Buddy Fletcher: Financial Genius โ or a Fake?
EVEN IN THE DAKOTA, the storied apartment building on New York’s Upper West Side, home to such cultural icons as Yoko Ono and Lauren Bacall, Buddy Fletcher stood out. African American, fantastically accomplished, and wealthy, Fletcher had grown up in modest circumstances, gone to Harvard, and graduated as “first marshal” of his class in 1987. From there he hit Wall Street, earned millions before he turned 25, and started his own firm, Fletcher Asset Management. By the time he was 30, the company was operating as a hedge fund and boasting of triple-digit returns. Fletcher made multimillion-dollar donations to Harvard, and gave away millions more to museums, arts groups, and civil rights causes.
BusinessWeek and the New Yorker, among many other publications, wrote glowing profiles, and in 2009 Forbes named him one of the country’s 20 richest African Americans. With a net worth of $150 million, Fletcher was just a few spots down the list from Oprah Winfrey, Bill Cosby, and Tiger Woods.
Fletcher dressed in a Gatsby-esque cavalcade of beautifully tailored suits and traveled around Manhattan in a Bentley driven by his full-time chauffeur. He bought a $5.9 million castle in upstate Connecticut. In New York, he rented offices for his hedge fund at the top of the GM Building on Fifth Avenue. There, rising 48 floors from the southeast corner of Central Park, he could gaze down upon the city in every direction.
Then there was his home, Apartment 52 at the Dakota, which, as the New Yorker put it, was “decorated with the apparent intention of recreating, as nearly as possible, the fusty, woody interior of the Harvard Club.” That was just one of four Dakota residences Fletcher had purchased over the course of two decades. In addition to two apartments for himself, he’d bought one for his mother and another for his employees to use.
Then, at the beginning of 2010, Fletcher informed the building’s board that he intended to buy still another Dakota residence. The owner of Apartment 50 had passed away, and Fletcher was ready to write a $5.7 million check for the two-bedroom.
As others had before, the members of the Dakota board — themselves mostly high-powered financial types — examined Fletcher’s financial statement, including an assessment of his net worth and records from his hedge fund. It was all standard operating procedure — but then the board came back with an answer Fletcher did not expect: no. Fletcher, the board said, could not afford to buy another apartment. In fact, it couldn’t say for sure how he was paying for the other four.
Buddy Fletcher, according to his neighbors in the Dakota, wasn’t the wealthy investor he appeared to be, but the head of a financially opaque hedge fund who was struggling to pay his bills. The news traveled fast to Cambridge, where the question was nervously asked: Was one of Harvard’s highest-profile philanthropists not what he seemed?
Alphonse “Buddy” Fletcher Jr. — he got the nickname as a little kid — and his younger brothers, Geoffrey and Todd, grew up middle-class in Waterford, Connecticut. His father, Alphonse Sr., originally from Louisiana, worked as a technician at the Electric Boat submarine-making factory in nearby Groton. His mother, Bettye, was a public school principal and administrator. Firm believers in education and hard work, they couldn’t have been prouder when Buddy got into Harvard.
Photo by Fred R. Conrad/The New York Times/Redux
Fletcher threw himself into university life, finding a residence in Adams House, the most artistic and socially avant-garde of Harvard’s houses. In what was considered a more conservative move, though, he also joined the ROTC program at MIT (Harvard did not then allow ROTC on campus). Fletcher was popular. He was funny, considerate, and polite — almost excessively polite, some people thought. And at a school where African-American students often felt marginalized, he seemed determined to fit in. He was “punched” for membership in the Phoenix-S.K., one of Harvard’s exclusive finals clubs, and as a junior was voted its president. The following year, the entire senior class elected him their first marshal, foremost among the eight seniors who helped organize class events.
After graduating in 1987, Fletcher moved to New York to take a job at the investment bank Bear, Stearns. His mentor there was a partner named Elliot Wolk, one of the firm’s most powerful financiers. “He worked for me for two years,” says Wolk, who retired in 1997 but still keeps in touch with Fletcher. “He’s extremely smart and has a very pleasant personality — he was an extremely good salesman.” Wolk recalls that he taught Fletcher equities trading, and Fletcher’s job was to find opportunities to implement it.
Apparently, he was good at his job: After two years, Fletcher’s salary and bonus totaled $160,000. (He used some of his earnings to help pay the tuition of his brothers, who’d followed him to Harvard.) But Fletcher “didn’t think $160, 000 was enough,” Wolk says. In 1989 rival firm Kidder, Peabody offered him a job trading for them. Fletcher told colleagues that Kidder had promised him a $100,000 base salary and 20 to 25 percent of any profits he generated. He was 23 years old.
