On Aug. 4, 2012, a bright young mortgage department employee at J.P. Morgan named Ben Sayer was all smiles: The head of a rapidly expanding hedge fund said to have almost $200 million in assets—one Anthony Davian of Davian Capital Advisors—had invited him to attend his fund’s annual golf outing for clients at the swanky Firestone Country Club in Akron, Ohio. And this meant, to Sayer at least, that he might be on the verge of snagging a job offer at Davian’s Akron-based fund.
While a job offer at any hedge fund certainly represented a dream opportunity to him, the prospect of being offered a slot at Davian Capital was something apart: It was a fast-growing and remarkably successful effort, with annual returns allegedly exceeding 20 percent when other, much more well-known funds were struggling to earn half as much.
Better still, Sayer liked the way that Davian himself used social media—Facebook, Twitter, YouTube and other services—to share ideas and market his two funds. It seemed to Sayer, a 27-year-old University of Akron graduate, that Davian was as willing to swap insights with him as readily as he would kick around ideas with veteran traders managing hundreds of millions of dollars. Davian’s informality and willingness to engage in dialogue made him appear entirely different from the hedge fund industry legends in New York.
Sayer was right about one thing: Davian eventually did offer him a job as an analyst at Davian Capital and he could dream, briefly at least, of acquiring the experience that would propel him to riches and perhaps enable him to launch his own fund one day.
But within a month of Sayer’s taking the position, the smile had vanished from his face and questions about the firm came to him fast and hard. Not only could he not get a straight answer from Davian about where the $200 million of client capital was, but by this past June, the fund itself had come to a standstill after being besieged by fraud allegations from all directions.
Things got even worse: After Anthony Davian’s wife found him passed out in their car suffering from carbon monoxide poisoning earlier this month, he was rushed to the intensive care unit of a hospital. Meanwhile, a growing number of regulators swarmed over the fund asking some very pointed questions about what had happened.
When the Southern Investigative Reporting Foundation examined the fund’s documents and conducted multiple interviews with investors and the fund’s founder and employees, it uncovered a very different reality behind the well-constructed image of Anthony Davian and his fund. It appears that Davian’s greatest accomplishment may be the invention and marketing of his image as a tech-savvy fund manager of an immensely successful hedge fund portfolio.
While Davian’s assertions that his fund’s asset base reached about $200 million appear to be pure fiction, there’s no doubt that the fund’s investors have suffered sharp losses in their investments, with the extent of the damage still unknown. Though the Davian Capital Advisors drama can’t rival other hedge fund sagas in size, for sheer difficulty in sorting out the true from the false it has few rivals.
If potential investors had done any advance digging, they might have encountered several red flags in Anthony Davian’s background. Raised in the Greater Cleveland area, Davian attended Holy Name High School in Parma and the University of Akron, from which he claimed to have received a 2003 degree in accounting, following a course of study that helped make him “a lethal short seller.”
While Davian did attend the University of Akron and appears to have studied some accounting, he did not graduate, according to the school’s registrar’s office. Moreover, according to public records, the school had a $2,221 lien in place on Davian's assets as of April 2011 for nonpayment of unspecified debts. An attempt to garnish Davian’s wages from a series of bank accounts he disclosed to the courts proved unsuccessful in 2011 and 2012 since the accounts were closed or empty.
Some years earlier, in April 2003, Davian had sought personal bankruptcy protection from his creditors in the U.S. District Court in the Northern District of Ohio, and the online record indicates he was granted relief by that July. At least six other claims against Davian from creditors remain outstanding, including another lien attached by a law firm he once hired.
After Davian attended college and before he began managing money, he spent some time working for his father’s Cleveland-based tool and die factory.
In recent years, though, Davian’s appeals to investors, especially online, were anchored by his frequent assertions that money management simply came easily to him. Less clear is when he started and with how much capital; Davian himself has presented two separate versions of his debut.
