The Diary of a Fraudster | James Brandolino Part 1

[00:00:00] Pulling up to Mickey D's just for drinks? Oh yeah, that's me. Nothing extra, just perfection

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[00:00:35] new opportunities. At Strayer University, we know a thing or two about getting and staying ahead

[00:00:40] of change. For over 130 years, we've been providing students like you with innovative tools

[00:00:45] and customized support. So you can find your way forward and always keep striving. Visit

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[00:01:10] James Randallino started a hedge fund which was a fraud, a pondis game, all the illegal activity,

[00:01:16] how he went from civil to criminal. We really dive in to the details of his fraud,

[00:01:23] the psychology of it. Like what's critical is that not all frauds have the same flavor.

[00:01:30] All frauds are bad. Don't get me wrong. It is morally bad to do a fraud. There's a reason why

[00:01:37] he went to jail. He wanted to go to jail. He tried to kill himself and it's amazing the story

[00:01:44] of how he failed to do that. But before I give too much away, we're going to discuss in detail

[00:01:51] the fraud and then tomorrow I'm going to release the story of him going to jail, what happened there

[00:01:58] and how he came out the other side. Let's dive into the details of the fraud that James

[00:02:05] Randallino committed.

[00:02:11] This isn't your average business podcast and he's not your average host. This is the James

[00:02:17] Altiger show. James, thanks so much for coming on the show and you're going to describe

[00:02:31] your story in a moment. But when I was reading your story, so I was running a hedge fund that I

[00:02:37] had started from scratch around the same time as you were. Yes. I could totally understand

[00:02:44] what was going through your mind and why you did what you did and of course the eventual outcome.

[00:02:51] But maybe in your words describe what happened. Again, I appreciate you coming on the show. It's

[00:02:56] very interesting and it's very interesting lesson about the psychology of fraud.

[00:03:04] The psychology of fraud, James, and really how fast things happen. Most investment fraud does not

[00:03:11] start out as investment fraud. I think that's probably where I want to start first. Most people

[00:03:15] don't wake up one morning working at Amazon saying I want to steal 5, 10, 15, 20, $50 million

[00:03:22] so they go out and get a website and they get some legal marketing documents. They open up a bank account

[00:03:27] and start soliciting for investor funds and then when the Fed is already SEC knocks on the door

[00:03:34] or they hit the phone call, they're on the jet going to Brazil to hide with the money. That really

[00:03:40] happens that way. In my case, I had been trading for a long time. I have a background that's very heavy

[00:03:49] in the futures and securities market. I worked on the trading floor in college on the

[00:03:55] grain floor and in foreign exchange. So I knew the floor very well. I was an ops manager and a trading

[00:04:02] desk manager at a firm that is now to funk, but a formal global leader, MF Global based out of New

[00:04:08] York. When you say you're the trading manager, what does that mean? Is that are you trading or

[00:04:14] is that the back office or what is that? No, I was actually when I was an ops manager, I was an

[00:04:19] ops manager, a junior ops manager over probably 40, 50 employees who were on the trading desk. But when

[00:04:25] I was a desk manager, there was another person to myself who were running their own book of business.

[00:04:32] Okay, so you knew what you were doing. You knew how to trade. I've been trading since I was in

[00:04:38] high school and just did a quick backstory. My whole motivation to trade came when you know

[00:04:44] after my freshman year in high school in 83 when the movie trading places came out, right? And Dan

[00:04:49] Acroid and Eddie Murphy are trying to corner the frozen concentrated orange juice and we're

[00:04:54] getting a new reported trade. That's really kind of where my impetus to start trading and have

[00:04:59] a career in trading began. When I was when I was in enough global, I had designed a

[00:05:07] an intermediate term bond trading strategy trading that basically yield per 10 versus 30 year

[00:05:12] treasury bond futures. And so what does that mean? So the US government and just from very

[00:05:18] basics, the US government issues bonds which are essentially they're borrowing money from other people

[00:05:25] and some are three year bonds and some are five year bonds and some are 10 year bonds.

[00:05:30] And I guess they always trade kind of a certain distance from each other and you would

[00:05:36] if that distance went out of whack, you would arbitrage it somehow. You were like buy one and sell

[00:05:40] the other. Right exactly when trading the 10s versus the 30s, you know that that's that the yield

[00:05:45] curve yet the spread, you know changes every day. All of it's not quite as volatile as trading

[00:05:51] the outright instruments but there are certain patterns that you know I thought I'd recognize and

[00:05:57] you know we traded that really for you know for three years before I decided to go out on my own.

[00:06:03] And how were you doing when you're trading for MF Global or you generally up?

[00:06:08] So so when I when I was in up global, I was very limited in terms of of approaching clients with

[00:06:14] our trading system. It was more of a it was more of a discount account of a charge swap operation

[00:06:20] in terms of the clients that we had. It was a lot of a lot of funds that we had and basically

[00:06:24] they're they're calling their own shots were just basically placing orders and developing business

[00:06:28] that way. So I left MF Global in 99 and formed my own small futures futures broker term. So I could

[00:06:37] solicit clients and trade the system with the ultimate goal of eventually going out on my own.

