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The Woes of Martin Armstrong

The feds say the former offshore hedge fund manager scammed investors out of $1 billion. But the imprisoned armstrong says he's only guilty of knowing the whereabouts of too many financial skeletons.

By Nina Mehta

Martin Armstrong, former chairman of Princeton Economics International Ltd., and now prisoner #12518-050 at the Metropolitan Correctional Center in lower Manhattan, arrives for his interview in the eleventh-floor visitor's room carrying a paper manuscript box marked EVIDENCE.

The room is a low-rent affair with a row of barred windows, stacks of cheap plastic chairs, and a chunky metal-encased camera that stares down at us from its perch high in a corner. Armstrong's fingernails are long, and there's an air of sour indifference about him.

After a quick handshake and chat with his court-appointed criminal-defense lawyer, Armstrong faces his guest, the small tape recorder clicks on and the interview begins.

To federal authorities, Armstrong is a mega-swindler, a Ponzi scheme operator who bilked Japanese investors out of $1 billion. According to documents filed in federal court last year, Armstrong sold $3 billion in promissory "Princeton Notes” to Japanese corporates, invested the proceeds in risky currency and commodities transactions, racked up huge losses and then concealed the losses from investors.

He was indicted last September on criminal securities fraud by the U.S. Attorney for the Southern District of New York, and released on a $5 million bond. He has been accused not of theft, but of misleading clients about financial losses and using new funds to mask those losses. In January, when he failed to hand over corporate files and assets to the court-appointed receiver for his companies, he was charged with civil contempt and incarcerated in the high-rise prison a few blocks from the World Financial Center. He and his two offshore companies, Princeton Economics International and Princeton Global Management Ltd., were also slapped with civil suits filed by the Securities and Exchange Commission and the Commodity Futures Trading Commission.

Armstrong, however, believes he's an innocent man who has been silenced because he knows too much. He sheds his nonchalance as the interview proceeds, picking up intensity; by the end, he's calmly skywriting accusations about the motives of those involved in the case. After nine months in prison, he remains staunchly uncooperative and, in his view, uncowed. "They think that by putting me in here they'll get me to plead guilty and cut some sort of deal, so it makes it easy for everybody,” he says. "Bullshit. I'm not going to do it.”

"This is not an unusual situation,” adds Martin Siegel, his attorney, pointing to the federal government's willingness in the Wen Ho Lee nuclear-secrets debacle to build a legal case on speculation and rickety evidence. "It's not as rare as people think it is. It's standard operating procedure.”

Chain of Events

Armstrong says he knows how the river gods of finance operate. He knows about Republic Bank and Warren Buffett conspiring to manipulate the silver market in September 1997. He knows the names of the vultures who have attacked third-world currencies. And, from his ringside seat in the capital markets, he has witnessed the impotence of U.S. regulators to do much of anything about this grim circus. "Things got out of hand,” he says of the Asian crisis that started in 1997 and matured over the next two years. "That's part of the reason why, once this began with me, all of a sudden Tiger Management starts closing down and everybody's running for the hills—because of what could possibly come out of the case.”

Armstrong also believes he's being silenced because he knows too much about the backroom dealings and dissolute ways of Republic National Bank, which merged with HSBC Holdings, the British banking conglomerate, at the close of last year. Republic New York Securities Corp., a Republic subsidiary, acted as the custodian of Armstrong's brokerage accounts.

When Armstrong was arrested last fall, the news nearly scuppered the HSBC-Republic merger. Republic's share price was punched down $10, and Edmond Safra, the bank's billionaire founder and one of the world's richest men, was forced to personally trim his takings from the merger by $450 million in order to save the deal. In late November, about a month after Armstrong declared he would subpoena documents and tapes of specific phone lines from Republic to buttress his defense against securities fraud, Safra was killed in strange circumstances in his home in Monaco.

Armstrong, however, does not think Safra was offed because of his case. He brings up Russian money-laundering and what he describes as a coup to remove Yeltsin from office. According to Congressional testimony by a Republic deputy general counsel, Republic was the bank that tattled on the Bank of New York's involvement in Russian money-laundering in 1998. But Armstrong thinks Republic was playing both sides of the law. "Republic instigated the Bank of New York deal,” he says. "That particular money-laundering deal was given to the Bank of New York, and that particular deal led directly to the Kremlin, which caused Yeltsin to resign.”

