Fishers investment manager Keenan Hauke suffered massive losses in his hedge fund seven years ago. Then, rather than fess up, he orchestrated a scheme to dupe investors, generating fake account statements for clients that showed money they didn’t really have and returns they hadn’t earned, state investigators allege.
Hauke as of late last year was telling the more than 50 investors in his Samex Capital Partners hedge fund that it held $9.5 million, far more than was actually there, investigators in the 4-month-old inquiry say.
While court filings suggest Hauke’s goal, at least initially, might have been to pay back the investors over time, state securities regulators say they found that he began to tap investor funds to pay personal expenses, including costs of his Fishers home and Barbados condo and vacations to Barbados and Italy.
Keeping the fund afloat, state regulators allege, required an influx of money from new investors in order to fund withdrawals by other investors—the textbook definition of a Ponzi scheme.
“In true Ponzi scheme fashion, records show that in order to substantiate high rates of return to investors ... Hauke had to solicit more and more investor money into Samex Partners to meet payments to those investors that had put in requests for withdrawals from their fictitiously reported account holdings,” the state alleges in a Hamilton Superior Court filing.
The hedge fund’s investors—many from Indianapolis, others scattered from North Carolina to California—likely will suffer losses topping $5 million, said Chris Naylor, Indiana’s securities commissioner.
IBJ reported in April that the Securities Division of the Secretary of State’s Office began investigating Hauke after Scott Noble, a co-worker, notified the state about irregularities he said he had discovered.
Around the same time, the FBI launched its own investigation, according to investors who have been interviewed by agents.
Noble was a financial adviser at Samex Capital Advisors, Hauke’s financial advisory firm. That firm, which managed $24 million in assets, did not have access to clients’ money. The allegations of wrongdoing involve only the hedge fund, which Hauke ran alone.
Hauke, 40, is cooperating with investigators, said his former attorney, Larry Mackey, a partner with Barnes & Thornburg who is in the process of turning over representation to a public defender.
While Mackey would not comment in detail, he said the initial loss in the hedge fund was caused by Robert Beasley, another hedge fund manager whose firm provided back-office administration for Hauke’s fund.
He said Beasley, who has a long record of run-ins with regulators, plowed $3.5 million into Michigan residential real estate without telling Hauke—and lost the entire sum.
“Keenan ... has explained to the FBI that Beasley took millions of dollars from the hedge fund without Keenan’s knowledge,” Mackey said.
Hauke did not attempt to keep his businesses afloat after regulators stepped in. He consented to a court order appointing a receiver and did not contest the state’s revocation of his securities license.
He sold his Samex Capital Advisors’ financial-advisory business to Global Investment Solutions LLC of Canada, committing that any commissions he ultimately earns from the transfer would go to a restitution fund for investors.
Meanwhile, he and his wife, Sarah, who have three children, are pursuing a divorce after 16 years of marriage. In June, she filed papers to begin the dissolution process. She said in the filing she was without means to support her family.
Any equity in the family’s homes is going to the receiver, William Wendling, a partner with the law firm Campbell Kyle Proffitt in Carmel.
Investors say they’re stunned by Hauke’s downfall.
They say he reported solid returns, often in the double digits, but not so large as to be improbable for a hedge fund. Such funds, which cater to the wealthy, typically use sophisticated, high-risk strategies in an attempt to generate outsized gains.
And they say he seemed like a solid person. Hauke talked often about his family, his children and Catholic faith, as well as about the hobbies and interests of his clients.
New Jersey investor Wayne Pomanowski said he had such confidence in Hauke that he was not alarmed when he received a statement from Samex’s Chicago accounting firm in 2005 listing a zero balance.
Pomanowski said he called and wrote the firm, Michael J. Liccar and Co., but didn’t get a response. When he reached Hauke in Indianapolis, he said, “Wayne, it was an accounting glitch.”
Pomanowski, a New Jersey tax commissioner and real estate consultant, believed Hauke at the time and continued to have confidence in him, even though from then on the statements came straight from Hauke.
Adding to his credibility, investors say, was his high profile in the media—his investing column in IBJ, for instance, as well as appearances on CNBC, Fox Business Network, Bloomberg Television and Bloomberg Radio.
“It is a story everyone should hear because Keenan was your All-American boy,” Pomanowski said. “I never even heard the guy swear once.”
Running into trouble
Hauke was only 29 in 1999 when he incorporated Samex Capital Partners, the state’s first hedge fund. He’d recently moved to Indiana after being a stockbroker and trader, first in New York and then in Florida.