[00:06:43] And you know I was shooting probably five and a half to about six and a half percent

[00:06:48] and you know Jordan drawdowns were pretty low and you know after about three and a half years

[00:06:53] of having that track record under my belt, I decided to become a member of the board of trade

[00:06:58] and started futures hedge fund. I think that's the question. I'm sorry I'd always interrupt but

[00:07:04] no, no, I don't ask now. I'll never ask absolutely. So five and a half six percent in 1999

[00:07:11] everybody I knew then was quitting their hedge funds and their brokers because you know

[00:07:18] they didn't understand that five and a half six percent was a great return if you had no drawdowns

[00:07:23] like it was a good solid return but you know this was the internet boom everyone wanted 200 percent

[00:07:28] correct. So it and basically you know my clients were mostly high at no worth individuals,

[00:07:34] business owners and this was just a small piece kind of an alternative investment for

[00:07:39] you know for their portfolio so I wasn't you know managing you know 50 percent of somebody's

[00:07:44] portfolio with the strategy. It was you know maybe you know five percent eight percent

[00:07:49] no more than 10 percent as an alternative strategy. How would they justify investing with you

[00:07:53] when they see all their friends making like you know all just by any internet stock

[00:07:57] and you're going to make that in a day like you're making five and a half percent a year plus your

[00:08:02] you know hedge funds was a little more risk because it's you don't have access to the money or

[00:08:07] the investor doesn't like how would you sell such a strategy. It's a small piece of their portfolio

[00:08:14] and a lot of these guys were making you know we're we're sling for the friends kind of guys right

[00:08:19] so they were they were doing really well in other parts it's just just just a small piece

[00:08:24] and it definitely was a part of the sales process. I mean everybody that you know most of my

[00:08:31] initial investors were family friends of family people that I knew a long time and of course

[00:08:36] my my long standing broker clients so I had already a relationship with with everyone that

[00:08:43] that I solicited to invest in my fund right and I was able to raise it in this period we

[00:08:49] raised a couple of million dollars initially so it was like a good start you wanted to build up

[00:08:55] prove a track record and then go for the gold raise like at that time a large fund would be like

[00:08:59] a hundred million dollars correct but I mean even even at that point you know if I could have raised

[00:09:04] you know ten million dollars I mean I understand I didn't come from a bank I didn't come from

[00:09:08] you know to Morgan or you know Morgan Stanley or any of the big banks I was you know just someone

[00:09:13] who you know kind of came up from the bootstraps and you know learned on my own and and didn't really

[00:09:17] have a lot of context at the time and basically just raised money where I could which was former

[00:09:22] clients and family and friends so so together I'm sorry for asking so many questions but like with

[00:09:27] a few million and you're charging like a two in 20 like two percent of assets 20 percent of profits

[00:09:32] something like that correct were you able to make a living at that point or you had money saved

[00:09:36] well well we're not even gonna get to that well so I had quite a bit of money saved but I think

[00:09:42] we need to get a step back and really kind of talk about the catalyst for how how the how the

[00:09:49] front started okay so and which is really interesting because the catalyst was I became a member

[00:09:56] of the board of trade all my documents were done and I'm waiting literally on the floor and I

[00:09:59] and I had three or four jobs in the floor I knew people I knew how it operated so it's

[00:10:04] long hair was new to the floor I'm waiting for for the the board of trade IT department to come

[00:10:09] and hook all of my equipment up at the desk and I'm just kind of walking around and there's the

[00:10:14] Dow Jones futures pet right and I'm just mesmerized about you know these huge orders coming in huge

[00:10:19] paper coming in that just moving the Dow you know 50 80 points in a matter of a minute or two or three

[00:10:24] minutes and I'm just kind of thinking myself boy what did the interesting if I could rework my models

[00:10:29] a little bit and to account for this volatility and maybe earn another 100 200 300 basis points and

[00:10:36] I could be at that 8% 8 and they have 9% and I'd be a hero understand you know none of my clients

[00:10:42] had ever suggested boy you know we wish that you were you know making more money or we wish that

[00:10:47] you were you know trying to you know be a little bit more aggressive and you're trading they were all

[00:10:51] happy with you know the little piece that I was managing their portfolio and kind of just like that

[00:10:57] I took about a week before I started even trading could a fund and I reworked some models and I did

[00:11:03] some real quick back testing and it back tested okay I mean nothing great but I go well I'll make

[00:11:09] it work right I've traded for a long time so my first week of trading I lost 3%

[00:11:16] and that that just feels so bad particularly you're just starting these are friends and family

[00:11:23] they see all their friends making 100% a year and boom yeah and you know it's not so much 3%

[00:11:29] because I had a few months where I was down over 3% when I was managing their funds as a broker

[00:11:35] but you know like you just said it's it's month number one right of the new fund and I had

[00:11:41] a couple weeks could I have it's scheduled that a an dependency paid from would get all the documents

[00:11:48] from the bristram and they would run all the numbers and they would send statements to clients

[00:11:52] and I'm just kind of thinking what am I going to do I've got two weeks before this is going to happen

[00:11:56] I've got to get everybody on the phone or go visit everybody or I've got to do something right

[00:12:01] and just to show you how fast it happens I'm sitting in an office in the board trade

[00:12:06] with one of my colleagues you know he's on the phone I'm paging through in you know institutional

[00:12:10] investor magazine and the light bulb goes off James I see an advertisement for hedge fund accounting