In a February 2012 video posted on YouTube with the immodest heading “Financial Rockstar,” Davian claims to have started his fund in 2007, raising capital in a classic “bootstrapping” fashion. While he may have scrambled for money, he seemed to avoid early worries about profits, with his video declaring he had realized returns of 42 percent after accounting for fees in just his first year of trading. This sharply outpaced the returns of dedicated short sellers and equity long and short managers, whose returns for that year averaged 13 percent and 12.8 percent, respectively, according to the Dow Jones Credit Suisse Hedge Index.
His trading proved so profitable that by August 2007, Davian was spending much of his time “golfing and fishing,” according to his YouTube account.
Yet an October 2012 letter that Davian wrote to a short seller (who requested anonymity) offers quite a different launch narrative, yet equally superlative in its instant success. The letter states that Davian’s first fund started in 2008 and by that August it had grown 52 percent after having shorted the stock of Merrill Lynch, Lehman Brothers and National City Corp., affording him the ability to “basically travel around raising capital, golfing and eating and drinking along the way.”
In this same correspondence, Davian explained that he attempted to fight off boredom by launching the Davian Letter, which disseminates his trading ideas to subscribers at $79 or $99 a month. The newsletter generates profits of “several hundred [thousand dollars] annually,” Davian wrote, implying that by the fall 2012, he had at least 2,000 subscribers. (In fact, the newsletter never earned more than than $30,000 a year.)
Investors don’t seem to have lodged any complaints after hearing Davian’s extraordinary assertions; instead they appear to have swooned over the massive returns Davian alleged to have realized. (The initial years of a money manager’s career are often closely scrutinized by prospective investors who watch for how market volatility is handled—but that does not appear to have been the case for Davian.) No one asked why a money manager capable of earning returns in the 40 percent to 50 percent range (during one of the most volatile stretches of stock market history) would have troubled himself with a newsletter business peddling daily stock tips to subscribers for $1,200 a year.
Davian’s vigorous promotional activity had few peers. In the YouTube video, he comes very close to guaranteeing “high 20 percent or mid-30 percent” returns.
For Davian, would-be investors’ embracing of his social media posts afforded him endless promotional opportunities. Davian became a popular Wall Street voice on Twitter, with his @hedgieguy handle issuing dozens of messages daily on everything from macroeconomic issues to potential trades. In what became his trademark, he made identifying a worthwhile trade appear very easy, especially during 2011’s rout in Chinese reverse-merger stocks: Once a stock he highlighted as problematic collapsed, he would tweet out, “Ching!” (simulating the sound of a cash register closing) to signal even more profits for Davian Capital.
(Following questioning by the Southern Investigative Reporting Foundation, Davian has “locked” his Twitter account, closing public access to his messages.)
As someone who had almost 5,000 followers on Twitter in late May and who had sent out more than 43,000 tweets, Davian has a name recognition that typically takes established money managers a decade and billions of dollars in assets to muster. For the members of the public who plugged into Davian’s Twitter stream, it was like walking into a nonstop conversation at a party full of traders swapping ideas, jokes and opinions. This vitality was not lost on others. Indeed Ben Sayer initially connected with Davian in 2011 by following him on Twitter.
Davian’s success at deploying social media led him to strike a populist pose online, deriding the graduates of high-profile universities and graduate schools: He argued that their very academic training made them “smidiots” (a pairing of “smart” and “idiots”) and vowed to never to hire them.
Yet, results are all that matters in money management. At the end of the day, as Davian liked to tell his investors, keeping focused on this mind-set is how he managed to build a successful hedge fund and why guys who went to Ivy League schools were trying to get into his firm.
According to its quarterly letters to investors, Davian Capital Advisors certainly deserved to be sought after: The company reported gains of more than 8 percent and 20 percent, respectively, for its two main portfolios in the nine months through the end of September 2012. The company boasted that a newly hatched small-cap short-only fund, the Rubber City Gravity Limited Partnership, reported 21.2 percent returns during its first eight months of operation last year.
Such returns made it seem as though Davian’s performance compared quite favorably with that of the legendary fund managers dominating Wall Street’s landscape.
Rewards soon followed. Davian began building a big house in a woody section of Bath, just outside of Akron, promoted by his builder on his Web site. He diversified beyond money management, telling everyone about a brewpub he was backing and an organic pet food and supplies business he cofounded.
