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A Fund Tempted, Then Crushed, Investors

Its young founder is under arrest. Victims wonder about their money.

By Joseph N. DiStefano INQUIRER STAFF WRITER

Would you in vest a big chunk of your life savings with a 23-year-old Wharton School dropout with a taste for fancy cars and big houses?

A Delaware dentist did. So did his wife's hairdresser, and a local home remodeler. And a Pennsylvania nursinghome operator, and a nearby Christmas tree farmer. And a Nebraska uniform dealer, and his son.

Despite Mark Yagalla's youth and lack of formal credentials, these selfmade businesspeople were attracted by his apparently encyclopedic knowledge of securities markets-and by the signs ofYagalla's success, which went beyond his expensive lifestyle.

Today, Yagalla's reputation is in tatters. Members of his staff have quit or turned government informer. Investors who gave him millions of dollars are wondering if they will ever get it back, or whether their experience will serve only as a costly cautionary tale.

Yagalla's early success as a money manager rested in part on investments in Internet and high-tech stocks. As the market for such stocks collapsed earlier this year, his investments and the lifestyle they supported began to unravel.

Fate of investors' fund unknown after filing of fraud charges

On Oct. 18, five days after Yagalla attempted to borrow $500,000 from a Las Vegas casino against his overdrawn brokerage account, he was arrested by the FBI at his $1.3 million mansion in the exclusive Pentland development north of Wilmington.

He became the latest of several operators of loosely regulated private investment firms, or "hedge funds," to face federal criminal fraud charges alleging diversion of clients' money to managers' personal pockets.

Investors found Yagalla convincing. An Ernst & Young audit report showed his infant investment fund, Ashbury Capital Partners LP, posted gains of more than 60 percent-three times what the Standard & Poor's 500 average achieved-during 1999.

Ashbury's promotional materials referred would-be investors to earlier Yagalla clients such as Ronald E. Coffins, an Ivy League-trained orthodontist with a busy practice in Delaware's fastest-growing suburbs.

And they showed that Yagalla, for all his youth, commanded a staff of seasoned Wall Street professionals: a onetime Dean Witter Reynolds vice president, two investment bankers, and a Harvardeducated stock analyst and three securities traders who had worked together at the brokerage of Josephthal & Co.

According to federal prosecutors in New York and the Securities and Exchange Commission, Yagalla lied to investors earlier this year when he claimed the Ashbury fund was making money for them.

In fact, prosecutors allege, the fund was running out of money-as Yagalla was using investors' money to finance a lifestyle that included $1 million-plus homes in three states and a car collection including two Ferraris, two Mercedeses, and a $310,000 Bentley Azure that can go 150 miles per hour. Today, Yagalla's

Ashbury fund is so depleted that it "cannot repay any more than a fraction of the proceeds" to its investors, according to the SEe.

Yagalla was released on $250,000 bail pending a hearing in New York next month. Yagalla and his New York and Wilmington attorneys, who initially said he planned to fight the charges, did not return calls seeking comment late last week.

Under federal securities law, hedge funds such as Ashbury are supposed to be restricted to small groups of sophisticated, wealthy investors-typically people with more than $1 million to invest.

Unlike mutual funds and other common investment vehicles sold through registered stockbrokers, hedge funds aren't subject to most federal reporting and regulatory requirements-making it tough for investors to know what managers are doing with their money.

"This is the underbelly of the securities market," said former SEC litigator Richard A. Levan, of Levan Friedman, LLP . "Hedge funds are difficult to police. It's not enough that your neighbor or friend claims to have reaped handsome profits. You don't know where [the profits] came from."

Indeed, the apparent scope of Yagalla's alleged fraud-though Ashbury advertised it was raising $1 billion, the SEC said last week it has so far identified only $8 million-pales compared with two other recent cases.

In New York in August, fund manager Michael Berger was held on $100,000 bail and charged with stealing $400 million from investors through his Manhattan hedge fund; A day after Yagalla was arrested, Florida hedge fund manager David M. Mobley was charged with misawropriating $120 million from his Maricopa fund.

Both Mobley and Berger are contesting those charges.

