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Investors trusted; millions missing

A Bradenton man collected $73.7-million in hedge fund investments and committed suicide; nearly all of it is apparently gone.

By JENNIFER LIBERTO
Published June 23, 2005


HarrisFederal regulators say Howard K. Waxenberg kept most of investors' $73.7-million.

Text of SEC complaint

To friends and family, Howard K. Waxenberg was a proud father, a clever jokester and a successful businessman.

To the Securities and Exchange Commission, he was the mastermind of a long-running, expensive Ponzi scheme that went undetected until he shot himself in the head last month in his Bradenton condominium.

Waxenberg, 54, ran a hedge fund, a private investment firm that pools clients' dollars into accounts to invest them in a variety of ambitious ways.

Over 15 years, Waxenberg had collected more than $73.7-million from nearly 200 mostly wealthy investors scattered from Los Angeles to Boston, according to SEC records filed in federal court earlier this month.

He won their trust despite losing his job and trading privileges in the 1980s for lying and stealing from his employer, a national brokerage firm.

Investors apparently never made the connection. Neither did regulators. When the SEC froze Waxenberg's hedge fund accounts earlier this month and seized his records, 95 percent of the money he had collected from investors was gone.

Waxenberg kept few records. He fabricated quarterly reports, which arrived on investors' doorsteps with hefty checks. Investors thought they were getting their promised double-digit returns, as much as 20 percent a year. In reality, most were just getting a little of their own money back.

Four days before his death, Waxenberg sent two-sentence notes to some clients, announcing his retirement with checks presumably returning their original investment. Many of the checks bounced.

The SEC uses Waxenberg's case to illustrate why the agency wrote new rules to regulate hedge funds, which lately have skyrocketed in popularity, along with hedge fund fraud. The funds currently aren't regulated but will be in February.

That comes as no comfort to the retirees, widows, doctors, lawyers and accountants who gave Waxenberg millions.

"I knew one day it would end, perhaps with a slight detrition," said Andrew Marias, a California investor who lost much of his employee pension IRA to Waxenberg. "I never expected anything like this."

* * *

Howard Waxenberg never seemed like the type of guy who would steal millions, say SEC attorneys, investors and longtime friends.

He had married Zelda Steiman, daughter of a wealthy San Diego builder and philanthropist, Morris Steiman, who built synagogues and gave millions to community causes, according to the San Diego Union-Tribune.

Zelda Waxenberg declined, through her attorney, to speak with the St. Petersburg Times.

High school classmates who saw Waxenberg last year at their 35th reunion say he had once distinguished himself in a class of 639 at Rock Island (Ill.) High School by running a marathon around the school track - circling it 105 times.

"He was very determined, but he also just did silly little things," said Rick Miers, 54, who grew up with Waxenberg.

At the reunion, he boasted of his teenage sons, Jake and Zack, classmates say. He had put on weight but looked healthy enough, greeting middle age with a graying beard, mustache and thin-rimmed glasses.

He told his classmates self-deprecating stories of a corn-fed Jewish Midwestern boy coming of age in downtown Los Angeles. They chuckled at his notion that Rock Island, with a population of about 40,000, should shape a 2020 Olympic bid for the Quad Cities, the area that encompasses Rock Island and Moline/East Moline in Illinois, and Davenport and Bettendorf in Iowa, population 400,000.

Classmates enjoyed reading Waxenberg's post reunion e-mails, which included a quirky list of reasons to attend the 2009 reunion. "You can see what everyone looks like after your Lasik surgery," he wrote, signing off as "Wax." "You really do like going to the John Deere museum."

Waxenberg left Rock Island for the University of California at Los Angeles, where he graduated in 1973 with a psychology degree.

He bounced from job to job around Los Angeles until he landed with Jefferies & Co. Inc., the national brokerage firm, according to National Association of Securities Dealers records.

By the early 1980s, he lived in New York, where he had his first run-in with securities regulators.

In 1983, Waxenberg was trading options for both his personal account and Jefferies' account at the same time. According to NASD records, he made sure that profitable trades went to his personal account and losing trades went to his employer. He also faked paperwork for the firm's books and records to cover up the scheme, the records state.

The NASD Board of Governors decided in 1987 to make an example of Waxenberg by forever banning him from stock trading. Because of that ban, he never would have qualified for membership in the federal Commodities Futures Trading Commission, necessary to trade futures contracts - which Waxenberg later boasted to clients was the key to his big returns.

After Jefferies & Co. fired him, he moved to Southern California.

Three years after the censure, he opened a private hedge fund. He worked alone and called the firm Downing & Associates, setting up an office in Del Mar, Calif., a small seaside city north of San Diego.