[00:12:17] software and just like that I'm like here's the answer all I've got to do is buy the software put

[00:12:23] all the information there show a small game instead of a loss I mean you know 3% is actually 2.89

[00:12:29] percent right I could make this back I've been trading for a long time I can make it back in a

[00:12:33] month two months tops and well you know at that point you know after two three months whatever would

[00:12:39] be to make it back you know I can hire the old CPA firm again and everything will be fine right

[00:12:45] so so this is like step number one like okay in numeric terms like if you had a $2 million

[00:12:51] down 2.89 percent you're down I don't know $57,000 which it feels like you could make that up and

[00:13:01] it doesn't feel like you're robbing anybody of five million dollars or anything like that it just

[00:13:05] feels like something you could you could get to and then it's all good and nobody loses money

[00:13:09] and you're a hero again absolutely yeah and and that was that was the the motivation to do it and

[00:13:17] it was it was you know then nothing I wanted to let everyone down that's different part of it be

[00:13:20] other part I'm thinking well if I show a 3% loss I mean you know what are these guys getting the

[00:13:25] thing it's your first month I mean you know we trusted you and you know you know I think

[00:13:29] gonna pull out and you know if so many people pull out I'm gonna close the fund and then when am I

[00:13:33] gonna do right so yeah it was it was that kind of situations because and again I'm diving into

[00:13:40] like what you were thinking you thought like then what am I gonna do because a it feels good to be on

[00:13:44] your own it doesn't feel good to then go back to the job admitting failure but be how are you gonna

[00:13:50] get a job as a trader which is what you were doing when or this is what could be going through your

[00:13:54] mind how are you gonna get a job as a trader when you just lost this money trading so right

[00:13:59] it's not only feels bad it's like you really were calling your existence into question

[00:14:04] exactly right and and just to make another point with you said not that I lost money trading I lost

[00:14:10] money trading a system that was not my system you know I had never really studied that although I've

[00:14:17] taken orders I took orders for you know clients who traded indices you know when I was a broker but in

[00:14:22] terms of studying that volatility and that market and those players and what moves that market etc

[00:14:26] and the psychology it was just something that was kind of foreign to me so I was it's the worst part

[00:14:31] about it was that I wasn't even trading my strategy I was actually trading market that I was not

[00:14:36] familiar with which was a recipe for disaster of course well you were trading this stock market

[00:14:40] instead of the bond market correct and what month are we talking about yeah so this this is

[00:14:46] beginning of February of 2003 February of 2003 so I was trading pretty actively then

[00:14:52] and at that time the best strategy not so much on Dow futures but on Nasdaq futures or Nasdaq

[00:14:59] 100 futures was basically if something dipped you'd buy it and it will go up so I don't know if

[00:15:04] you were counter-trend trading or what you were doing I was trading a mean reversion strategy

[00:15:10] yeah so mean reversion strategies did work but February 2003 you know we were kind of

[00:15:18] preparing for war at that time which started a month later and

[00:15:24] things were pretty volatile you had to have some guts at that if February in March

[00:15:29] was a little more volatile or those were probably the most volatile months of 2003 if I remember

[00:15:34] correctly correct so what's interesting is that in terms of trading a mean reversion strategy yeah

[00:15:41] buying the dips is great but when you're you know when you're trying to sell the the upper channel

[00:15:45] you know going back to the mean you know that's where I would get crushed so you know I would have

[00:15:50] maybe three four five winning trades small winners and then I get crushed on that you know you

[00:15:56] know trying to sell the upper channel and to go back and that that's why I would just get hit

[00:16:00] it would just take one or two trades to wipe everything out plus so on that average every every

[00:16:05] you know two percent winner there was a you know a three percent loser four percent

[00:16:09] that's the thing about mean reversion strategies is that you're going to have lots of winners

[00:16:13] in a single month of 20 trading days you might have 19 winners and one loser and you still lose money

[00:16:19] and you're exactly right and it's really really really tough and I understand too when I was

[00:16:24] trading my buying strategy I was probably you know doing a couple trades at most a week probably

[00:16:31] three trades every two weeks when I was you know trading you know the S&P's in the day out futures

[00:16:36] you know I was trading probably five six seven eight times a day so in terms of the psychology

[00:16:42] involved and I'm sure you can attest to this the psychology involved in that kind of trading is

[00:16:48] is completely different than something that's intermediate terminal or long-term trading.

[00:16:53] Yeah very much so you're you're you're living and dying you I would feel my whole blood

[00:16:59] forced through my body every heartbeat like every tick would affect my psychology

[00:17:05] I mean it's awful it's like sports it's like you know you got you've got two pieces in terms of

[00:17:10] trading you've got the the quantitative models that are telling you what you should be doing

[00:17:16] and then you've got the psychology part should I actually do it or can't I can I follow that model

[00:17:21] right and if I have five losers in a row how can I take that next trade or if I have five winners in a

[00:17:26] row can I take that next trade right and it's and that's the worst part you know you have three four

[00:17:30] big losing trades and the next trade you don't take and that's the one that's going to get you

[00:17:35] to about even or maybe a little bit above even so it's you know psychology is so important trading

[00:17:41] is you know as you know

[00:17:58] pulling up to Mickey D's just for drinks oh yeah that's me nothing extra just perfection

