Kat’s eyes twitched from fatigue. It was almost three a.m. She longed for some shuteye, but couldn’t rest until she tallied up the damage for Zachary. Edgewater appeared to be the victim of a massive fraud, bigger than anything she had ever seen.
Since arriving home from Edgewater several hours ago, she continued to analyze the individual client accounts against the statement copies she had found in Nathan’s office. It was a painstaking, eye-straining process. She had checked over a hundred and fifty accounts so far but had yet to come up with a single account where the paper statement matched the computer records. The paper copies boasted double-digit returns, yet most accounts in the computer had balances close to zero, with investment losses instead of gains.
The investment returns of the paper accounts were also remarkably consistent. Too consistent, as a matter of fact. Every account she checked earned exactly a twelve percent return, regardless of the timing of the client’s investment. Such consistency was statistically impossible given that the fund itself fluctuated. It invested in different currencies with constantly changing gains and losses.
The wind gusted outside, and she longed for the warmth of her bed.
“Still at it?” Jace stood in the doorway of the upstairs study, holding two cups of steaming coffee.
“Come see this, Jace.” She waved him over to her computer screen. “The client accounts only total about one hundred and fifty million dollars. Not the billions showing on Edgewater’s financial statements. I’ve crossed referenced them with the account statements I found. It doesn’t look good.” She had found files of paper statements in a locked filing cabinet at Edgewater. None reconciled to the balances in the computer system.
Jace handed her a coffee and pulled up a chair. “A hundred and fifty mil out of three billion? You mean 2.8 billion missing? How can it be so different?”
“It appears that Nathan’s been operating a giant Ponzi scheme. He takes investors’ money and transfers it out as soon as it comes in. These must be copies of the fake statements. It’s how he keeps track. See this?” Kat pointed to the computer screen where she had reconstructed investment returns for a sample group of twenty Edgewater investors. “All these investors earned exactly twelve percent per year for the last three years.”
“That’s impressive. I make less than two percent at the bank. Maybe I should move my money?”
“It’s fake, Jace. All made up. Each of these clients invested at different times. Some have been in the fund the whole time, and others just invested in the last year. Yet they made exactly the same return on investment.”
“Coincidence, maybe?”
“No. I’ve compared dozens of clients and their investments in the fund. The fund supposedly invests in all types of currency speculation, yet I can’t reconstruct the transactions in each of their accounts, or any of the other trades in Edgewater’s hedge fund. I’ve traced all the trade settlements from the bank statements and reconstructed the gain or loss in each currency that Edgewater trades in. Know what I get?”
“What?”
“A loss, Jace. There is no twelve percent return. Zachary thinks his currency model works, but it doesn’t. There are no trades. Nathan simply doesn’t execute them. He’s not investing the money, and Zachary’s oblivious to that fact because he never reviews the accounts.”
“You mean it’s all faked? Don’t other people work here? How could that go unnoticed?”
“Nathan is very hands-on, which is surprising with his frequent trips and absences. An executive doing administrative work is another fraud red flag. The work is much too junior for a billionaire founder.” Someone had to be helping too. The extent of the manual account manipulation was too much work for just one person.
“Zachary really has no clue about this?”
“He says he doesn’t. As hard as it is to believe, I think he’s telling the truth,” Kat said.
“But how could Nathan get so much money without Zachary or anyone noticing?”
“I don’t know. This fraud has been operating for at least ten years. Look at this.” Kat held up a statement. It had the Edgewater name and logo on it, but it was in a different format than the computer-generated statements. The client name was glued to the statement.
Jace took the statement and rubbed his finger over the logo. “Sloppy. This cut and paste job wouldn’t fool anyone.”
“He doesn’t use this version—he scans and emails an electronic copy, so no one knows it’s been doctored. He tallies everything on a spreadsheet and just adds a percentage increase to each account every quarter. Everyone’s happy.” The cryptic spreadsheets Kat had found in Nathan’s office finally made sense. It was his manual accounting system of sorts.
“How does he ensure the real statements don’t go out?”
“Someone else must be in on it. When the system prints the real statements, they are destroyed. The doctored statements are mailed to clients instead.”
Jace whistled. “All this money goes where?”