By his own account, Fletcher was an instant success at Kidder. His first year there, he generated an astounding $25.5 million in net profits for the firm. With his 20 percent cut, he was expecting a bonus of $5 million — well on his way to becoming Kidder’s second-highest-paid employee.
But Kidder balked at paying Fletcher the bonus he expected, and accusations soon began flying. In 1991 Fletcher resigned. Then in June of that year, he sued Kidder, charging the firm with racial discrimination. “Kidder determined that the amount it was obligated to pay Mr. Fletcher was simply too much money to pay a young black man,” Fletcher said in his complaint. “Kidder’s management [was] determined to put Mr. Fletcher in his place….” Fletcher wanted nearly $30 million in damages.
Kidder representatives have never previously spoken publicly about the lawsuit, but Granville Bowie, who was then Kidder’s human resources manager — and one of the targets of Fletcher’s racial discrimination suit — told me that the real story was very different: The firm said no to paying the bonus because Fletcher had refused to tell anyone just how he was generating those electronic profits.
According to Bowie, Fletcher claimed that although he was trading with the firm’s money, his trading strategies were his and his alone. “Fletcher had a business that…frankly, we didn’t know what it was, and we didn’t know how it was making money,” Bowie says. “He took the position, ‘I’m making money…go away.’” That attitude made the young trader’s supervisor, managing director Thomas Ryan, nervous. Were Fletcher’s profits for real?
In 1992 a New York Stock Exchange arbitration panel denied Fletcher the damages he claimed, awarding him a relatively modest $1.26 million, and later another arbitration panel dismissed the racial discrimination suit. The arbitration award wasn’t really a victory for Fletcher, but the story that emerged in subsequent media reports was less nuanced: On Wall Street, went the narrative, even Harvard grads get discriminated against if they happen to be black. Buddy Fletcher, though, had fought back.
In 1997, Fletcher got some revenge when his younger brother Todd staged an off-Broadway musical based on the Kidder, Peabody battle. Titled Julius Caesar: The Fall and Rise of a Wall Street Star, Todd’s play, which Buddy helped finance, told the story of a black chief executive of a securities firm called Rome, Inc. who is murdered by white business partners.
AFTER THE BITTER END at Kidder, Fletcher rented office space from Bear, Stearns and began soliciting investors for a firm of his own, Fletcher Asset Management, or FAM. Over the next four years, Fletcher, acting as a broker-dealer — meaning that he could buy and sell equities for himself and his clients — built a business around his secret investment strategy. By 1994 the press was reporting that Fletcher was an investing wunderkind. BusinessWeek touted his audited financial statements, which established triple-digit returns. Fortune wrote that “math wizards at his ten-person firm use complex computer programs to do an arcane form of stock trading timed to dividend payouts.” And, the magazine added, “His firm achieved average annual returns of over 300 percent over the past two years….”
Fletcher later moved on from his dividend strategy to one of investing in cash-poor companies, giving them capital infusions in exchange for stock priced below market value. (Investment clients provided most of the cash; Fletcher would take a management fee and a slice of the profits.) That stock was likely to go up, Fletcher explained to clients, because he would invest only in companies with strong underlying fundamentals and because FAM would help the company grow. Fletcher’s deals were immensely complicated — hard even for financial professionals to decipher — but they seemed to work. Starting in 1991, the year it was founded, FAM would report an unbroken string of profitable quarters that lasted more than a decade.
In 1995 Fletcher registered FAM with the SEC as a hedge fund, a move that allowed him to conduct a broader range of investment activities. Most new hedge funds are hungry to raise capital, but FAM insisted that it would not take money from just anyone. Potential investors in FAM were “screened” to make sure that they were “friends and allies,” Fletcher explained in Stock Market Wizards, a 2003 book by Jack Schwager. As Fletcher put it, in language that called to mind Bernie Madoff, “If we were just looking to raise as much money as we could, sure, the more the merrier. [But] at this point, we just want supportive investors. It’s not worth the trouble having an investor who would be a distraction.”
Fletcher told Schwager that he’d had a talent for investing since childhood. In junior high, he said, he wrote a computer program that could pick winners at a local dog track. By analyzing everything from finish times to weather conditions, the program could predict with 80 percent accuracy whether a dog would finish in the money. When an impressed Schwager asked Fletcher how much he’d made from his bets, the hedge fund manager demurred, saying that the racetrack took such a significant cut of his winnings, “even though we won 80 percent of the time, it still wasn’t enough to make money.” Had Fletcher thought of a similar program for beating the S & P 500? “Oh, sure,” Fletcher told Schwager. So why hadn’t he implemented it? “We’ve been very busy.”