[00:18:05] straw coming in hot for the coldest cups on the block because there are drinks then there are drinks

[00:18:14] from McDonald's mixed things up with any size lemonade or sweet tea for a dollar 49 perfect

[00:18:20] with our classic fries price and participation may vary cannot be combined with any other offer

[00:18:25] but

[00:18:29] in a fast paced world every day brings new challenges and new opportunities at Strayer University

[00:18:35] we know a thing or two about getting and staying ahead of change for over 130 years

[00:18:40] we've been providing students like you with innovative tools and customized support

[00:18:44] so you can find your way forward and always keep striving visit strayer.edu to learn more

[00:18:51] strayer university is certified to operate in Virginia by chef and has many campuses including at

[00:18:55] 21 21 15th Street North in Arlington Virginia

[00:19:01] there's three stages of my fraud that this first stage lasted about a year and a half so I

[00:19:05] have to body year and a half i'm i've probably out about 50,000 in in the hedge fund

[00:19:11] and i'm thinking what what am i gonna do i'm a sales introvert i don't want to go back to

[00:19:15] everybody and say i need to raise more money right let's put more money and let's make this thing

[00:19:20] bigger so what do i do i you know i read my 401k account i get a home equity land credit on

[00:19:25] i condo i basically put my entire net worth into the fund to to try to make it work right now

[00:19:32] at this point when you say you have 50,000 dollars in the fund you were like roughly two million

[00:19:37] down to 50,000 like you had lost everything correct and that's because were you taking bigger

[00:19:43] and bigger swings like were your position sizes going up they weren't they want huge positions

[00:19:50] but they were large enough to you know to two and a year and a half you know lose about two million

[00:19:55] bucks and at this point i just it's very important to realize the problem here was not that you were

[00:20:01] down money the problem here is that your investors didn't know you were down you were you if you

[00:20:08] had never said anything to your investors nothing a liver would have happened at this point but

[00:20:12] you were telling investors that they were actually up they think they're making you know you know

[00:20:17] one percent you know one and a quarter percent per month and actually they're down you know at

[00:20:23] the end of the year and a half about a hundred percent correct yeah so they had so they thought maybe

[00:20:28] there was like uh two point one i was made at two point one million in the fund but in reality there

[00:20:34] was 50,000 dollars in the fund exactly so so after after that year and a half i put my

[00:20:41] begin putting my own money into the fund which of course is against sec rules because i get

[00:20:46] let everyone my investors know that i was i was flooding the fund with my personal money because

[00:20:51] basically i'm trying to you know cover the losses right so that was why stage two and that lasted

[00:20:57] for about a year right what was illegal there well why why is that against sec rules because

[00:21:02] if you were disclosed to your investors listen i'm down but i'm going to pay you back with my

[00:21:07] personal money here it is that wouldn't have been illegal no it well it would have been it would have

[00:21:12] been fraud it would have been civil i would have been i probably would have been kicked off the

[00:21:15] board of trivet would have been censured by the sec but at that point it was civil because i had not

[00:21:20] taken any money right they were just losses that i there were legitimate losses that i was hiding

[00:21:26] right and again if you had been disclosing losses it wouldn't have been any problem at all

[00:21:31] so yes and no so you know people fund managers lose money all the time and as long as they lose it

[00:21:41] legally technically i didn't lose it legally because i was not trading my bond system now if i had lost

[00:21:46] the money trading my bond system then and i had all the risks disclosed in my in my hedge fund documents

[00:21:54] absolutely that that have been no issue people are going to hate me for interrupting all the time

[00:21:58] no people always say oh you're letting them talk but i have to i just really want to understand so

[00:22:05] the hedge fund docs said specifically what your strategy was and you didn't leave room for

[00:22:10] on occasion the hedge fund manager might trade other strategies correct okay so now i understand why

[00:22:17] at the very least you are in trouble with the sec if not breaking a lot

[00:22:21] correct but at that at that point it's just civil so you know i i don't my personal amount worth

[00:22:27] into the fund and this lasts about another maybe another year just over a year so now we're

[00:22:33] we're almost at the three-year mark right and you know i'm basically back down to that you know

[00:22:38] 15 to $100,000 in the fund and i'm like man what am i going to do i've got that yeah i've got no money

[00:22:43] um you know i'm i'm broke i'm going to sit down with everybody i'm i'm not sure what's going

[00:22:48] to happen here right where you married um i was actually divorced i actually got divorced in

[00:22:54] oh four and that was because of the stress related to what was going on well that was definitely

[00:22:59] part of it um my ex-wife was was not from all those she was a US citizen she was not from the

[00:23:04] United States and i just really really felt i didn't want to get her involved in the whole mess

[00:23:09] and basically i just you know decided that you know we should get divorced and yeah i basically

[00:23:14] told i didn't want to have kids and that was like a you know being you know european that was

[00:23:19] real important to her and i just didn't want to get her involved because she had absolutely nothing

[00:23:23] to do with the whole situation because she was also a a a a registered rep on the

[00:23:28] industry industry with another fund so i didn't want to get her involved at all so but at this point

[00:23:34] this is this is where your neck deep in your isolation like you you you you thought initially okay

[00:23:43] it's fraud but i'm going to make this up quickly no one will know well i'll wash my hands of it

