and others who were not named or charged - schemed to deliberately mislead the bureau and others about the leveraging of the investment.
"Those entrusted to manage public funds owe the public a duty of good faith, loyalty, and fair dealing," said Greg White, the U.S. attorney for the Northern District of Ohio. "When that trust is violated, offenders must be held accountable."
If convicted, Mr. Lay could face up to 20 years in prison and hundreds of thousands of dollars in fines.
The state's failed pact with Mr. Lay first came to light in June, 2005, after The Blade began investigating problems in the bureau's investment department and in its $50 million rare-coin venture with former Toledo-area coin dealer and GOP insider Tom Noe.
Mr. Lay and his attorneys at the time defended MDL's handling of the investment, claiming Mr. Lay was being used as a scapegoat and saying bureau officials understood Mr. Lay's strategy and were aware of the leveraging of the investment. Mr. Lay and his attorneys did not return messages yesterday seeking comment.
Mr. Lay is the 19th person who has been charged in the two-year investigation of corruption at the bureau since The Blade began reporting on the agency. In total, 16 money managers and public officials have been convicted on charges stemming from the wide-ranging state and federal task force.
Inspector General Tom Charles said last night that "details of the case [against Mr. Lay] will come out in the trial" and he referred to the indictment of Mr. Lay as part of the "ongoing and continuing investigation."
He said the timing of the charges filed against Mr. Lay stemmed from the federal-state task force working in "three tiers" - on the allegations that led to the felony convictions of Noe, the state ethics violations that led to several convictions including Gov. Bob Taft for failing to disclose golf outings and gifts, and the bureau's investment practices.
Republicans have long hoped that the MDL investment loss would give the scandal a bipartisan taint because Mr. Lay made extensive campaign contributions to Democrats nationally and hired the daughter of George Forbes, a Democrat who was a member of the bureau's Oversight Commission. In Ohio, Mr. Lay contributed primarily to Republican candidates.
Mr. Lay, who has a degree from Columbia University in New York, was an account executive at Dean Witter Reynolds before he founded MDL in 1992.
In 1998, the bureau first hired MDL to operate a bond fund. Five years later, the bureau agreed with a proposal from the firm to create a fund aimed at hedging risk - the active duration fund.
To solicit investors, MDL and its directors used a Jan. 15, 2003, document that outlined the hedge fund's investment strategies and objectives, according to a civil lawsuit filed against MDL in state court.
In September, 2003, Terrence Gasper, then the bureau's chief financial officer, transferred $100 million from the bond account with MDL to purchase shares in the hedge fund. Last year, a state audit said Gasper transferred the money "without any supporting documentation justifying the transfer."
The bureau invested another $100 million in the hedge fund in May, 2004.
Gasper, who was forced to resign in October, 2004, for his handling of the MDL investment, was sentenced last month to five years and four months in prison after pleading guilty to massive corruption charges last year.
In September, 2004, after Gasper and former chief financial officer Jim McLean confronted Mr. Lay about the poor performance of the hedge fund - which was worth just $57 million despite the initial investment of $200 million - he said he had overleveraged the fund by 900 percent even though it was in reality 4,500 percent, according to the indictment.
On Sept. 23, 2004, the bureau granted Mr. Lay's request for an additional $25 million "in order to avoid the imminent loss of all of its remaining investment," according to the indictment.
On Sept. 27, 2004, Mr. McLean told Jim Conrad, then the bureau's administrator-CEO, in a conference call that when he wanted to "tighten the screws" on MDL, Gasper had told him that Mr. Conrad had given permission to "give MDL a break." Mr. Conrad has denied that accusation.
Two days later, the bureau requested a redemption of its investment. Mr. Lay then unsuccessfully attempted to obtain more investment money from the bureau, prosecutors say.
The bureau was able to recoup only $9 million of its $225 million investment in the hedge fund, the indictment said.
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