“A good chunk of it has gone to a company called Research Analytics. I’ll pay them a visit tomorrow.” Kat pointed to the pile of Research Analytics invoices. “Fifty million was transferred so far this year, and two hundred and twenty million last year. I’m still searching for the rest.”
“What if a client wanted to cash in their investment? Wouldn’t that expose the fraud?”
“Only if Nathan doesn’t give them their money. As long as more new money comes in, he can pay redeeming investors without the fund going broke. He just moves the money from one investor account to another to cover it.” Kat caught a movement out of the corner of her eye. She turned around to see Harry in the hallway, dressed in shorts and a golf shirt. “Going somewhere, Uncle Harry?”
“Just out for a stroll.”
“It’s the middle of the night. And it’s raining.” Harry had decided to stay over after watching the game with Jace. Had Harry been on these nighttime excursions before?
“It is? Maybe I’ll just stay in, then.”
Kat and Jace exchanged glances. What if she hadn’t been awake? Harry would have gone out in the sub-zero weather without a coat. “Okay, Uncle Harry. See you in the morning.”
Harry shuffled back down the hall. The doctor was right: Harry wasn’t safe on his own. But moving him to a care home was out of the question. She’d figure something out tomorrow. She turned back to Jace.
“Would you redeem your investment if you were earning twelve percent a year for five years running?”
Jace shook his head. “No way. I can’t get that kind of return at the bank—or anywhere else.”
“That’s exactly what Edgewater’s clients think too. Year in and year out, they’ve earned fantastic returns. No one redeems their investment unless they’re in dire straits. You’d be crazy to pass up that income. Nathan’s banking on very few redemptions. Investors always cash in less profitable investments first.”
“So Nathan just needs enough money to cover off the few accounts that did redeem.”
Kat nodded. “Yes, and that hasn’t been a problem. Investors are practically banging down the door to invest in the hedge fund. The fund has an air of exclusivity about it. Nathan doesn’t let just anyone invest, so people consider themselves lucky to invest in the first place. If they redeem their investment, they might not be allowed back in. And you have to be rich to invest in a high-risk hedge fund with a minimum five hundred thousand investment.”
“It sounds like there’s no risk at all. The investors get a hefty return, year over year. The markets haven’t been anything like that. It’s too good to be true.”
“It is—as long as Edgewater keeps earning those stellar returns. Zachary thinks it’s due to his secret trading model.”
“Sounds like you doubt him.”
Kat sipped her coffee. “I think he believes his model works. Trouble is, it’s never been proven, since Nathan isn’t processing the trades. And Zachary never checks. I guess he assumes twelve percent overall sounds about right. Zachary’s suspicions are bang on, though. Nathan is clearly defrauding Edgewater. The fake client statements and Beecham & Company prove that. I just don’t get how Zachary could be so disconnected. There’s more.” She filled him in on Edgewater’s unlikely association with Fredrick Svensson.
“The Nobel economist guy? Maybe there’s a good reason to pay him. Even with different views, he might have some good currency predictions.”
“It’s too weird, Jace. Svensson’s push is for a common currency—like the Euro—only on a global scale. Edgewater exploits and profits from the very discrepancies Svensson seeks to eliminate with his model. It makes no sense.”
“Maybe Zachary has some ideas. Since he’s so smart.” Jace smirked.
“I doubt it, Jace. Zachary insists that all trades are based on his proprietary trading model. He says they don’t use any outside research. There is one more thing I can’t figure out.”
“What’s that?” Jace asked.
“How is Nathan pulling this off? Zachary says he enters his trades into the system himself. But when I checked, those trades aren’t being pulled into the accounting system. It’s like it’s not connected to anything.”
Jace never got a chance to answer.
They both froze as a loud crash followed by shattering glass came from downstairs.
Kat dropped her pen. Heavy footsteps thudded on the front stairs. She jumped up and peered out the study window. A dark figure ran down the walkway to a black sedan idling at the curb. She couldn’t tell whether it was a man or woman as they slammed the passenger door. The car’s tires squealed as it tore away from the curb.
She ran to the hallway with Jace close behind. They both slammed to a stop on the upstairs landing when they smelled the gasoline.