His investment strategy relied heavily on technical analysis, a discipline for forecasting the direction of prices through the study of past market data, primarily price and volume.
It’s not clear when he crossed paths with hedge fund manager Robert Beasley, CEO of Longboat Global Funds Management LLC of Sarasota, Fla.
Hauke’s investment-advisory registration lists Hauke as being an employee of Longboat starting in 2002. Two years later, when Pomanowski was considering investing in Hauke’s hedge fund, Pomanowski’s initial meeting was with Beasley, not Hauke. Pomanowski was surprised, but Hauke later explained the two worked together.
That was around the time Beasley’s world came crashing down. That year, the National Futures Association challenged how Longboat was valuing its Piranha Capital hedge fund. In 2005, the Commodity Futures Trading Commission charged Beasley with fraud, alleging he told Piranha investors their money was going into commodities when in fact millions went into his personal real estate deals.
That case concluded in 2007 with a federal court’s issuing a permanent injunction against Beasley and Longboat and ordering them to pay more than $15 million in restitution. Investors ended up receiving less than $1 million.
The Samex Capital Partners funds that Mackey says Beasley steered into Michigan real estate deals apparently disappeared quickly. The nature of those investments isn’t entirely clear, but by 2007 the Benton Spirit newspaper of Benton Harbor, Mich., listed nearly three dozen Samex-owned parcels in the area as being in foreclosure.
Beasley could not be located for comment.
Rather than own up to investors, Hauke dismissed Liccar, the Chicago firm that issued client statements, eliminating oversight. He then began producing statements himself that did not reflect the losses, according to state regulators.
Meanwhile, he set up a second fund, this time using the Indianapolis accounting firm DeWitt & Shrader for auditing and account statements.
But only some of his customers received the DeWitt statements. Hauke shifted enough money into the new fund to make those customers whole and conceal their losses, tapping other clients’ funds to do so, investigators allege.
“Over the course of the next seven years, Keenan continued to raise money from investors in both accounts,” Matthew Allen, litigation counsel for the Securities Division, said in an e-mail.
“Some clients’ funds were deposited in DeWitt-audited accounts; other funds were deposited in an undisclosed bank account which Keenan allegedly used as his personal slush fund.”
Too much pay?
Overstating account values and reporting returns on money that didn’t exist may have translated into Hauke’s receiving much higher pay than he’d really earned.
Investors in the hedge fund had agreed to pay Hauke an annual management fee of 2 percent of the hedge fund’s net asset value. A $10 million fund, for instance, would generate $200,000 in management fees. Plus, investors agreed to pay Hauke 20 percent of the fund’s returns.
Investigators and the receiver are sifting through the books and finding plenty of problems.
In a Hamilton Superior Court filing, the Securities Division alleges that neither Hauke nor his companies “maintained standard accounting and compliance practices as evidenced by the commingling of investor funds, the conversion of those funds for the personal use of the defendants and the creation of dual business logs, one being apparently legitimate and the other fiction.”
For example, records show in 2010, $230,000 was transferred from the hedge fund to Hauke’s personal bank account at Forum Credit Union. Another $82,000 was transferred from the hedge fund to Samex Capital Advisors.
Meanwhile, investors thought the value of the hedge fund was chugging higher. They were told it returned 11 percent in 2010 and even made money in 2008—the year the financial crisis hit, and the S&P 500-stock index shed 38 percent.
A chart prepared by Samex Capital Partners showed that $1,000 invested in the fund in 1999 would have grown in value to $3,000 by mid-2006. During the same span, the S&P 500 lost value.
“They were left to think these were wonderful returns—that this guy was really getting it done,” said Naylor, the securities commissioner.
In retrospect, investors say they should have seen red flags, from the amateurish-looking statements that didn’t seem to arrive on a regular basis to the rock-steady performance.
They attributed Hauke’s bookkeeping shortcomings to the fact he was running a small business.
And perhaps with the exception of his Barbados condo, they saw few signs he was living beyond his means. He drove a Toyota Prius for years, shoveled his own driveway when it snowed, and called himself a minimalist.
But perhaps most reassuring was his friendly, sincere demeanor.
“He knew I was interested in athletics,” said Bill McGuire, a retired State Farm Insurance manager in Alabama who played football at Mississippi State University. “He talked to me about things other than investing as much as he talked about investing.”
“That gave me more confidence in him that he wasn’t a con man. But con men are con men. That’s part of the problem.”•