The Cautionary Tale of an Investment Adviser Gone Astray; Mark Spangler, an investment adviser, preached the doctrine of acting in his clients’ best interest. But his actions put the lie to his beliefs

November 15, 2013

The Cautionary Tale of an Investment Adviser Gone Astray


IN the world of Ponzi schemes, Mark Spangler was a small-time crook. But his early career, as a respected investment adviser in Seattle and onetime head of a national adviser organization that pushes its members to act in their clients’ best interest, gives his recent conviction on 32 criminal counts a twist. At its height, the Spangler Group — which consisted of him and later his wife — supposedly managed $106 million. It collapsed in 2011 for the reason that all Ponzi schemes collapse — clients wanted their money back and he didn’t have it. But it had been coming undone for years, ever since Mr. Spangler, 58, started to fashion himself a venture capitalist, a role he was ill suited to.He is now awaiting what could be a life sentence on charges of fraud, money-laundering and investment adviser fraud.

Mr. Spangler was convicted a month before a dreary holiday I proposed last year: Madoff Day — the anniversary of the collapse of Bernard L. Madoff’s Ponzi scheme on Dec. 10, 2008. As I suggested then, the day should be remembered to remind people why it is important to be as vigilant about assessing who manages their money as it is in evaluating a doctor.

Mr. Spangler’s Ponzi scheme started like any other. He ingratiated himself with a couple of wealthy groups — employees at Microsoft and Immunex, a biotechnology company now owned by Amgen — who referred their friends to him. He pitched the wealthier clients on private deals that would pay them a big return and him a high commission if they succeeded.

After a string of failures, he thought he had found two companies — TeraHop Networks, which made tracking devices, and Tamarac, a provider of software to financial advisers — that would make it big. For that to happen, they needed money, and he began diverting funds from the other accounts he managed to feed them. TeraHop struggled; Tamarac showed promise. But in 2010 clients began making withdrawals and he didn’t have the money to give them.

Mr. Spangler, who came from a well-known family in Seattle, began his career legitimately. He attended a prestigious Catholic prep school and the University of Washington. As his practice grew, he became the national chairman of the National Association of Personal Financial Advisers (Napfa), a group of fee-only advisers who commit to work in the best interests of their clients.

But by the early 2000s, he had become an advocate of private placements, risky, illiquid investments in little-known companies that promised a large return if they succeeded. Most of the ones Mr. Spangler picked failed.

“I remember him talking at a conference saying why he went away from publicly traded companies and into private partnerships because the returns were better,” said Nick Stuller, president and chief executive of Advice IQ, a company that evaluates advisers. “When I heard that, I said that is something really different, that’s very unusual.”

As Mr. Spangler’s failures mounted, he began dipping into the privately managed mutual funds — with names like Growth and Income — that he had for his more risk-averse clients. Those funds had been managed by outside advisers until 2003, when he decided to manage them himself. He told clients that this would save them on fees, but it really removed third-party oversight of his dealings. By the end, he had diverted the bulk of his clients’ money — some $43 million — to TeraHop, where he had become the chief executive, and Tamarac.

“He got bit by the venture capital bug,” said Mike Lang, an assistant United States attorney who was one of the prosecutors. “We’re in Seattle. Everyone is making money. He wanted a piece of that.”

Andrew Stoltmann, a Chicago securities lawyer, said what Mr. Spangler did happens more than people realize. “I can’t tell you how many brokers or investment advisers want to be hedge fund managers, mutual fund managers or investment bankers,” he said. “You see these guys doing this kind of stuff all the time — raising money for private companies or running their own mutual funds. Nine times out of 10 it ends disastrously with massive losses.”

Of course, there is a big a difference between getting clients’ consent to put money into private investments that might fail and doing it without their knowing.

When I first wrote about Mr. Spangler in 2011, shortly after federal agents seized his passport to keep him from fleeing to Ecuador with his wife, people who knew him were shocked.

Susan John, who was then the national chairwoman of Napfa, said she was struggling to reconcile the man she had known for 20 years with the one charged with fraud. This week, in an email, she said: “The whole affair saddens me greatly. Consumers need to use diligence when selecting an adviser and continue to monitor their investments periodically so that they notice any change in philosophy or implementation.”

Yet she conceded that Mr. Spangler had once had such a sterling reputation that it lulled clients into a false sense of security. “My personal opinion is that the entire regulatory framework needs to be re-evaluated so that consumers are better protected from those whose self-interest gets in the way of their better judgment,” she said.

Richard Boyd, who, along with his wife, ultimately lost $750,000, said he met Mr. Spangler for coffee several times after the firm was shut down. “He said, ‘Don’t worry. Everything will work out,’ ” said Mr. Boyd, who has a doctorate in molecular biology and worked at Immunex. “He was talking about being our adviser again once this all blew over.”

In his fraud, Mr. Spangler was a combination of the best — or worst, perhaps — of Mr. Madoff and R. Allen Stanford, who sold fraudulent certificates of deposit and was later convicted of a $7 billion fraud. Mr. Madoff ingratiated himself with the Jewish communities in New York and Palm Beach, while Mr. Spangler did the same with wealthy but financially naïve executives at Microsoft and Immunex.

Like Mr. Stanford, Mr. Spangler relied on people failing to read or understand what was on their quarterly statements. Reports from the Stanford Financial Group were filled with small quantities of legitimate securities and had a line or two at the end showing the bulk of the money was in certificates of deposit later determined to be fraudulent.

In Mr. Spangler’s statements, he provided only a breakdown of how money was allocated to his various funds.

“There was no indication on the statements,” Mr. Boyd said. “They painted a very rosy picture. They showed our basis and current value for every investment we had. Our money had grown by 40 percent.”

Mr. Boyd said there were never names of individual securities or mutual funds on the statements. Essex Porter, a television reporter at KIRO TV in Seattle, and his wife, who worked at Microsoft in the early 1990s, never suspected anything was awry. Even looking back, he said the only red flag was that the financial statements started to come less regularly toward the end.

It is often easy to spot the warning signs of a fraud in retrospect, but in this case they were subtle and showed the need for extra vigilance. Mr. Boyd said he once asked Mr. Spangler what stocks and funds he was invested in, but could not get a clear answer.

Ms. John said a third-party custodian could verify the holdings. But in Mr. Spangler’s case, he ceased to have one after 2003. By making himself a general partner in the private funds and investment vehicles, he could write himself a check to cover any expenses — or buy his $890,000 yacht.

“Only a small number of advisers put their money into nontransparent investments,” Mr. Stuller said. “A lot of questions have to be asked. You need to know who is the accounting firm? Who is the auditor? There is a great opportunity for fraud.”

But to be fair, spotting these warnings will be hard for clients with a trusting, even friendly relationship with their adviser.

Two years after his fraud was found out, his clients have fared better than most in similar schemes. They have been paid back about $29 million, which is a little less than half of the money they put in to the Spangler Group, according to Kent Johnson, the court-appointed receiver.

As for Mr. Spangler, his lawyer, Jon Zulauf, would say only: “This was a troubling verdict. Mr. Spangler believed that his investments were in the long-term best interests of his clients.”

Even if they had been, they were done without his clients’ knowledge. And it showed that even someone who claimed to be a fiduciary needed to be checked up on.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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