[00:23:48] and and and it'll it's going to be good and the long but now you realize you're in trouble

[00:23:53] and this is midway through and you're probably stressed out of your mind

[00:23:58] was your libido functioning you're probably too stressed uh full of your life what you know that

[00:24:03] that's a good question i i really don't really remember all that much you know i at that point

[00:24:08] i you know i really wasn't dating i was pretty much focused on you know i'm i'm turning this thing

[00:24:13] around and you know most of my either lot of friends who were local and you know most of my clients

[00:24:19] were high-know with individuals and you know i had a few that would call me probably at least once

[00:24:24] a week how we're doing what's going on the the the bond record did this how do we do the bond

[00:24:29] market did that how are we going to do this month and um you know i would give calls um hey we want

[00:24:34] to come down and and and see uh because i you know i was kind of like the anti made-off i was not

[00:24:38] secretive at all people wanted to come down uh come down to the floor and watch me trade because i

[00:24:42] trade it every day it's not like i never traded right and took the money and ran

[00:24:46] i was trading literally every day and if people wanted to come down and watch me trade and

[00:24:50] and and and look at my my screens and stand next to me on the floor uh at my at my desk space they

[00:24:56] were more the welcome to do it so i was always very open about a and transparent about you know

[00:25:02] about what i was trading and how i was trading and i would get calls all you know all the time you

[00:25:08] know you know from from my clients you know asking questions where where the the key comes in is

[00:25:14] at that almost a three-year mark and i'm just kind of saying what am i going to do i've got it

[00:25:18] you know i got to get everybody in a room and just kind of say hey this is what happened i haven't

[00:25:22] taken any money we lost the money legitimately but you know we got to do something right and out

[00:25:29] of the middle of nowhere i get a phone call and almost didn't take the call it was a overall for one

[00:25:34] of my really good clients who wanted to come into the fund and my buy-in at the time was only $50,000

[00:25:39] and he goes why i want to put more than in the fund is that okay well sure what are you thinking

[00:25:44] does i want to put 500 in i'm thinking 500 oh my god here we go now i can now i can if i take

[00:25:50] this money i can not only bring in some one analyst i can try to fix this thing and i can

[00:25:58] have some money to live on and really from that all that three-year mark three-year eight that's

[00:26:03] when i was actually taking money from from the fund to provide for living and business expenses

[00:26:09] i see so this is a big transition so so it's important to understand so now with this 500,000 you

[00:26:15] weren't just going to say to yourself okay this is money i can now invest to make back everything

[00:26:21] it's now this is money i can use to live and improve my trading while i simply figure this out

[00:26:29] like how i'm going to survive so this is going to just sort of like bridge the way until you figure

[00:26:34] out a solution but you were going to actually use this money to live on which is definitely criminal

[00:26:38] and absolutely and that that's really where the lexicon changed things from you know from

[00:26:42] civil to criminal and i and i probably didn't know it in the in those terms at the time but you

[00:26:47] know i knew that i was actually wrong for me to actually take that money but really there was never

[00:26:51] during the whole period there was never you know more than a you know a couple days in a row where

[00:26:56] i really didn't think i could make the money back well let me ask you a question and if you think

[00:27:00] any ways that you know that i try to make it back and and just couldn't and one of the ways was

[00:27:06] i was doing a lot of trading in my in my personal account in my individual account because as a

[00:27:12] number of the exchange i could trade just huge huge numbers in my individual account and as long

[00:27:18] as i was flat at the end of the day i'm i could trade 100 to one margin if not more you know with

[00:27:23] a hundred thousand dollars i could take trade ten fifteen million dollars worth of s and p or

[00:27:28] dial or yeah nasaq futures um and as long as i was flat by days then there'd be no problem so

[00:27:36] this is where you did start taking big swings to try to make everything back bigger swings yeah

[00:27:40] and i i wouldn't say i wouldn't say i swung for the fence every day i mean i you know i

[00:27:45] yes you know do i have a days where i you know i was down 50 60 grand and yeah but i also had days

[00:27:50] where i was up you know 30 40 50 grand too so um but of course that the losing days definitely

[00:27:56] outnumbered the winning aids i mean usually my losses were on average probably ten

[00:28:01] fifteen thousand dollars per trade and my winners were averaging probably three four thousand

[00:28:05] dollars per trade so i just wouldn't have fences on some occasions but it wasn't thankfully

[00:28:10] i guess every day i mean so you were so the five hundred thousand you were used okay well let me back

[00:28:17] up a second so sure the fact that you consider taking advantage five hundred thousand in order to

[00:28:25] have some money to live on shows that you're you were thinking now okay i'm entering into the world

[00:28:30] criminal fraud so my gut tells me you probably were stressed but not as stressed

[00:28:38] as you could have been like you actually filed some relief that this five hundred thousand

[00:28:42] can come in because now you could you could live and and you had good intentions in a

[00:28:46] weird way and that you wanted to solve a problem but your brain was now acknowledging that you're

[00:28:51] willing to do this yeah i mean the pain of uh of escalating the fraud from civil to criminal

[00:29:00] was much less painful than having to make those phone calls or sit down and everybody in a room

[00:29:06] and saying this is this is what i did this is what happened i lied and you know you're you're

