The Hillcrest Children’s Center was founded in 1812 as a resource for the orphans of the War of 1812. Over the next 192 years, Hillcrest its operations and funding resources grew in excess of $8 million.
With concerns about stock market volatility on their minds, a member of the board introduced his friend Garfield Taylor, a former employee of Fannie Mae, to his colleagues. Mr. Taylor assured the board that he and his firm, Gibraltar Asset Management could guarantee a 12% return with little or no risk.
Relying on the board member’s reference and Mr. Taylor’s background at Fannie Mae, the board hired Gibraltar Asset Management. Satisfied with the first year’s performance, the board voted to give almost half of their endowment to the firm. Within the next 18 months it was clear that something was wrong. Not only did Hillcrest not receive the income that Mr. Taylor had promised, Hillcrest was unable to gain access to the assets that Gibraltar controlled. By late 2009 and early 2010, Hillcrest realized that they had lost almost $8 million to what the SEC called a classic Ponzi Scheme.
What went wrong and what would conformance to the Global Fiduciary Standard of Excellence (GFSE) have accomplished? First, the GFSE calls for a thorough due diligence process in the selection of an advisor (GFSE Practice S-3.2). Secondly, portfolio assets should have been protected from theft and embezzlement through a registered custodian or other authorized agent (GFSE Practice S-1.6). Thirdly, no proper risk level was identified for the portfolio (GFSE Practice S-2.2) and, lastly, no procedure was in place to assess the quantitative and qualitative aspects of their advisor on an ongoing basis (GFSE Practice S-4.2). Had the board at least followed a proper due diligence process in the first place, they would have avoided the issue completely.
Early in 2015, Mr. Taylor was sentenced to 12 years in federal prison for his crime. Sadly, it will take Hillcrest many years to recoup their losses.