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Paul Greenwood and Stephen Walsh charged with Ponzi fraud and misappropriation of roughly $1.3 billion of investors' money in Westridge Capital Management and WG Trading Investors LP.

02/25/09 - SAN FRANCISCO (MarketWatch) -- The U.S. Commodity Futures Trading Commission said Wednesday that it charged futures traders Paul Greenwood and Stephen Walsh with fraud and misappropriation of investors' money in what the regulator called a $1.3 billion scam.

Greenwood, 61, of North Salem, N.Y., and Walsh, 64, of Sands Point, N.Y., were arrested Wednesday morning. They are scheduled to appear in Manhattan federal court Wednesday on one count each of conspiracy to commit securities fraud and wire fraud, one count of securities fraud and one count of wire fraud, the FBI said.

From at least 1996, Walsh and Greenwood raised roughly $1.3 billion from investors for Westridge Capital Management, WG Trading Investors LP and other investment vehicles.

They "falsely depicted" that all investors' money would be used in an index arbitrage strategy. But roughly $553 million was instead transferred to another entity from which Walsh and Greenwood siphoned funds, the CFTC's complaint alleged.

More than $160 million was used for Walsh's and Greenwood's personal expenses, including purchasing rare books, horses, Steiff teddy bears for as much as $80,000 as well as a $3 million residence for Walsh's ex-wife, the CFTC said.

To cover their tracks, Greenwood and Walsh manufactured promissory notes to make it look like investors' money had been loaned to them, according to the regulator.

"Defendants treated investor money -- some of which came from a public pension fund -- as their own piggy bank to lavish themselves with expensive gifts," CFTC Acting Director of Enforcement Stephen Obie said in a statement.

Several institutional investors, including charitable and university foundations and retirement and pension plans, invested more than $668 million through WG Trading Investors, the FBI noted.