Social media seemed to grant Davian the luxury of an online forum where he could say whatever he wished as long as his company’s numbers appeared to be rising.
That is—until the day some people showed up at his office with very specific questions they wanted answered. It was the day of the client event attended by Sayer: Aug. 4, 2012.
Brian Clark and his former college roommate at Florida State University first encountered Davian on Twitter in 2011 and struck up a dialogue with him that led to the latter’s subscribing to the Davian Letter. (Clark’s former roommate, who requested anonymity, is referred to here as “Nick Miller,” to shield him from job loss and litigation from his employer. His account was supported by personal and business documents and corroborated by numerous on-the-record sources.)
Miller and Clark each have taken different routes to following the capital markets. Clark runs an information technology consultancy in Tallahassee, Florida, and stock trading is his hobby. Miller is an analyst and trader for a bank’s portfolio management arm.
Davian invited Miller and Clark to visit his company because they had completed a pair of research reports for his newsletter and he was interested in exploring if they might do more; Davian and Miller had spoken about the possibility of Miller's working for the fund.
Yet Davian would have been better off if Miller and Clark had missed their flights since the two Floridians had an entirely separate agenda: They had been doing their homework on Davian’s fund and planned their visit as a way to find answers to a growing list of questions.
As a trader who had dealt with dozens of hedge funds, Miller could not stop thinking about Davian’s frequent remarks about the hassles of setting up a new fund. Davian complained about lawyer fees—a standard hedge fund manager gripe—but then would let slip that he had been forced to spend “a few thousand dollars on legal bills.” In Miller’s experience, most fund managers would click their heels in joy if they could launch a new fund with less than $75,000 in legal fees.
Then there was the fact that virtually no one seemed to work at Davian Capital Advisors. In conversations with the attendees at the client event, Miller and Clark learned that the fund’s staff amounted to Davian, an accountant referred to by Davian as the chief financial officer and an analyst who worked as a bank teller three months before joining the fund, according to her résumé. This appeared to be a very different workforce from the “team” described in videos by Davian as “the best.” When Miller and Clark questioned Davian about how he could make the $200 million fund’s investment decisions with effectively one other person, they did not get an answer.
Their chance sighting of a rather humdrum marketing document for the hedge fund served to crystalize their concerns about Davian and his fund. After arriving at the Davian fund’s offices following the cocktail reception, Miller and Clark picked up a flyer from a stack on a table and immediately noticed something awry in the section on risk management measurements: specifically in the rendering of the Sharpe ratio, an equation measuring variability of reward. The Sharpe ratio is often used as a risk management barometer to assess whether a fund’s investors are being adequately compensated for the risks being taken with their money by the fund’s managers.
A high Sharpe ratio indicates that investors are generally being rewarded for the risk assumed; but an astronomically high Sharpe ratio for a fund exposed to the daily risks of the stock market suggests that something is greatly out of whack. The Sharpe ratio for Davian Capital Advisors seemed to suggest that the fund was generating exceptional returns while taking on virtually no risk, a scenario too good to be true. The fund’s Sharpe ratio was more than 6; anything over 3 would have been remarkable. This meant that Davian had not caught the single biggest error that could be made in calculating the hedge fund industry’s baseline risk measurement.
Bearing a more reserved demeanor than his old roommate, Clark patiently explained to Davian that the Sharpe ratio was mathematically impossible. In short order, it was removed from display.
There was a final thing that struck the pair from Florida as odd at the festivities: the complete lack of clients. At the party of 20 or so, most attendees were people invited by Davian from his Twitter following; just two or three were investors, a remarkably light showing at the primary social event for a fund with $200 million in assets.
After their return to Florida, Clark and Miller had no more direct dealings with Davian or his fund, but their overheard questions and pointed observations to Davian and other client event attendees last August appear to have had some effect: Investor withdrawals increased and little new money came in.
One investor who had seen enough and wanted his money back was Richard Weilnau, a semiretired real estate developer and motorcycle buff who splits his time between Florida and Ohio. He had been waging a low-intensity conflict with Davian for most of 2012 in an effort to withdraw his $100,000 investment after Davian failed to provide him with trade activity updates, he told the Southern Investigative Reporting Foundation.
