Buddy Fletcher: Financial Genius — or a Fake?
The Journal also reported on problems regarding the company’s dealings with three public-employee pension funds in Louisiana. According to representatives for the funds, FAM had guaranteed a 12 percent annual return, which led to them investing $100 million with Fletcher in 2008. When they attempted to withdraw $32 million last March, though, Fletcher said the money was locked up in illiquid investments. Instead of cash, he offered the funds a two-year promissory note. Within days of the Journal article, other press outlets reported that the Securities and Exchange Commission had opened an investigation into FAM. The Journal also reported that the FBI and Louisiana state officials were investigating FAM. In February, trustees of the three funds filed a legal petition to liquidate Fletcher’s flagship Income Arbitrage Fund.
As the Dakota lawsuit has dragged on, more allegations of Fletcher’s finances have emerged, many from an affidavit by Dakota board president Bruce Barnes. According to Barnes, Fletcher claimed to be worth $81 million, but had only $50,000 in the bank. Most of the rest of his self-reported worth, some $70 million, came from what appeared to be an extraordinarily generous valuation of his stake in FAM. And though he paid cash for at least two of his four apartments, Fletcher had also taken out a $20.8 million loan from JP Morgan Chase Home Finance that looked an awful lot like a mortgage (he put his apartments up as collateral). The loan payments alone — almost $1.5 million annually — appeared to be more than Fletcher was earning from his fund.
Barnes’s affidavit claimed Fletcher “has virtually no liquid assets…is highly leveraged, with significant debt, [and] his current level of annual interest expense far exceeds his annual income.” Barnes, a financial expert in his own right — he’s a retired CFO of several multimillion-dollar companies — further noted that there was a “blurry distinction between Fletcher’s personal accounts and business accounts.” According to Barnes, Fletcher was also withdrawing money from his stake in the fund, which he had done in amounts of $1.8 million in 2007, $6.4 million in 2008, and $5.3 million in 2009. But the more Fletcher withdrew, the less money FAM had to generate new revenue. The hedge fund reported net income of just $458,778 in 2007, and net losses in 2008 ($875,063) and 2009 ($137,430).
If the Dakota board is right, then Forbes is wrong: Buddy Fletcher isn’t one of the country’s 20 wealthiest African Americans. Instead, he seemed to be struggling to stay afloat. That, of course, raises a few questions regarding the paper wealth Fletcher claims. For years Fletcher has lived a grandiose lifestyle and made major philanthropic contributions because of the fees generated by his hedge fund. And it’s certainly possible that, despite his current troubles, FAM did indeed enjoy a remarkable string of profitable quarters. But the financial issues raised by the Dakota lawsuit and the Louisiana scandal raise the question of whether those fees have been inflated by unrealistic evaluations of FAM’s incredibly complex investments. In short: Was Fletcher building a genius’s portfolio or a house of cards?
IT’S HARD TO IMAGINE ANYTHING more uncomfortable at Harvard than a million-dollar alumnus donor becoming enmeshed in scandal. That’s particularly true when the person in question is the college’s first major African-American donor. As a result, almost no one from the university was willing to speak on the record for this story. (Rudenstine and Gates did not respond to requests for interviews. Through a spokesman, Fletcher denied a request for an interview.) At the least, it appears that the university might be losing a major donor — but some insiders wonder whether Fletcher was ever all that valuable to the university. From a financial perspective, anyway.
Those familiar with Harvard’s fundraising have long suspected that Rudenstine took unusual measures to facilitate the donation of the university professorship. At the time, such professorships cost at least $3 million to endow, and Fletcher later valued his gift at $4.5 million. But sources familiar with the terms of the gift say its value was nowhere near that. The reason? Fletcher didn’t give Harvard cash. Instead he donated his shares in a FAM affiliate, Fletcher Capital Markets. The equities it held came with numerous strings attached, making its worth almost impossible to determine, but some people with knowledge of the deal doubt it was actually worth $3 million when it was gifted. “This was a very complicated gift, not the sort of thing that Harvard would normally do,” says one high-level administrator. “It wasn’t easy to turn this into real money.”