Several investors said they never met "Downing"; they talked only to Waxenberg.

Waxenberg told clients that he day-traded Standard & Poor's 500 futures contracts on the Chicago Mercantile Exchange. In later years, he promised 18 percent to 20 percent annual profits. Doctors, lawyers, accountants and retirees say they believed in Waxenberg.

"The results spoke for themselves," said Nathan Greenberg, 86, of Palm Beach, a semi-retired accountant who invested $4.4-million with Waxenberg over eight years, money that now appears to be lost. "He was consistent, and he kept his word up until the very end."

Part of the reason nobody questioned Waxenberg for so long is that his hedge fund worked like any other small hedge fund. He sent investors quarterly checks and annual audits without fail. He even went to hedge fund conferences.

Over the years, he grew so popular and took on so many clients, he started changing the rules on some of his funds. Early on, he'd accept investments as small as $50,000. But in 2002, he set a minimum of $250,000, requiring investors to "faithfully represent" they were worth at least $1-million, excluding their home.

He also renamed the hedge fund after himself.

* * *

In June 2002, Zelda Waxenberg bought a $425,000 Bradenton condominium behind the secluded walls of IMG Academies, a 200-acre sports community, where son Jake could play soccer full time with the best. IMG, where Venus and Serena Williams polished their tennis games, can cost up to $70,000 a year, including tuition at the private school, which Jake attended.

Howard Waxenberg leased a tiny office in a nearby office park. He never hung a sign on his door, according to office neighbors.

In a 2002 letter to woo investor Robert Fischer of St. Louis, Waxenberg said his company was 20 years old; it was only 12. He referred to staff he didn't have. According to state records, Waxenberg never registered his hedge fund with the Florida Department of Financial Services. No state regulatory agency ever received a complaint against the company, which was registered with the Secretary of State's Office.

This spring, when Waxenberg announced his retirement, he told those who asked that the business was getting to be "too much of a strain," investor Nathan Greenberg recalled from a conversation.

People expected to at least get their money back.

"I did this with my eyes wide open," said investor Marias, who moved $225,000 worth of retirement savings from the established Oppenheimer & Co. to Waxenberg.

"With double digit returns," Marias said, "you don't really want to find anything bad."

Marias, 64, is now contemplating whether to emerge from retirement.

Investors Fischer and Henry Shaw are skeptical. They want to know if Waxenberg is really dead, or if he's living the good life in Argentina.

"We're afraid it's all gone," said Shaw, who would only acknowledge that he had a "substantial amount" at stake.

The Manatee County Sheriff's Office confirmed that Waxenberg shot himself May 15. Zelda Waxenberg found his body and called the police. She said the last time she had seen her husband alive was about 3 p.m. that day.

The SEC had been looking for Waxenberg weeks before his death, said Rod Rawlings, who runs a real estate company two doors down from Waxenberg's office.

When federal regulators searched the office, they found only a few file cabinets and crates, six computers and two suitcases. There were no formal books, records or client files.

But what little they found raised questions.

Quarterly statements mailed to investors in one fund showed gains of 10 percent during the last six months of 2004, while an audit found from a Chicago firm for the same period showed the fund lost 3.41 percent of its value.

The SEC says that, despite what he told clients, Waxenberg wasn't doing much day-trading, not since 2002. He mostly invested in low-yielding money market funds. They say he made up earnings statements each quarter.

He even created fake IRS filings that confirmed his investors' supposed annual profits, which means investors may have paid federal income taxes on money they never earned.

Waxenberg pocketed at least $1.6-million from the investment funds, according to a handful of personal bank records found by investigators. The SEC doesn't know what more he might have taken, since records were spotty.

On June 9, the SEC filed an emergency action in federal district court in Tampa, freezing the assets of HKW Trading, LLC, Howard Waxenberg Trading, LLC, and Downing & Associates Technical Analysis, and the estate of Howard Waxenberg.

While going after the companies, the SEC admits it lacks a human target. "No one's in charge; it was rudderless," said SEC attorney Christopher Martin of Miami. "It's unfortunate."

Federal investigators wouldn't confirm or deny whether any criminal charges might spring from the case.

Judge Susan C. Bucklew ordered Waxenberg's remaining investment companies and funds into receivership, overseen by Tampa attorney Burton Wiand.

Only a handful of Waxenberg investors have made claims. The SEC encourages investors to call Wiand at (813) 228-7411 if they are owed money.

The catch?

Only $3.9-million remains of the $73.7-million Waxenberg collected.

Times news researchers Cathy Wos and Carolyn Edds contributed to this report. Jennifer Liberto can be reached at 813226-3403 or liberto@sptimes.com

[Last modified June 23, 2005, 06:51:45]


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