Returns too good to be true - again

  • Article by: MATT MCKINNEY , Star Tribune
  • Updated: February 14, 2009 - 9:10 PM

Federal prosecutors believe "the coolest guy in the room" lost $25 million of other people's money before he was found out.

He was a master trader who ducked in and out of the financial markets with aplomb. A single trade netted $69,000. He didn't lose his nerve when the tide turned against him.

Thus the description of Charles E. Hays went on in the 2007 book "Millionaire Traders: How everyday people are beating Wall Street at its own game," written by two employees of an electronic trading platform where everyday people may trade online.

The chapter's title: "The Coolest Guy in the Room." And small-time investors, Hays coolly says in the book, are better off just giving him their money rather than risking it on their own.

The book paints a radically different picture of Hays than the one that has come out in federal court this month, where federal prosecutors now say he was the operator of a Ponzi scheme and a trader who lost money 20 out of 24 months. The expanding investigation has found 75 people who lost at least $25 million entrusting their money to Hays, prosecutors say.

The world Hays built held the trappings of a market wizard: his house, set in a wooded section of Rosemount; his reputation among day traders, built in part by the 33-page "Millionaire Traders" profile, and his $3 million, 64-foot Viking cabin cruiser.

Yet behind all of that was a relative newcomer to the futures market who left his job as a product manager for companies designing automotive test products to trade stocks.

An investor who asked not to be named said he first learned of Hays through a friend.

"We should have known. We were just too greedy. We got a statement every month. ... It would look wonderful," said the man, noting his family didn't lose as much as others.

"We thought this guy was a personal friend for a number of years. Lifetime best friends. You think you know somebody."

Investigators with the Commodity Futures Trading Commission (CFTC) have uncovered six Ponzi schemes nationwide so far this year. Armed with tips for consumers on ways to spot fraud, the commission has paired prosecution of the Ponzi schemes with a public relations blitz, talking to news media about each case in the hope of warning others away.

"These schemes are so insidious because not only do they steal investors' money but they hurt investors' confidence at a time in our nation's history when we need confidence in the markets," said Steve Obie, CFRC chief investigator.

For several investors who entrusted money to Hays, it was his reputation that drew them in. Some of that was Hays' own doing, they say, but his image was burnished by "Traders."

Authors Kathy Lien and Boris Schlossberg, who worked for Global Forex Trading, an electronic trading service, said Friday that Hays misled them, too. "This is one of the tragedies of dealing with real people," Lien said. "They can defraud us."

The book had described Hays (misspelled "Hayes" in the book) as one of the "best risk takers in the retail trading game," a man who "breaks many of the sancrosanct rules of trading yet thrives in the chaotic world of e-mini stock index futures, where the difference between fortune and failure can be measured in seconds."

Hays started trading stocks for himself in 1999, he told the authors. "I never considered myself good at interpreting news, even today," he's quoted in the book. He started trading in the last months of the 1990s tech boom, a time when Yahoo stock routinely shot up by double-digit percentage points, enriching anyone who bought in for the ride. That easy money ended in March of 2000, when the dot-com bubble burst. He eventually migrated to futures, trading the S&P 500 and Nasdaq 100 contracts.

He told the authors he would go to his trading room 15 minutes before the opening bell, glance at headlines and the direction of the market, and then trade. His style, he said, was to move in and out of the market in two minutes or less, working the opening hour of the trading day before calling it quits. He traded so frequently he often spent $500 a day in commissions.

Anyone coming into the market with less than $100,000, he said, was doomed to fail. "So, if they come into the market with $20,000 or $30,000 and a mortgage payment, a car payment, and a kid in college, they might as well just give me their money because they'll lose it."

'He was looking at noise'

The commission alleges that Hays told one investor that he made consistent monthly returns of 3 percent by trading futures, but in fact he lost money in 20 out of 24 months between the summer of 2006 and last July, court records show. Hays also drew up a fake document that purported to show he had $37 million in trading funds with a well-known brokerage firm, using the firm's letterhead, according to court documents. The account, in fact, contained much less and belonged to someone else.

Hays' criminal defense attorney, Tim Webb, said Friday that the case is "not as black and white as the government's complaint suggests."

One of the people swayed by the buzz about Hays was John Krahn, a day trader from New York.

"I went and met Chuck and spent a day with him," said Krahn. "He was supposed to be very good at this. Lots of people told me that." Krahn had followed Hays through the internet chat room Hays ran. Posting online what he claimed were his most recent trades, Hays showed others what he had done to supposedly clear big gains.

About a year ago, Krahn flew to Minnesota and spent a day with Hays. He watched as Hays peered into one of his terminals, ignoring the dozen or so other screens in the room. Hays stared at bid and asking prices for E-mini stock index futures, an electronic contract traded on the Chicago Mercantile Exchange.

"He would buy a certain number of contracts and if it went against him he would buy twice as many, and if it went against him again he would buy four times as many, and then eight times as many," said Krahn.

The technique would only pay off if the market reversed itself quickly. Otherwise, Hays' losses in the highly leveraged futures market could quickly accumulate. Hays moved in and out of the market according to something he said he saw in the pattern of numbers, Krahn recounts. It didn't make sense.

"He was trying to convince me that he saw something, but he was looking at noise," said Krahn. Next, Hays showed Krahn checks that had just come in that day from eager investors. One was for $50,000; two were over $100,000 each.

'Total shock'

A week before Hays' arrest, his Internet chat room closed.

"I've known Chuck forever," said Cathy Ulshafer, a day trader and member of Hays' chat room. "Total shock."

Ulshafer quit trading when she lost $100,000 of her own money. Hays offered to get her back on her feet with some of his cash, but she declined.

"He had a good line of bull. You asked him, 'What do you do?' He said, 'It's discretionary,' and he never really told anybody."

Ulshafer, who lives on a boat in Florida, said Hays lent money to others who lost theirs, sending $50,000 to an Austrian photographer and to another person in Malibu, Calif.

Investigators say they've seized Hays' yacht and $1 million from his primary bank accounts; at a hearing last week in federal court in St. Paul, a CFTC attorney said the agency has found cash in additional bank accounts, but didn't give a dollar figure. Hays, who faces criminal charges of wire and mail fraud and civil violations of the Commodities Exchange Act, has been held at the Sherburne County jail since early last week.

It's an all-too-familiar story, said Hank Shea, a former assistant U.S. attorney for Minnesota and fellow at the Halloran Center for Ethical Leadership in the Professions at the University of St. Thomas law school.

"They flourish in good economic times, in part because people get caught up in pursuing high returns, and then they're discovered when the economy turns downward," he said.

The collapse of the schemes leaves empty-handed investors wishing they had followed simple rules -- if it sounds too good to be true, etc. -- but it also leaves a legal tangle that could include accountants, lawyers or others who knew of the scheme but didn't step forward.

"Who's going to be held responsible?" asked Shea. "That's going to be the next wave of inquiry here."

Matt McKinney • 612-673-7329

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