In the mid-’90s, Fletcher moved FAM from Bear, Stearns to the GM Building, and then later to an Upper East Side townhouse. (It’s now at 48 Wall Street.) He set about hiring friends and family to help him manage his growing portfolio. Several of Fletcher’s Harvard chums — classmates Angela Dorn, Stephen Cass, Michael Meade, and Paul Ryan — would join him at FAM during the ’90s. He appointed his mother, Bettye, a director of FAM’s philanthropic activities. As a director of international investor relations, he hired his youngest brother, Todd. And for a vice president, he turned to his own boyfriend, Hobart Fowlkes Jr., who worked in European furniture at the auction house Christie’s.
Fletcher and Fowlkes moved comfortably through New York society, regularly inviting friends, potential clients, and neighbors to soirees at Apartment 52. Fletcher’s staff included chefs for his home and office and a chauffeur, who drove, variously, a Porsche, a Mercedes, a Jaguar, and a Bentley. All the amenities were necessary, Fletcher told BusinessWeek, to convince investors who might be skeptical of his youth and experience: “When we call a company and say we’d like to invest millions of dollars when other investors are shying away, sometimes they don’t take us seriously.”
FLETCHER’S ASCENT COULDN’T HAVE come at a better time for Neil Rudenstine, Harvard’s president from 1991 to 2001. Perhaps the most liberal president in school history, Rudenstine was determined to improve race relations on campus, partly by pouring money into Harvard’s neglected African American Studies department. Rudenstine wanted a black donor to fund a university professorship — the most prestigious academic position that exists at Harvard — for black scholars. But Harvard didn’t have a lot of black alumni, and many of the ones it did have didn’t look back fondly on their time in Cambridge. Fletcher was different. He was wealthy, and he wanted to align himself with the university.
In April 1996 Rudenstine announced that Fletcher had given Harvard more than $3 million to fund the Alphonse Fletcher Jr. University Professorship. “This was an important gift for Neil,” says one former Harvard official. And for Fletcher, the official says, endowing a professorship meant associating his name with the Harvard brand. Surely there would be more and larger donations to come. “Buddy was being groomed,” another high-level Harvard official recalls.
Fletcher would later serve not only on the Committee on University Resources — the powerful group of donors that helps shape Harvard policy — but also on the New York Major Gifts Committee and as a director of the Harvard Alumni Association. His money gave him clout: When Cornel West — the first scholar to hold the Fletcher chair — exited Harvard in 2002 after a falling-out with then-president Larry Summers, Fletcher served as an intermediary between Summers and black alumni, working to rebuild bridges. Harvard officials were pleased, but some wondered whether Buddy Fletcher was too good to be true. “The unbroken string of profitable quarters was already an object of some puzzlement,” says a Harvard official. “I remember people being impressed, but puzzled.”
Fletcher didn’t limit his generosity to Harvard. In May 2004, on the occasion of the 50th anniversary of the Supreme Court’s landmark Brown v. Board of Education ruling, Fletcher announced that he would give $50 million to people and organizations working to promote civil rights. As part of that pledge, he would establish the Alphonse Fletcher Jr. Fellowships, $50,000 grants to be awarded to civil rights–minded scholars, artists, and writers. Henry Louis “Skip” Gates Jr., soon to become Harvard’s second Alphonse Fletcher Jr. University Professor, would be the primary director of the grant-giving.
The details were largely unspecified, but no matter: The Times compared Fletcher to Bill Cosby and Oprah Winfrey, and quoted a philanthropy expert who called the pledge “one of the largest individual gifts ever made by an African-American.”
In 2005, the Harvard Gay and Lesbian Caucus approached Fletcher to discuss giving him its annual Civil Rights Award. “The grapevine had made it known that he was in an intimate relationship with a man, so he seemed to qualify,” says Warren Goldfarb, a Harvard philosophy professor who is one of HGLC’s founders. “But we weren’t at all sure whether he would want to be public.” After an initial reluctance, Fletcher decided to accept the award at a dinner in June of that year. Shortly after, he made a $100,000 contribution to the group.
