Charging Mark D. Lay with failing to report to investors overleveraging that had grown to more than 4000 percent, U.S. attorneys for the Northern and Southern Districts of Ohio indicted the investment manager on four counts concerning his handling of an offshore hedge fund that allegedly resulted in the Ohio Bureau of Workers’ Compensation losing $216 million of its $225 million investment.
In directing the bulk of the trade activity of the MDL Active Duration Fund, an investment consisting primarily of government, corporate, and mortgage-backed fixed-income securities, Lay far exceeded the fund’s pre-set limit of 150 percent in borrowing, according to the indictment issued Friday. In an April 2004 meeting with the workers’ comp board’s chief investment officer, Lay did not admit that the fund’s leverage was 900 percent, according to the U.S. attorneys.
In September 2004, the CIO and CFO of the board confronted Lay about the fund’s poor performance, which by then had a value of $57 million despite the $200 million the workers’ comp board had invested, according to the indictment. While Lay admitted at that meeting that the fund was overleveraged, he “falsely” told the board executives that he had only borrowed 900 percent of the funds assets while knowing that the leverage exceeded 4500 percent, the U.S. attorneys contended.
The indictment charges that Lay, the chairman and chief executive officer of MDL Capital Management, hid the true nature and effect of the use of leverage in the fund by failing to disclose the overleveraging and its effect on the investment funds to the comp board, thus breaching his fiduciary role as an investment advisor. He was charged with investment advisory fraud, mail fraud, and conspiracy to commit mail fraud and wire fraud.
CFO.com could not reach Lay at press time for comment on the indictment. Lay stated last week, however, that “Recent reporting and comments concerning MDL Capital Management and its investment performance have painted an inaccurate and misleading picture of the Company and our track record.” Lay claimed that all his company’s fixed-income products, with the exception of the one the workers’ comp board invested in, had made money.
The indictment seeks forfeiture of nearly $1.8 million , which represents the amount of compensation MDL received from the workers’ comp board for managing the Fund. If convicted, Lay faces up to 20 years in prison and a fine of $500,000.
Lay is the 19th person to be charged in the case, according to the Columbus Dispatch. So far, the task force probing the fraud has produced 16 convictions, the paper added.