[00:29:11] basically your money's gone because i lost the trading yeah two small questions one is

[00:29:17] did anybody where any of your investors was this like money that was life or death to them

[00:29:22] no 95 percent of my clients were sophisticated i net worth there were there were no

[00:29:28] grandmother's grandfather should lost their homes and and during this time before

[00:29:34] when you were considering making all the phone calls did you consider killing yourself

[00:29:40] well that that that will we can talk about at the end okay i mean i guess what and i guess two

[00:29:46] two two i guess before we get to that part i would say you know there was i was never going to let

[00:29:51] myself get caught if if the you know if if the if if i ever saw the FBI come on the floor

[00:29:57] or or if i ever got a call from you know the SEC or the or the uh come out of future trading commission

[00:30:03] that they want to look at my books and records i was never ever ever gonna let that happen i

[00:30:08] was always gonna come into a side before that happened but at the end of the story there's definitely

[00:30:13] there's definitely a context to that yes and and then just in terms of trading strategy again i

[00:30:18] i am very familiar with those years even day by day like i remember the trading so viscerally and

[00:30:25] i was doing a mean reversion strategy similar to you sometimes on s&p futures never on doubt futures

[00:30:31] but always on nasa 100 futures it did work pretty well although i will say like that again that type

[00:30:38] of strategy you get lots of wins it's high probability wins but the losses are very painful and

[00:30:45] managing those losses is the key to a strategy like that and it's very quant based you have to know when

[00:30:51] the the mean reversion is going to kick in statistically like historically speaking when do nasa

[00:30:57] futures mean reversion usually kick in that's what i would i would trade off of yeah and even if i

[00:31:02] would put some type of filter in there you know just just trading from the long side or do something

[00:31:06] what having a like a long-term indicator that you know if this was in a long-term or i think

[00:31:12] it's trades from the long side or on the short side maybe cut my size in half or you know or down

[00:31:19] to quarter and trade less size from the short side with when the trend is up but i just didn't do it

[00:31:25] but also because you had a different agenda in that you were also not only trying to run a fun

[00:31:31] but trying to get out of the hole of civil fraud i mean no matter what you had committed civil fraud

[00:31:39] absolutely but but you could have you could have a lot of people out there are not caught because

[00:31:46] they fall into situations like you and then they climb out of the hole now you know unfortunately

[00:31:51] you were not able to climb out of the hole and before you continue the story i'm always curious

[00:31:56] do you think made off started the way you started like he was considered a genius right he's

[00:32:01] started he was the first head of the Nasdaq he was considered this this genius prodigy guy

[00:32:07] and then he started a fund you think his first month he was down 3% and then just bit by bit

[00:32:13] became the largest fraud in history um absolutely and it's chronicled by Diana Enriquez

[00:32:19] the New York Times reporter who won a book and it's on my shelf here if i can see it and i don't see

[00:32:25] it um she wrote a book about about made off and in the early 60s he was trading just paying stocks

[00:32:34] and basically lost a ton of money during this major downturn because he was basically telling his

[00:32:40] clients his investors that you know that it was safe and secure and he basically lost it all

[00:32:46] he actually borrowed and i'm thinking this is certainly maybe 61 62 63 and he actually went to his

[00:32:52] father-in-law and borrowed the equivalent of i want to say like $400,000 in today's money

[00:32:59] and payback all of his investors so they would not know that he lost their money and he actually

[00:33:04] paid it payback because his father-in-law as well but that just goes to show you on the psychology

[00:33:10] of just the fear of letting others see you know you're you're miss your shortcomings especially

[00:33:19] in trading and maybe you're not as smart as you you thought you were etc right because trading is

[00:33:24] so much for like everyone's just calling you a genius like particularly a guy like made off

[00:33:28] like everyone's calling him a genius and then if he loses money it's like he's his images of himself

[00:33:34] changes well and what's really interesting is you know i mean with made-off is that i mean he was a

[00:33:39] i mean he was a legitimate business person i mean you know being being the with the six largest

[00:33:43] market maker and i think it was in oh in oh savage so what you know what he did with in terms

[00:33:48] of a lot of time trading and saving investors money you know getting you know getting fills back

[00:33:54] you know within you know three to five seconds versus you know what was it before his 30 seconds

[00:33:58] a minute i mean he was just huge in that realm so he actually had a lot of street cred that was

[00:34:04] well deserved but he just he just took that that that trust and wrapped it into a his money management

[00:34:12] and the fact that he did this once before like in the 60s and sort of covered up the problem

[00:34:17] successfully probably made him think he could do it again in the early 90s or whenever his broad started

[00:34:23] and and he just wasn't able to so i always wondered whether it was he had bad intentions from the

[00:34:30] beginning or just started with fear and perhaps good intentions but i always wonder if he just slipped

[00:34:37] into the criminal stuff

[00:34:52] pulling up to mickey dees just for drinks oh yeah that's me nothing extra just perfection

[00:34:59] straw coming in hot for the coldest cups on the block because there are drinks then there are drinks

[00:35:08] from McDonald's mixed things up with any size lemonade or sweet tea for a dollar 49 perfect

[00:35:14] with our classic fries price and participation may vary cannot be combined with any other offer

[00:35:19] but a but in a fast paced world every day brings new challenges and new opportunities at

