Feds' man on inside agonized as scam went on

It's not easy watching innocent people hand over millions of dollars to a con man.

For months in early 2009, trader Ty Schlobohm helped investigators get to the bottom of Trevor Cook's $190 million Ponzi scheme. Schlobohm secretly recorded seminars, meetings and cocktail parties at the Van Dusen mansion in Minneapolis as $25.9 million poured into Cook's bogus currency investment program -- mostly from retirees seeking shelter from the collapsing stock market.

While Schlobohm and the authorities gathered evidence, Cook and his pals burned through the money even faster than it came in. From March to mid-July 2009, when the scheme collapsed, Cook paid nearly $21.4 million of the incoming investors' funds to earlier investors and spent $10.6 million more on expenses, luxuries and other ventures.

"I was really confused and really wracked with guilt that I couldn't put the nail in this coffin when it seemed like a locked, solid case," Schlobohm said.

Cook has pleaded guilty to fraud and tax charges and was sentenced in August to 25 years in prison -- the only person to face criminal charges in the case to date.

Schlobohm wonders why it took so long. The 37-year-old from Orono said in a recent interview that he pestered the FBI and regulators to shut down Cook sooner, but he always got the same response: There were "procedures and protocols" to follow.

Assistant U.S. Attorney Joe Dixon, who is overseeing the government's ongoing criminal investigation, said in a recent interview that the government responded promptly when Schlobohm reported his suspicions.

He was quickly "wired up" and sent back to gather evidence, Dixon said. Once the evidence was in hand, Dixon added, the government subpoenaed Cook's records, a necessary prelude to freezing bank accounts and seizing assets.

Dixon commended Schlobohm for alerting authorities about Cook's suspicious activity. Still, while the fraud was obvious to the informant, Dixon said, it wasn't enough to intervene. "We needed to get proof, and we did," he said.

Schlobohm's undercover work was first revealed last month in the New York Times. He said he went public to encourage finance professionals to report wrongdoing when they see it.

Chief U.S. District Judge Michael Davis said at an Oct. 14 hearing in Minneapolis that the article contained information he hadn't been privy to, even though he had been overseeing the receivership gathering assets for Cook's defrauded investors for nearly a year.

"Millions of dollars slipped through the fingers of Trevor Cook while the federal government, both civil and criminal, did nothing to stop the millions of dollars coming into his coffers," Davis told an attorney with the U.S. Securities and Exchange Commission (SEC) in court.

The judge also said he wonders whether his receiver should be interviewing people he doesn't know about. "That's just a rhetorical question," he told the SEC attorney. "I don't expect you to answer because you're just the messenger. And since you're the messenger, you make sure that you take it back to your people."

Cook's currency operation worked through a web of mysterious figures and entities that extended to Europe, the Middle East and Latin America. He placed trades through a bankrupt Swiss firm that was run by two Jordanians, one of whom previously co-owned a limo company in the Washington, D.C., area, the other of whom once worked as a grocer near Chicago.

Schlobohm said he fears the investigation runs deeper than what is publicly known.

Rachel Ehrenfeld, a scholar in money-laundering and terrorism-funding, said the Cook case raises concerns the government should check out. She noted that Jordan has been used as a transfer station for funding terrorist groups.

'Risk-free' returns

It was in February 2009 that a friend suggested Schlobohm speak with Minneapolis- based Technical Niche Trading (TNT) about an investment opportunity. Schlobohm, who had spent much of his career raising money for hedge funds, said he wasn't interested initially, but he perked up when he learned that TNT was considering investing in Oxford Global Advisors, a Minneapolis-based fund that supposedly had $4.4 billion and was earning "risk-free" returns as high as 12 percent. TNT arranged for him to meet Cook, Oxford's chief investment director, who was seeking capital for his "Enhanced Yield Fund."

Schlobohm said he told Cook he might invest up to $500,000 in the program. And if Oxford Global could produce audited figures, Schlobohm said he could easily raise as much as $500 million.

Schlobohm said Cook presented his investment strategy, showing what he described as live trading data on a computer. But Schlobohm noticed the word "demo" in small letters on the screen. He returned to his office and quickly found red flags in Cook's background and his pitch.

Schlobohm said he planned to walk away, but TNT kept calling. "I said, 'Listen, you guys, this is crap. I don't know what the hell is going on, but it's not for me.' And then they persuaded me for one more meeting with Trevor."

At that meeting, Schlobohm noticed inconsistencies in Cook's description of the program. On his way out, he saw a salesman pitching the program to a group of older women and decided he should alert authorities. "I just thought, you are scum if you walk away from this and don't do anything," Schlobohm recalled.

On March 19, 2009, Schlobohm sent the FBI a packet of materials outlining why he believed Cook was defrauding investors. "It was so egregious, it was to the point of satire," he said.

Schlobohm called the Commodities Futures and Trading Commission (CFTC) six days later, which opened an investigation into Cook's currency trades. He said he tried to get the SEC involved as well, but no one from that agency has ever called him.

Schlobohm also sent his analysis of Cook's currency program to the U.S. attorney's office in Minneapolis and met with prosecutors. Among many things, Schlobohm's analysis noted that Cook's numbers were "statistically impossible" to achieve.

'Method actor'

Working at the direction of the FBI, Schlobohm said he attended about 10 meetings, including three investment seminars at the Van Dusen mansion.

"Trevor seemed like a method actor to me," Schlobohm said. "He acted like this swashbuckling successful trader, claiming to be the head of this $4 billion fund, and yet there's this one meeting he had to skip because he had to go to Iowa and wrestle 50 grand from an old lady."

Meanwhile, Oxford chief operating officer Tom Richardson explained to Schlobohm that an audit had not been done because it would be too cumbersome and costly. Even so, Richardson assured him that "they hired KPMG to get some sort of an opinion letter," though KPMG later denied doing so, Schlobohm said.

The SEC subpoenaed Oxford's records on June 22, 2009. Within weeks, some Cook investors in Ohio filed a lawsuit complaining they couldn't withdraw nearly $5 million from the program, accelerating its collapse.

Schlobohm wrote in an e-mail to the FBI that his contacts at TNT had met with Cook that night and he told them the SEC subpoena was filed because Cook's associate Bo Beckman -- a high school and college hockey player -- had submitted bogus financial documents in an effort to buy a minority interest in the Minnesota Wild. "You can't make this stuff up," Schlobohm wrote.

On Nov. 23, the SEC and CFTC filed emergency court papers to shut down Cook's operation and freeze its assets.

A source close to the investigation said the agencies held back to protect the undercover investigation. In addition, the SEC didn't see a way into the case because it wasn't clear at first that Cook was dealing in securities, spokesman John Nester said.

Schlobohm quit his job at a Minneapolis investment firm during the investigation. He said it was taking too much of his time. Despite leading authorities to Cook, he feels partly responsible for the investigation taking so long.

Today, he is working as a trader at a small firm in Long Lake. Despite the difficulties, he's proud that he stepped forward and hopes others will, too.

"I feel somewhat successful in sending the message that these scams are not going to be tolerated, that they will be policed by the investment community," he said. "My message is, step up -- cowboy up -- police your industry."

Dan Browning • 612-673-4493