How does all this connect with Armstrong? "I would have been, through this civil case and the criminal case, the first person ever to get Safra on the stand,” he asserts. "I don't think he was killed specifically for anything particular in this case. But Safra had a reputation for being involved in a lot of money-laundering—for CIA stuff, for Iran-Contra...If I got him on the stand, some of this might have come out.”

The Safra connection now qualifies as spilt milk. But Armstrong saves his strongest criticism for Republic Bank.

Republic, he says, was worried about losing its banking license in Japan. The Financial Supervisory Authority, Japan's regulator, had begun cracking down on so-called tobashi deals. Throughout the 1990s, Japanese pension fund managers and corporates were underwater on their investment performance as the Nikkei fell. But according to Japanese accounting rules, the losses didn't have to be shown until realized. Instead of simply taking their lumps, Japanese managers scrambled after products they could swap for their crippled portfolios. Credit Suisse First Boston and a dozen other Wall Street firms answered their cries with complicated fixed-income instruments that carried short-term embedded options—instruments that were deemed acceptable at the time but that eventually led the FSA to accuse CSFB of illegal activities and yank its licence to do business in Japan. Cresvale International, a Hong Kong-based brokerage subsidiary of PEI (and the entity through which the Princeton Notes were sold), was among the firms doing these tobashi deals in Tokyo.

The funds for Armstrong's Japanese note-holders were supposed to be held in segregated accounts at Republic New York Securities. But federal authorities believe that when Armstrong started running into trouble, he dumped everything into one pool in order to conceal losses. According to documents, this was by William Rogers, head of the futures unit at the Republic broker-dealer, who oversaw Armstrong's accounts, at his client's behest. For his part, Armstrong says that Republic collapsed the accounts, perhaps to confuse or mislead Japanese regulators clamping down on activity it no longer wanted to tolerate.

The Princeton-Cresvale scandal came to light when a Japanese regulator noticed that more than 200 run-of-the-mill net-asset-value letters sent to Cresvale clients had been signed by Rogers, rather than a low-level employee. Republic Bank conducted an internal investigation, discovered that money was being moved around between accounts in a giant shell game, suspended Rogers and James Sweeney, president and CEO of the broker-dealer, and alerted the Feds. Documents filed in court last year by the SEC indicated that Armstrong had "caused” the misleading NAV letters to be written.

Since then, it appears Republic has cooperated with the authorities and has not been charged with any wrongdoing. Rogers and Sweeney have also not been indicted or charged with any securities-law violations. (Republic declined to be interviewed for this article.)

Armstrong denies that he cheated clients and ordered the Princeton accounts to be collapsed. Indeed, he lays the blame for all problems on the Republic broker-dealer. Its back office, he says, was a disaster—and the bank's internal memos will confirm that Republic knew about sundry accounting indelicacies and back-office gridlocks. HSBC now has a gag order on him and is trying to block access to memos and tapes of conversations he's seeking through the discovery process. At least one group of Japanese corporates is suing the bank for fraud. "[Republic's] argument is that it would be unfair that any discovery I had from the criminal case would be turned over to the Japanese to help them in their suits against Republic,” claims Armstrong.

Not surprisingly, a number of questions remain. Republic argues that Armstrong pulled the strings for the entire securities scam. But why didn't anyone at Republic worry that 90 percent of all the business in the futures division was generated by Armstrong's Princeton companies, as has been reported in press accounts? Under what rock was Republic's due-diligence task force sleeping when the Princeton accounts were being messed up?

Armstrong's story is equally hard to credit. How could Armstrong not notice that hundreds of millions of dollars weren't where he thought they were? And if he lost tens or hundreds of millions of dollars by betting wrong on yen-U.S. dollar, as is speculated, is it possible he wasn't such a great trader after all?

Legal Eagle

Answers to these questions are not likely to surface until the criminal case against Armstrong comes to trial, which may not be until this time next year, says Armstrong's lawyer. Meanwhile, the prisoner from Maple Shade, N.J., spends his free time in the law library at the Manhattan Correctional Center, grinding out legal briefs and letters. He jokes that Siegel, his lawyer, expects him to pass the bar exam.