[00:35:27] stara university we know a thing or two about getting and staying ahead of change for over 130

[00:35:34] years we've been providing students like you with innovative tools and customized support

[00:35:38] so you can find your way forward and always keep striving visit strayer.edu to learn more

[00:35:45] share university is certified to operate in virginia by shove and has many campuses including at

[00:35:49] 21 21 15th sheet north in Arlington virginia. Since your clients thought you were up each

[00:35:58] year and this is your fourth year were you taking fees on your quote unquote wins that didn't exist no

[00:36:03] big red flag i never took fees from my clients and were they suspicious that you weren't taking fees

[00:36:09] where they tell you hey no i don't need the money don't worry about it i've got you know

[00:36:13] kind of clients on you know you guys are what you have started with each in the beginning i don't

[00:36:17] need to take fees. Got it so you avoided very for a long time you avoided criminal implications

[00:36:25] but now you just you were willing the decision point was do i call everyone and completely

[00:36:31] an utterly and not only embarrass myself but maybe call into future how everybody know about my

[00:36:38] integrity and my my you know you could be thinking of yourself your idiocy in the market absolutely

[00:36:43] going to do again you'd rather not do that but maybe you could still push kick the can and solve

[00:36:49] the problem if you slip into criminal fraud with this new investor right and you know i the

[00:36:54] thing is is i wouldn't even say then i thought well you know if you know now that i've got this 500

[00:36:59] thousand if i could make it back it was never if it's met or one i'm gonna make it back right

[00:37:04] so the good intentions i and i use that phrase but you know obviously there's issues to it but

[00:37:09] the good intentions were intact you weren't like a like a criminal mastermind you were scared of death

[00:37:15] and you rationalized oh okay now i'm gonna get into criminal fraud right absolutely what where

[00:37:23] you know if if i'm you know that first week of trading if i want to excuse my language

[00:37:27] if i would have the balls to call my client up and say hey we're down we're down 2.89 percent

[00:37:31] you know just FYI i'm giving the heads up when you get your statements in a couple weeks

[00:37:35] that you know that's what it's gonna show so we're gonna we're gonna keep moving forward if i

[00:37:39] would have just done that this probably never would happen so like i'm sure you read market

[00:37:43] wizards or stock market wizards which was out around that time and i forget which investor it was but

[00:37:50] one of the guys he raised money from a client and day one they lost a huge chunk of money

[00:37:57] and the first thing they did was call that client sell the client everything that happened and

[00:38:01] the client actually put more money with him because of the honesty you know as the flip side right

[00:38:07] yeah it's yeah it's a shame that i made that decision you know so now so now we're but we're

[00:38:13] probably in the 2000 beginning of 2006 and you know i'm basically living off of you know

[00:38:20] probably at that point maybe taking 10,000 every every two three months to live on i've hired a

[00:38:27] a few quant analysts to come in and we worked the models i hired a trading psychiatrist to

[00:38:35] we did some a bunch of phone sessions to work with the my psychology of trading that's really

[00:38:40] that's really where my bigger issue was if i would have followed my my my trading models as I should have

[00:38:48] i probably would have been up money i i definitely want to have lost nearly as much as i lost

[00:38:54] and what software did you use to build your trading model so i used a software called trade station

[00:38:58] oh yeah i know very well it's almost like a c-like language to build really it's really easy to

[00:39:05] to build and test and um yeah that was the issue it's you know it's like i know what i should be doing

[00:39:11] with this trade but you know i'm trying to outcast it and outsmart because i've i've had you know

[00:39:16] four losers in the row i'm not going to take the next trade and you know sure no that's going to be

[00:39:20] the winner and and who is your trading psychologist i'm gonna go to the kind of to the end and we can

[00:39:25] kind of backtrack a little bit talk about some of the red flags so you know basically

[00:39:30] were i might almost at the eight-year period and you know i'll probably down to

[00:39:36] under a hundred thousand dollars again and i could have raised him done money i had probably three

[00:39:40] four prospects where i could have raised another probably five to two hundred thousand maybe a

[00:39:44] little bit more now understand i'm raising money other coins are putting more money in drink

[00:39:49] drink this period as well drink that from a year three to year eight as well so i'm really

[00:39:54] hemorrhaging money so why are you so consistently losing like this this mean versus strategy is

[00:40:00] not working well if if i would have followed the system as i should have i probably would have done

[00:40:11] not really much worse than having some small losses okay right and it was it was just the fact

[00:40:19] that if i can you know kind of come up with uh you know rework it so i could you know reduce some

[00:40:26] of the looters because like i said the winner it was probably winning probably almost two-thirds

[00:40:30] of the time of course those are small losses right versus versus the big losses how do i you know

[00:40:36] can i trade bigger sides in certain situations and maximize those and minimize the you know the

[00:40:43] the the one or two losing trades in a week versus the you know the the 20 winning trades straight

[00:40:48] the week yeah yeah it gets to the point where you know and i'm gonna just say again i never really

[00:40:57] thought that i couldn't make the money back and it was early December of 2010 and i'm on my balcony

[00:41:03] overlooking downtown Chicago it was a Sunday holding a couple coffee and thinking you know what

[00:41:08] i'm down about out just about four mil i'm not gonna make it back i'm done so um really within