“During our discussions about investing in the funds [Anthony Davian] assured me that I would get a frequent update on the fund’s trades so I could track performance myself,” Weilnau said. Shortly after he made his investment, “Anthony told me managing the paperwork from the [fund’s] three prime brokers made that impossible. So I tried to redeem immediately.”
Weilnau said he encountered “every excuse in the book” from Davian, but most were a variation of "we’re in some illiquid investments and can’t pull them right now,” a baffling excuse from a long and short equity fund, whose long investments were mostly liquid, larger capitalization stocks, including those of Volkswagen and eBay, and whose short investments were in companies like Herbalife and Nu Skin. There was, of course, the penny stock short portfolio, which was sharply less liquid, but most funds with a stock portfolio valued at $200 million can easily meet a $100,000 redemption request within a month’s time.
Weilnau’s struggles to get back his investment and the sorts of questions that Clark and Miller raised finally led Davian Capital employee Robert Ake to confront Davian this past May over his growing inventory of concerns about the fund’s health.
That was a problem for Davian because Ake was the fund’s chief financial officer. “By late spring nothing made sense [financially] and someone had to say it,” Ake told the Southern Investigative Reporting Foundation.
To be sure, Ake’s title was CFO, but in no serious understanding of the title was that the job he performed. The limits placed on Ake were akin to those imposed on journalists in the former Soviet Union, with a great deal of crucial information being considered off-limits—matters like the fund’s bank statements.
Ake never got an answer from Davian about why he was forbidden to see the fund’s bank balances, he said. The few times Ake tried to broach the subject, he was brushed off.
Recognizing a major problem, Ake referred to the brokerage’s account statements to begin to find answers to some of his questions about the fund’s business. The first thing Ake tried to determine was the exact amount of the fund’s assets. In the accounts that Ake saw regularly, there had not been more than a couple million dollars in client assets. For a year or more, whenever Ake had asked Davian about the location of the nine figures’ worth of client assets, he was ignored or given a nonsensical reply.
What Ake observed—and Davian could not explain—was that the ebbs and flows of the cash reserves in the fund’s brokerage statements tracked the fund’s expenditures on renovations for a new office space. Ake also supposed that perhaps some of the money was being siphoned off for Davian’s personal expenditures.
Ake’s confrontation about this, the minute revenue earned by the Davian Letter and Davian’s statements to clients—with insuations like the fund had special access to popular initial public offerings—went nowhere.
The fund’s director of investor relations and marketing, Sean-Michael Kvacek, took a similar tack with Davian, who poorly received his blunt assessment of the skepticism in the institutional capital world about Davian Capital. The traditional sources of hedge fund capital—endowment and pension funds, as well as many high net worth individuals—had too many questions that could not be answered to their satisfaction, Kvacek told his Davian Capital colleagues. Everyone approached by Kvacek for money seemed to share the assessments of Nick Miller and Brian Clark.
On May 15, Kvacek phoned Davian about the difficulties the fund was facing in bringing in new investment capital. Davian responded to Kvacek that there had been months when he wasn’t sure the fund could make payroll because of withdrawals, adding, “I’ve been able to plug the holes and in one case I brought in an additional $500,000.”
Kvacek told Davian that with the fund’s having close to $200 million under management, plugging holes should not be a problem. (He assumed this because the fund was entitled to a fee of 2 percent of assets, which would have come to roughly $4 million, if $200 million were the total.)
Responding bluntly, Davian began listing the expenses that eat up that $4 million: a 32 percent tax rate, payroll, payroll taxes, medical costs, Bloomberg terminal fees, as well as legal and accounting expenses. But in trying to rebut Kvacek, Davian listed less than $3 million in expenses and some of the costs cited seemed improbably high, such as $250,000 for accounting fees.
Kvacek was fired two weeks later when, according to a lawsuit filed by Davian Capital against him, he was discovered forwarding his notes from work and fund documents to an acquaintance at a Nevada-based fund of funds. Davian told the people at his company that the Kvacek suit was about protecting Davian Capital’s intellectual property. The fund’s lawyers even reached out to the person at the Nevada fund who had received Kvacek’s emails to inform him that attempting to use the sent documents could result in litigation.