The former PEI chief has gone through about half a dozen attorneys over the last 13 months. Last September, he wired $1.3 million in advance retainer fees to three law firms from his Princeton companies hours before a court-mandated asset freeze. Some of the attorneys abandoned Armstrong's defense after Alan Cohen, the court-appointed receiver from the New York law office of O'Melveny & Myers, required them to surrender the fees. Other lawyers were fired by Armstrong. Although he now has a court-appointed attorney for his criminal case and another one for his contempt charge, he is representing himself in some of the civil suits being brought against him—and in any event appears to be calling the shots in his legal defenses.

Yet for all the current focus on his criminal defense case, much of Armstrong's time this year has been spent fighting his civil contempt charge. He now belittles this as a "side show,” but over the months he has fired off a round of legal salvos damning the receiver and Judge Richard Owen, the federal judge for the Southern District of New York who is presiding over his civil cases, for various abuses of law and violations of his civil rights.

These documents won't win plaudits from the ABA for their display of dispassionate legalese. They're forceful screeds, written in seeming haste with a ragout of typos and mistakes, but with full citations from case law and the statute books. Armstrong doesn't enumerate his complaints in calm, measured paragraphs as much as hurl poison darts at all involved—from his former lawyers, some of whom he dismisses as spineless, to the judge, who he suggests should recuse himself from the case because of unlawful ex parte discussions with the receiver, one of his former law clerks.

Ego Games

In a series of high-octane motions, Armstrong argues that the receiver is a shill for the New York District Attorney, and that he has operated in bad faith by embellishing the record, misleading the court and manufacturing evidence. He upbraids the receiver and the judge for a string of improprieties, writing that the civil contempt charge "has been brought for punitive purposes with malice and indicitiveness of forethought with the intent to disrupt my defense, prejudice my case and deliver to the US Attorney a tactical advantage in my criminal prosecution.”

"How the Receiver could not find a 6 foot suit of armor or marble antiquities prominently displayed in my former office is simply inexcusable particularly when he is demanding my incarceration for failing to produce these very items.”
—Martin Armstrong

He maintains that Cohen has an "Alter-Ego” reason for wanting to be receiver. He believes Cohen has devalued key parts of the Princeton companies and inflated the value of missing assets in an effort to buttress the government's case "that this [whole operation] is somehow a fraud that had no means of meeting its obligations.” Cohen's reason, according to Armstrong: he wants to bill more hours. The receiver is not interested in running the Princeton businesses but in milking "his new found money-machine behind the cloak of your Honor,” writes Armstrong.

In a related vein, he contends that Cohen has not done his duty to properly manage the Princeton companies under his receivership. For several weeks last fall, says Armstrong, the receiver didn't pay the staff of Princeton Economic Institute, an independent research organization with various ties to Armstrong (which the court eventually declared part of his corporate assets), so most of the employees left. He adds that the receiver didn't cooperate with banks, accept credit card orders from prospective customers, or respond to a group of clients that wanted to purchase the Institute—all told, that Cohen's handling of business matters has been the work of a layabout caretaker.

Where's Livia?

Perhaps a few odd twists to this case are to be expected. Like, for instance, the corporate goods on the receiver's Most Wanted list. The items still at large include 102 gold bars (worth $1 million), 699 gold bullion coins, $13 million worth of rare antique coins, a $750,000 black bust of Julius Caesar sculpted in the first century A.D., a bust of Emperor Commodus, a bust of Empress Livia (the wife of Emperor Augustus), seven cuneiform tablets and other rarities. In 1997 and 1998, says one coin dealer deposed by the receiver, Armstrong was among the world's largest buyers of rare coins minted in ancient Greece and Rome; his purchases influenced international coin prices.

Armstrong's criticisms of Cohen are also fluted with a droll, almost slapstick disdain. The receiver mistook a calendar shaped like a silver bar for silver bullion and a gold-plated paperweight for the real thing, he says. These were not "corporate assets” and were not "hidden” in his West Windsor, N.J., office. He tut-tuts the receiver for not immediately locating certain antiquities. "How the Receiver could not find a 6 foot suit of armor or marble antiquities prominently displayed in my former office is simply inexcusable particularly when he is demanding my incarceration for failing to produce these very items,” he moans. In light of such lapses, he wonders, "how can the court accept [Cohen's] declaration claiming he found no coins?”

After armstrong predicted the July 20, 1998, high in the u.s. equities market, the cia called, wanting to know how the institute's proprietary models worked.

