Buddy Fletcher: Financial Genius — 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?

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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 . . . .”

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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.”

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Fletcher’s ascent couldn’t have come 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. {snip}

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. {snip} 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. {snip}

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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.” {snip}

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?

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