Wall Street money managers who handled investments for San Diego County's retirement system have been charged with securities fraud.
Prosecutors say the the money managers diverted hundreds of millions of dollars from their clients' portfolios to maintain lavish lifestyles.
County retirement officials said the system had $78 million invested in Greenwich, CT-based WG Trading. San Diego cut ties with the firm Dec. 3, but since they hadn't given six months' written notice, they couldn't get that money back.
Now, any recoveries will be up to the courts.
WG Trading's principals, Paul Greenwood and Steven Walsh, were arrested Wednesday by federal authorities in New York.
According to a criminal complaint, $1.3 billion that WG Trading firm had under its management for 16 'institutional investors' was illegally shifted into personal accounts linked to Greenwood and Walsh over the past two years.
Investigators cited purchases of swank estates, horse farms, cars, expensive collectibles -- and alimony payments.
Besides the San Diego County Employee Retirement Association (SDCERA), WG Trading's clients reportedly included public employee retirement systems in Sacramento and the state of Iowa, along with the University of Pittsburgh, Carnegie Mellon University and some charitable foundations.
San Diego County's retirement system listed WG Trading as so-called Alpha Engine advisers on hedge funds and supposedly risk-free "index arbitrage" investments.
Investment specialists said WG saved the system money on "performance fees."
"There's a whole variety of these cases -- huge frauds -- which in my experience is unusual, to have so many of them hitting at the same time," said San Diego attorney Michael Lipman, a former federal prosecutor who now specializes in white-collar defense cases.
"It may be because people were doing exotic investments," Lipman said in an interview Wednesday, "and were dipping into the till and having a very high lifestyle."
Lipman said it may be difficult for the investors to recovery money through a court-appointed receiver from WG Trading or its principals.
"This is not a good market to be liquidating high-end assets right now," he said.
Meantime, SDCERA has a $127 million federal securities lawsuit pending against Amaranth Advisors and its former natural gas trader over the collapse of a hedge fund in 2006.
Beyond investors undertaking as much so-called due diligence as possible in vetting prospective fund managers, "frankly, it comes back to tighter regulation," Lipman said.
"I'm not privy to what the Obama administration's going to do," Lipman said. "But they're talking about restructuring the entire regulatory system for investments."