Armstrong further charges the receiver with abusing his court-appointed powers by acting as his prosecutor. Cohen, he says, is helping the D.A. make his case by not forcing those who cooperate with his office to fork over "tainted” corporate assets. He points out that Tina Mustra, his former executive assistant and one-time fiance (who continues to work at the Institute), still has a BMW, an ancient coin necklace and other gewgaws that came from the same pool of corporate assets the receiver has since seized. There's a quid pro quo at work here, he says—her deposition and help in exchange for her being allowed to hang on to her goodies. He claims this is extortion, then reminds the judge that extortion by a representative of the court is punishable by a fine and up to three years imprisonment. The receiver, he adds, also engaged in other acts of bribery.

Armstrong has charged Judge Owen with a number of legal no-no's as well. He writes that the judge has displayed animosity toward him, that the judge is irreparably "pro-government,” that he has no jurisdictional leg to stand on since this case involves offshore entities, and that his behavior has possibly contaminated "the independence of the judiciary and as such constitutes prejudicial conduct.” In June, Armstrong filed an official complaint against the judge for misconduct, alleging that he had engaged in extra-judicial discussions with Cohen about the Princeton companies and that a Special Master of the Court should be appointed to untangle this case's hoary mess of truth and lies.

Bad Facts

Perhaps one of the more indisputable facts in this legal saga is that Armstrong is not a temperate defendent. He has not cooperated with authorities, and his allegations have kept the receiver's office and others on their toes. When questioned about some of Armstrong's claims, for instance, Tancred Sciavoni, the receiver's counsel at O'Melveny & Myers, immediately e-mails dozens of legal documents and depositions disputing item after item in the lavish wreath of criticism Armstrong has tacked on the receiver's door.

In fact, Armstrong's facts don't quite fit. The suit of armor and other busts from his office were not on the laundry list of missing goods that ultimately led to his incarceration for civil contempt. Corporate assets were frozen by court order, never by the receiver's whim. Armstrong's windy explanations of the whereabouts of certain assets were found by the judge to be a legal nullity. (A deposition of Armstrong's chauffeur, for instance, negated his claim that he gave the 102 now-missing gold bars to Akira Setogawa, the head of Cresvale's Tokyo office, in a New Jersey parking lot in June 1998.) In addition, the group of investors that inquired about purchasing Princeton Economics Institute was not taken seriously since it was represented by a long-term friend of Armstrong's who refused to name the investors. Receipts, affadavits, wire-transfer letters and legal documents buttress the receiver's findings and fly in the face of Armstrong's statements about the disposition of assets and the course of events.

At the same time, it's worth noting that Armstrong's cycles-based models have had some spectacular successes. He may now be mocked in the media as a peacocky market predictor who guessed wrong about his own life's work in a big way, but he called the high of the Japanese Nikkei in 1989 months ahead of time—the Nikkei peaked the last week of December as he said it would, then crashed like a tsunami, casting off 40 percent of its value in a matter of weeks. (This was the reason for his close ties to Japan's Ministry of Finance and why Japanese corporates clamored to attend his conferences and buy his Princeton Notes.) More recently, and again months ahead of time, Armstrong predicted the July 20, 1998, high in the U.S. equities market—to the day. After that morsel of prognostication, claims one source, the CIA called Princeton, wanting to know how the Institute's proprietary models worked. Needless to say, Armstrong rebuffed them.

A prison attendant waiting in the vestibule area raps on the window. Time is up. As Armstrong leaves the visitor's room at the end of the interview, he doubles back to ask a few questions about the documents sent by the receiver's office. Three days later, a letter arrives from jail.

There are additional conspiracy charges and new information about the markets being rigged. "You will no doubt try to portray me as some greedy thief who is secreting assets,” he writes. "I am 50 years old and they threaten me with 25 yrs. I wouldn't live to enjoy any assets. If I had them, I would turn them over because I could earn more than enough outside to hire a 1st class defense. That they will never permit.” Switching tacks, he continues: "I am the guy who knows all the dirty little secrets and how the SEC and CFTC will never go after the big boys because it will destroy much of Wall Street if the truth ever gets out. They want the average person to believe the markets are fair and safe because they regulate them.”

Whatever the elastic truth of this case, Armstrong will eventually have to decide how fair and safe the U.S. legal system is. In the interim, he concludes, "They play a nice shell game. They keep your eye on assets while the real story goes untold.”