WAS FLETCHER HESITANT to accept the Civil Rights Award because his personal life was in turmoil? In 2003 and 2006, two male property managers hired by Fletcher to work at his Connecticut estate sued him for sexual harassment. Fletcher denied the allegations, though both men reportedly received confidential settlements. Then, in the summer of 2007, Fletcher surprised his friends by striking up a relationship with a woman. Her name was Ellen Pao, and they met at the Aspen Institute in Colorado, where both were among a group of fellows the institute had dubbed the “next generation of community-spirited leaders.” A few years younger than Fletcher, Pao also had an impressive résumé: A Princeton graduate with a JD and MBA from Harvard, she was a partner at the California-based venture capital firm Kleiner Perkins Caufield & Byers.
Fletcher and Pao were married before the year was out, and in May 2008 bought and moved into a $3.9 million apartment in San Francisco. By that fall they were the parents of a baby girl, Matilda Pao Fletcher. In about a year, Fletcher had gone from being in a long-term relationship with a man to marrying a woman and having a daughter.
Some people were surprised by this transformation. Stephen Cass was not among them. Cass had been one of Fletcher’s roommates at Harvard, and had then worked at FAM. But their relationship ended badly in January 1996, Cass says, when Fletcher fired him shortly before he was to receive a substantial bonus. Cass hired a lawyer, and months later Fletcher gave him a six-figure settlement. Over the years Cass has become convinced that with Buddy Fletcher, appearances can’t be trusted. Cass says Fletcher was a deeply conflicted young man at Harvard, obsessed with appearances and plagued by doubts about his own identity. Fletcher made disparaging remarks about homosexuals, Cass says, and seemed uncomfortable around more-activist black students.
When it came to the classroom, studying wasn’t his highest priority. In his concentration of applied math, says one Harvard acquaintance, Fletcher had to be “dragged over the finish line.” Cass says that “The social side and perception side of Harvard was much more important to him than the actual work. I never met anyone who wanted so much to be liked. And that’s a good thing. But if you take a good thing far enough, I suppose, it could become bad.”
IN JANUARY 2011, after the Dakota rejected his bid to buy Apartment 50, Fletcher sued the building for racial discrimination. The board members had an “extensive pattern of hostility toward non-white residents,” Fletcher claimed in his lawsuit. He charged that the Dakota board was against Jews, and had discriminated against an African American (allegedly making a black Dakota resident ride in the service elevator with her dogs — unlike the white residents) and a “Hispanic” apartment shopper (widely believed to be the actor Antonio Banderas).
“Mr. Fletcher’s application to purchase an additional apartment in the Dakota was rejected based on financial materials he provided…” the Dakota board responded. “Any accusations of racial discrimination are untrue and outrageous.”
From a PR standpoint, Fletcher’s lawsuit backfired almost immediately. The Wall Street Journal launched an in-depth investigation of FAM, and last July the paper reported some major peculiarities with the hedge fund. While FAM claimed to have $500 million in assets, the Journal argued that “it appears to arrive at this figure by counting some assets more than once…. A more orthodox way of measuring assets under management would produce a figure of about $200 million for one recent year.” Fletcher told the Journal that his investments were complex, but that they represented a “well-hedged and consistent portfolio.”
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.”
Fletcher’s other philanthropic pledges also look less than impressive. He says he fulfilled half of his $50 million civil rights pledge, but there’s little evidence of it. His primary giving appears to have been the Fletcher Fellows program of $50,000 annual grants. There were 12 such fellows in 2005, but the number has dropped since then — there were only five in 2011. In eight years, total spending on the Fletcher fellows has been about $2 million. “It’s a pledge, not a commitment,” Fletcher told one interviewer.
Buddy Fletcher turns 47 this year, and in May, his class will return to Cambridge for its 25th reunion. But as bad news continues to pour in, Fletcher has adopted a low profile. He hasn’t been seen around the Dakota in months. That lawsuit is progressing, but most of the claims against individual board members have been dismissed. It’s hard to argue discrimination against a building that has sold you four apartments. Last fall, Fletcher and Pao put their San Francisco apartment on the market, and the future of Fletcher’s hedge fund is in jeopardy — the bad publicity and SEC investigation make it unlikely that he will be able to attract new capital. Fletcher is fighting for his professional life.
As for Harvard: “If it were determined that the Alphonse Fletcher professorship had been endowed by a fraudster,” says a university source, “and not just any fraudster, but the first major African-American donor to the college — it would be awkward.” That said, Harvard would almost surely not return any of Fletcher’s money, nor rename its professorship. Removing the name, after all, would be an enormous controversy. Says the Harvard official: “The question is, How dishonorable do you have to be to have your name taken off something?”
Source URL: http://www.bostonmagazine.com/2012/02/is-harvard-graduate-buddy-fletcher-financial-genius-or-fake/