Andrew Caspersen: Fraud and Crime in Financial Careers
‘With great power comes great responsibility’. But sometimes that power is grossly abused. This is the case with the newest member of our Masters of Fraud series, Andrew Caspersen. A prominent banker, Caspersen concocted a bogus investment scheme that defrauded investors of $38 million.1 The total could have been much worse. Some of this money came from family and friends, while others came from charitable contributions.
As a result of his deception, Mr. Caspersen is currently serving a four-year prison sentence. But the mark on his family name will last much longer.
Born to a prominent and wealthy family, Caspersen accomplished the fraud by relying on the blind trust of others, a byproduct of the family name that had significant connections, reach and influence.
The patriarch, Finn Caspersen, was a financier who ran the consumer finance company Beneficial Corporation, later sold to Household International for $8.25 billion in stock.2 Suddenly quite wealthy, Finn became a major philanthropist, donating $30 million to Harvard Law School alone. This made him Harvard’s largest single donor, according to Vanity Fair.3
Each one of Finn’s four sons all pursued careers in finance. Their alma maters include prestigious names such as Harvard, Princeton, and Brown as well as tony prep schools like Peddie and Groton. Their financial careers were also impressive, working for a variety of private equity firms.
The 40-year old Caspersen was charged with securities and wire fraud. He also used the personal identification of others, without their consent. His own family may have lost over $3 million in the fraud. But the big losses came from a prominent charity. A friend (and former Princeton classmate) at Louis Bacon’s hedge fund Moore Capital, convinced the Moore Charitable Foundation, their philanthropic arm, to invest $25 million with Caspersen.
Caspersen reportedly lost more than half of the foundations $25 million by personally gambling on options. He was apparently buying very aggressive amounts of derivatives (at-the-money put options in this case) on the S&P 500 index.
An investor purchases a put option to obtain the right, but not the obligation to sell a set number of shares of a security. It is an investment strategy often used to express a negative or ‘bearish’ view of the markets or a particular security. But they can also be used as a hedge, offsetting the losses from an investment portfolio. If the market goes up, or stays flat, the options will result in a loss or expire worthless. They turned out to be very bad bets.
In total, the Securities and Exchange Commission claims that, “Caspersen … solicited $95 million to invest in a shell company”.4 This company was apparently the investment vehicle ‘Irving Place III SPV L.L.C.’, a Delaware entity.5 That name is very similar to a legitimate investment fund the firm used, which helped mask the fraud.
Caspersen also failed to mention to investors that he was the sole entity in the company. He also used tactics including setting up fake email addresses, domain names and invented a fictitious banker named John Nelson.6
Like all Ponzi schemes, the fraud is discovered when the investors ask for their money back. In this case it was the Moore Foundation who wanted their $25 million (plus interest). Prosecutors allege Caspersen had previously wired $17.6 million of that amount to his personal account.7
In the end, the bank account the foundation had originally wired the money to had a balance of just $40,000.8
But Why the Financial Crime?
The question remains, why would someone of such a privileged upbringing need to resort to such schemes? Caspersen certainly did not need the money, considering his family’s wealth. He is also married to an investor relations executive and the family owned multiple homes in New York City.
Andrew Caspersen himself enjoyed generous compensation. Prosecutors reported that he earned over $8 million in a two-year period working at the Park Hill Group ($3.68 million in 2015 and $4.5 million in 2014).9
Park Hill “specializes in raising money for private equity and hedge funds”. Caspersen certainly had the connections to raise money, and was apparently quite good at it. The problem is he was raising the money for his own slush fund.
The simplest answer is that Andrew Caspersen had a serious gambling problem. Instead of poker or the ponies, the game was the stock market. In addition to the fraudulently obtained funds, Andrew Caspersen may have also lost tens of millions of dollars of his personal money. In all, prosecutors believe Caspersen may have lost $108 million dollars trading in 2016, over a time period of less than one month!10
Despite the posh upbringing, there were some dark moments for Andrew Caspersen which could have played a contributing factor. His father, Finn, had battled kidney cancer and following in the footsteps of other financiers like Robert Wilson, took his own life. Previously, Andrew Caspersen’s longtime girlfriend was killed in the World Trade Center attacks of 2001. He created a memorial fund in her name providing educational opportunities for underprivileged children.
Ironically, it was his “gambling addiction” that saved Caspersen twelve years of prison time.
Caspersen was facing a maximum sentence of sixteen years in prison but was sentenced to just four. He is also permanently barred from the securities industry.
The sentencing judge cited Caspersen’s addiction as one of the reasons for the lighter sentence. The New York Daily News reported the judge noted at one point Caspersen had actually made back all the money he had stolen plus $50 million extra.11 But the addiction revealed that wasn’t enough and he soon gave it all back.
Could This Fraud Have Been Prevented?
Like other fraudsters we have written about, such as Nick Leeson and Jerome Kerviel, the fraud was partially enabled by a unique understanding of technology and back office procedures. In Caspersen’s case, it was the way to manipulate payments billing system at Park Hill.
Caspersen was able to essentially alter invoices they sent customers to have them send payments to his personal bank account instead of the company’s account. This underscores why concise risk management policies and procedures are so important.
There are methods of detection that could, and should, have been used in this case. With today’s technology, there is really no excuse for any firm to have software in place to pick up red flag activities. The fraudulent invoices should have never been allowed to go out without first being reviewed by a compliance officer or someone in the treasury department. And the unauthorized wire transfers should have been detected by an operations employee in the back office or the wire clerk.
Caspersen wasn’t working for a public company- rather a private equity fund where things are kept private for a reason. This discretion can aid in the discovery of investments but may be bad news for risk management.
The other detection methods are a bit trickier. On a more psychological level, Caspersen took advantage of people’s trust largely from the family name. This blind level of trust is consistent with other scandals like Bernie Madoff’s. The best way to protect yourself is by asking questions of managers and remaining inquisitive. If a ‘guaranteed’ rate of return in the double digits is offered to you, don’t bite.
If the subject of detecting, deterring and prosecuting financial criminals sounds appealing, consider a career as a fraud investigator, AML professional or forensic accountant. Many AML (anti-money laundering) professionals also pursue the CAML designation.
In addition to the certifications, aspiring professionals might consider an online MBA in Fraud Management. This degree will give you a leg up on the competition in a career that should, unfortunately, remain in high demand for years to come.
- 9 https://www.nytimes.com/2016/03/30/business/dealbook/charitable-trust-says-it-was-a-victim-of-an-investment-scheme.html?action=click&contentCollection=DealBook&module=RelatedCoverage®ion=EndOfArticle&pgtype=article&_r=0