Yagalla's local investors "are hardworking people who are in shock that their money has apparently been dissipated," said Wilmington lawyer Francis G.X. Pileggi.

Last week, Pileggi filed a lawsuit seeking to recover $750,000 invested in the Ashbury fund by Perry Scarfo, a Chester County resident who owns a busy Delaware hairdressing shop.

Scarfo was so distraught and embarrassed after Yagalla's arrest that he stayed home from his busy Pike Creek Valley shop where he normally spends 12-hour days, according to staff members and others familiar with the situation. He did not return calls seeking comment.

The SEC has statements from other investors and potential victims, including Collins, the orthodontist, and Chris Rau, a nursing-home operator from Yagalla's native Carbon County on the edge of the Poconos, who last week called his investment with Yagalla "a mess." Both declined further comment.

Also hurt by Yagalla's arrest was the Republican National Committee, which promised to turn over to the SEC $300,000 Yagalla had contributed.

Investors weren't the only ones who later felt duped. John Joseph Regan, an investment strategist for Josephthal & Co. in New York, joined Ashbury in early October as head of technical analysis.

By the end of the week, Regan had appeared as an Ashbury executi ve on two Bloomberg News television programs, discussing the investment implications of energy prices.

Regan, a 30-year securities industry veteran with a master's degree in business administration from Harvard Business School, lasted a week at the hedge fund. "He went there thinking he was going to participate [as an owner of] the company. It took him a few days to realize he didn't fit in;" said Josephthal general counsel Donald McCabe.

He and Regan could not explain why Regan was identified as an Ashbury executive on a promotional brochure that investor Scarfo obtained from the fund last spring.

Regan has been allowed to return to his old Josephthal job.

Jeff Lawson, president of Travel-Now. com, counts his Missouribased company as a Yagalla victim.

Yagalla had bought 250,000 Travel-Now shares with borrowed Lehman Bros. money in late September.

When Yagalla couldn't pay, Lehman seized the stock and has been trying to sell it-driving the price sharply lower, according to Travel-Now's Lawson.

"We were caught on the periphery of what Mr. Yagalla has done," Lawson said Friday.

Lehman Bros. is suing Yagalla to recover $7 million in unpaid trading costs. His checks to cover the Travel-Now purchase bounced.

Despite the accusations, some of Yagalla's original clients-who are not involved in the Ashbury fund-say he has done nothing but make them rich.

William Dolinsky, a Christmas tree farmer from Yagalla's hometown of Weatherly, Pa., said he "made a lot of money" in the mid-1990s by investing with Yagalla, whom he remembered as "a real good kid."

Doug Dudley, a Nebraska uniform-company owner, said he met Yagalla four years ago while investing in a Kentucky oil well-and was immediately convinced the youth was, "intellectual-wise, an exceptional young man. He seemed to have the knowledge of many 30- and 40-year olds regarding stocks."

At the time, Yagalla was 19. He had abandoned classes at the University of Kentucky; he had not yet enrolled at the Wharton School, which he also quit.

Dudley said the oil well was a bustbut he was so impressed with Yagalla's vision of growth trends in the economy and the stock market that he entrusted the young man with $100,000, which Dudley promptly converted into shares of Yahoo, Dell and other stocks that soared in the tech-stock boom of the late '90s.

Dudley said Yagalla more than doubled his money, enabling him to cash out late last year, "before the Internet went to pot." Yet his son and son-in-law have retained accounts with Yagalla. "One part of the portfolio has not done well this year," acknowledged Brad Dudley, Doug's son.

But Brad Dudley is still ahead over the three-year life of his investment in another Yagalla-managed account that is not part of the Ashbury fund. "My 401(k) plan hasn't done that well," and it's managed by a major mutual-fund company, he said.

The elder Dudley, who is 72, said he's worried about,Yagalla's future.

"I hope he is not in too deep," Doug Dudley said. "I've been concerned about him. I'm hoping he would give me a call."

Joseph N. DiStefano's e-mail address is jdistefano@phillynews.com

Copyright 2006. Richard A. Levan. All rights reserved