[00:41:15] about you know 30 seconds uh i decided i i basically kind of gave all my all my stuff away

[00:41:22] i had a beautiful him and organ i donated to a church i sold my i sold my condo and with and

[00:41:30] basically had given that sent that money to some clients who had redemption requests and i went

[00:41:37] outside of the city to a firearms dealer and i was gonna purchase a purchase a gun of course

[00:41:43] you know they know from the city in that time you know you couldn't have a firearm in the city

[00:41:47] so the guy wanted to sell me a revolver revolver now i had nothing about guns at all nothing never

[00:41:52] held one number never a shot one or anything other than what i saw on tv he was this is all you need

[00:41:57] you know it's 50 60 bucks whatever it was i'm like you know well i'm looking around go but about

[00:42:02] that one over there although that's a block 17 that's you know that's you know that's gonna be about

[00:42:05] 600 dollars you you know that's way too much gun for it's like why i want to get that one so i ended up

[00:42:11] buying that one why did you want the block instead of the revolver did you think the revolver

[00:42:16] couldn't do the job you know i i don't know for was ego or what it was you know just the

[00:42:22] you know i knew why i was buying it i was buying it to you know to commit suicide and i just

[00:42:27] thought what that block looks really cool that's that's what i was gonna buy um and and that's

[00:42:33] what i did buy so i bought the block i had a weight a week before i could pick it up and at that time

[00:42:39] it was uh uh at you know christmas time and spend a lot of time with family friends with even some

[00:42:47] of my uh in local investors they had no idea of course what was going on i ended up going to

[00:42:52] Vegas for new years and i came back literally from the airport went right to uh pick up the

[00:42:59] firearm and basically took a home wrote a bunch of letters and you know it was gonna you know commit

[00:43:07] suicide and i understand that i had never even held a firearm before here i am with this

[00:43:11] block 17 and you know i've got the clip out it's a new clip and i'm trying to you know i'm on

[00:43:16] YouTube trying to figure out how to you know how to load ammunition into into this clip and it

[00:43:21] it was it was i mean comical i guess now i can kind of laugh at it and on January 4th at about

[00:43:28] three in the morning i walked from chicago's Lincoln Park to north avenue beach and you know

[00:43:35] got there set a few prayers it was pretty cold and i had you know my my my globe off in my right hand

[00:43:42] and i raised the the block to my forehead and pulled the trigger and nothing happened i go

[00:43:48] there how could this happen i mean this is there i'm looking for a safety there's no safety on it

[00:43:53] well literally i didn't know what of time but the block has a built-in safety feature in the trigger

[00:43:59] and your finger has to be on the trigger in a certain way else it else the lock will kick in the

[00:44:05] lock is actually in the trigger and that's what saved my life and basically you know walk back

[00:44:13] walk back to i was staying with my girlfriend at the time and walk back and and um you know

[00:44:19] contact the new attorney and you know two days later i was sitting in front of the US attorney

[00:44:25] and the FBI in chicago oh my gosh and and they they had they have a they had no idea who i was

[00:44:32] they had no idea i'd never been under any investigation under with any regulatory or stay

[00:44:38] agency and they're like you know they kind of didn't believe it really kind of at first and my

[00:44:44] only requirement really was was that they you know they filed a complaint relatively quickly so i could

[00:44:49] be incarcerated so really i could protect myself from myself and i think it probably took

[00:44:55] away about 10 days 12 days which was actually pretty quick to them because you know i mean you know

[00:45:00] the FBI is like well we know we've got to check this out we want to make sure you know that's

[00:45:03] a nut that you know that that wants to be incarcerated we need to kind of check and make sure that

[00:45:07] what you're saying is true and um yeah so that's whatever i i i prefer with them a couple of

[00:45:13] then give them all my documents um preferred with the money future trading commission and then

[00:45:19] was incarcerated in January of 2011

[00:45:35] that was a riveting story come back tomorrow because

[00:45:39] James goes to jail why what happened and what happened after that it still continues the story

[00:45:48] and it's it's such an interesting topic to me i i mean i was running a hedge fund

[00:45:55] around the same time as James and and i knew a lot of funds in that business and i was skeptical

[00:46:01] of all of them and it was fascinating for James to kind of open to my eyes to how much fraud was

[00:46:05] out there but we we'd take it even further in tomorrow's continuation starting with James goes to

[00:46:12] jail James Brandolini that is not me

[00:46:24] pulling up to Mickey D's just for drinks oh yeah that's me nothing extra just perfection and

[00:46:31] a straw coming in hot for the coldest cups on the block because there are drinks then there are

[00:46:40] drinks from McDonald's mixed things up with any size lemonade or sweet tea for a dollar 49

[00:46:46] perfect with our classic fries price and participation may vary cannot be combined with any other

[00:46:51] offer but uh bye bye bye

[00:46:55] in a fast paced world every day brings new challenges and new opportunities at stereo university

[00:47:01] we know a thing or two about getting and staying ahead of change for over 130 years we've been

[00:47:07] providing students like you with innovative tools and customized support so you can find your way

[00:47:12] forward and always keep striving visit strayer.edu to learn more stereo university is certified

[00:47:19] to operate in Virginia by chef and has many campuses including at 21 21 15th Street North in Arlington

[00:47:24] Virginia