To resurrect the moribund fund-raising effort, Davian instructed Kvacek’s coworker Natasha Ivan to tell prospective investors that the fund had $5 million in assets. (It was not clear how Ivan was to explain the sudden shift in the fund’s overall size.)
Kvacek, who did not return repeated phone calls requesting comment, had not forwarded files to hurt Davian Capital, he told Ake and Sayer. Rather he did so because the other fund was Carter Global, founded by Jack Carter, the eldest son of former President Jimmy Carter, Kvacek told his colleagues. He figured that if anyone could effectively alert authorities to what he had come to believe was a complete fraud, it was a former senatorial candidate and president’s kid.
On June 3, Davian Capital’s four remaining full-time employees and a summer intern (the son of the architect building Davian’s new house) quit, never to return to the office.
Kvacek’s hunch that Jack Carter could get results proved to be on target. Within two weeks of Kvacek’s departure, the U.S. Secret Service called Robert Ake and he cooperated fully. As part of that process, Ake wore a wire and recorded Davian discussing “everything,” Ake said. (The Secret Service’s investigative efforts are traditionally associated with currency counterfeiting, but the agency does have jurisdiction over allegations of Ponzi schemes attempted by money managers.)
In late June the Secret Service and the U.S. Postal Service searched the offices of Davian Capital Advisors and confiscated records and computer hard drives.
Brian Leary, a Secret Service spokesman, declined to comment about Davian Capital Advisors, citing a longstanding policy of refraining from discussing potential or current investigations.
Toni Delancey, a Postal Service spokeswoman, did not return repeated requests for comment.
On June 25 in a phone interview, Davian strongly denied that his fund had any problems, saying, “Rumors are being spread by an ex-employee we are suing in court.” He added that only one other employee, research analyst Ashley Cook, had resigned in order “to attend law school.”
Davian insisted four full-time employees still worked for the fund but declined to name them or put them on the phone with a reporter. When told that he sounded like he was talking in an empty office, Davian responded that his colleagues was very busy trading and that there was no time for an interview.
Responding to a question about the actual amount of client assets under management, Davian acknowledged that there had been a misunderstanding. He said he had often stated that the fund had “between $150 million to $200 million under management” but had been referring not to internally managed client assets but to the assets owned or managed by the client base of the Davian Letter.
Davian then declined to discuss the dollar amount of assets currently managed by Davian Capital Advisors.
On both July 1 and July 8, Davian missed scheduled phone interviews with the Southern Investigative Reporting Foundation. On July 9 he sent the foundation an email from what he said was the intensive care unit of a local hospital, as he recovered from what he called “a near death experience.” He said he had been on life support through July 10, but declined to explain how he was able to send an email from his iPad on July 9.
In later emails, Davian declined to respond to questions about whether he had attempted suicide. (In an email exchange provided to the foundation, between the angry investor Weilnau and Davian over Davian’s management of the fund, Davian referred to his illness as resulting from an “accidental carbon monoxide poisoning.”)
Davian Capital Advisors appears to have suspended operations, according to former employees, and investors are scrambling to figure out what, if anything, remains of their money.
Weilnau said optimism about recovering all or most of investors' capital might not be warranted given that the whistle-blower was a CFO who sent an ad hoc group of frantic investors in several states an email stating that he had been prohibited from seeing the fund’s cash position.
The relatively little amount of money that Ake was able to discover, Weilnau said, has led the ad hoc network of investors to believe that the outlook for recovery of their funds is grim: “I asked Ake what was in the brokerage account cash balances and he told me it was about $30,000 total,” Weilnau said. “That makes me think the money is far from Akron.”
“I’ve had calls with the Secret Service, Securities and Exchange Commission and the Department of Justice and none of them can tell me what’s happening because of the ongoing investigation,” Weilau added.
In conversations with investors as recently as July 13, Davian strongly denied that any problems existed at the fund and insisted that the quarter’s investing was profitable, although he said June’s results are still being tabulated.