Sitting in a Minneapolis mansion and listening to a charismatic investment manager describe a currency trading system that kept earning handsome returns year after year, this long-time trader was certain he had stumbled onto a Ponzi scheme.  For one thing, he knew that Minneapolis, his home, was too small a town for a $4.4 billion investment fund to have escaped his notice, Edward Wyatt of the NYTimes reported.  And so began the odyssey, for Arthur F. Schlobohm IV, who started on Wall Street as a runner on the floor of the NYSE Exchange.

Mr. Schlobohm did some Google searches and found that the fund’s manager, Trevor Cook, had been suspended twice by the NFA, and been fined $25,000 for using false information to open a trading account for a customer.  Calls to contacts in Switzerland and Kuwait also raised doubts about Mr. Cook’s boasts about deal-making abroad. 

Nevertheless, he later found himself back in Mr. Cook’s mansion, surrounded by a room full of his neighbors, many of whom were about to hand their life savings to a charlatan.   “If I could have just leaned over and whispered in someone’s ear, ‘Don’t invest in this! Just trust me!,’ there would be a family out there now with kids that could go to college,” Mr. Schlobohm recalls of the meeting, which took place 18 months ago.

But he couldn’t do that.  At the time, Mr. Schlobohm, now 37, was working as an informant for the FBI.  Wired to record Mr. Cook’s sales pitches and carrying a hidden camera, Mr. Schlobohm gathered evidence for at least 4 months as the Justice Department zeroed in on the scheme. 

Mr. Cook pleaded guilty to mail and tax fraud last summer and was sentenced to 25 years in prison for orchestrating what ultimately became a $160 million swindle.  That Mr. Cook was brought to justice is undoubtedly a positive outcome.  But Mr. Schlobohm’s journey as a whistle-blower, and some of the financial losses that still occurred even though authorities were closely monitoring Mr. Cook, also underscore the limitations of the system.

During the period when Mr. Schlobohm helped the F.B.I. to gather evidence, from April through July 2009, at least $16 million flowed into Mr. Cook’s fund - and disappeared.  From the time securities regulators first had credible information that he was engaged in a fraud and when the authorities shut down his fund, December 2008 to July 2009, some $35 million flowed into the fund - monies that afforded Mr. Cook a lifestyle that included an expensive gambling habit, a collection of Fabergé eggs, fancy cars and the construction of a casino in Panama.

To continue, click onto:   [ NYTimes, "Whistle. Then Worry and Wait," 10/10 ]

Oh, and BTW.   For all of the Justice Department’s efforts, only about 5% of the $160 million invested in Mr. Cook’s scheme has been recovered.