Buddy Fletcher: Financial Genius — or a Fake?

Photo by Fred R. Conrad/The New York Times/Redux

Even in the Dakota, the storied apartment building on New York’s Upper West Side, home to such cultural icons as Yoko Ono and Lauren Bacall, Buddy Fletcher stood out. African American, fantastically accomplished, and wealthy, Fletcher had grown up in modest circumstances, gone to Harvard, and graduated as “first marshal” of his class in 1987. From there he hit Wall Street, earned millions before he turned 25, and started his own firm, Fletcher Asset Management. By the time he was 30, the company was operating as a hedge fund and boasting of triple-digit returns. Fletcher made multimillion-dollar donations to Harvard, and gave away millions more to museums, arts groups, and civil rights causes.

BusinessWeek and the New Yorker, among many other publications, wrote glowing profiles, and in 2009 Forbes named him one of the country’s 20 richest African Americans. With a net worth of $150 million, Fletcher was just a few spots down the list from Oprah Winfrey, Bill Cosby, and Tiger Woods.

Fletcher dressed in a Gatsby-esque cavalcade of beautifully tailored suits and traveled around Manhattan in a Bentley driven by his full-time chauffeur. He bought a $5.9 million castle in upstate Connecticut. In New York, he rented offices for his hedge fund at the top of the GM Building on Fifth Avenue. There, rising 48 floors from the southeast corner of Central Park, he could gaze down upon the city in every direction.

Then there was his home, Apartment 52 at the Dakota, which, as the New Yorker put it, was “decorated with the apparent intention of recreating, as nearly as possible, the fusty, woody interior of the Harvard Club.” That was just one of four Dakota residences Fletcher had purchased over the course of two decades. In addition to two apartments for himself, he’d bought one for his mother and another for his employees to use.

Then, at the beginning of 2010, Fletcher informed the building’s board that he intended to buy still another Dakota residence. The owner of Apartment 50 had passed away, and Fletcher was ready to write a $5.7 million check for the two-bedroom.

As others had before, the members of the Dakota board — themselves mostly high-powered financial types — examined Fletcher’s financial statement, including an assessment of his net worth and records from his hedge fund. It was all standard operating procedure — but then the board came back with an answer Fletcher did not expect: no. Fletcher, the board said, could not afford to buy another apartment. In fact, it couldn’t say for sure how he was paying for the other four.

Buddy Fletcher, according to his neighbors in the Dakota, wasn’t the wealthy investor he appeared to be, but the head of a financially opaque hedge fund who was struggling to pay his bills. The news traveled fast to Cambridge, where the question was nervously asked: Was one of Harvard’s highest-profile philanthropists not what he seemed?

Alphonse “Buddy” Fletcher Jr. — he got the nickname as a little kid — and his younger brothers, Geoffrey and Todd, grew up middle-class in Waterford, Connecticut. His father, Alphonse Sr., originally from Louisiana, worked as a technician at the Electric Boat submarine-making factory in nearby Groton. His mother, Bettye, was a public school principal and administrator. Firm believers in education and hard work, they couldn’t have been prouder when Buddy got into Harvard.

Fletcher threw himself into university life, finding a residence in Adams House, the most artistic and socially avant-garde of Harvard’s houses. In what was considered a more conservative move, though, he also joined the ROTC program at MIT (Harvard did not then allow ROTC on campus). Fletcher was popular. He was funny, considerate, and polite — almost excessively polite, some people thought. And at a school where African-American students often felt marginalized, he seemed determined to fit in. He was “punched” for membership in the Phoenix-S.K., one of Harvard’s exclusive finals clubs, and as a junior was voted its president. The following year, the entire senior class elected him their first marshal, foremost among the eight seniors who helped organize class events.

After graduating in 1987, Fletcher moved to New York to take a job at the investment bank Bear, Stearns. His mentor there was a partner named Elliot Wolk, one of the firm’s most powerful financiers. “He worked for me for two years,” says Wolk, who retired in 1997 but still keeps in touch with Fletcher. “He’s extremely smart and has a very pleasant personality — he was an extremely good salesman.” Wolk recalls that he taught Fletcher equities trading, and Fletcher’s job was to find opportunities to implement it.

Apparently, he was good at his job: After two years, Fletcher’s salary and bonus totaled $160,000. (He used some of his earnings to help pay the tuition of his brothers, who’d followed him to Harvard.) But Fletcher “didn’t think $160, 000 was enough,” Wolk says. In 1989 rival firm Kidder, Peabody offered him a job trading for them. Fletcher told colleagues that Kidder had promised him a $100,000 base salary and 20 to 25 percent of any profits he generated. He was 23 years old.

By his own account, Fletcher was an instant success at Kidder. His first year there, he generated an astounding $25.5 million in net profits for the firm. With his 20 percent cut, he was expecting a bonus of $5 million — well on his way to becoming Kidder’s second-highest-paid employee.

But Kidder balked at paying Fletcher the bonus he expected, and accusations soon began flying. In 1991 Fletcher resigned. Then in June of that year, he sued Kidder, charging the firm with racial discrimination. “Kidder determined that the amount it was obligated to pay Mr. Fletcher was simply too much money to pay a young black man,” Fletcher said in his complaint. “Kidder’s management [was] determined to put Mr. Fletcher in his place….” Fletcher wanted nearly $30 million in damages.

Kidder representatives have never previously spoken publicly about the lawsuit, but Granville Bowie, who was then Kidder’s human resources manager — and one of the targets of Fletcher’s racial discrimination suit — told me that the real story was very different: The firm said no to paying the bonus because Fletcher had refused to tell anyone just how he was generating those electronic profits.

According to Bowie, Fletcher claimed that although he was trading with the firm’s money, his trading strategies were his and his alone. “Fletcher had a business that…frankly, we didn’t know what it was, and we didn’t know how it was making money,” Bowie says. “He took the position, ‘I’m making money…go away.’” That attitude made the young trader’s supervisor, managing director Thomas Ryan, nervous. Were Fletcher’s profits for real?

In 1992 a New York Stock Exchange arbitration panel denied Fletcher the damages he claimed, awarding him a relatively modest $1.26 million, and later another arbitration panel dismissed the racial discrimination suit. The arbitration award wasn’t really a victory for Fletcher, but the story that emerged in subsequent media reports was less nuanced: On Wall Street, went the narrative, even Harvard grads get discriminated against if they happen to be black. Buddy Fletcher, though, had fought back.

In 1997, Fletcher got some revenge when his younger brother Todd staged an off-Broadway musical based on the Kidder, Peabody battle. Titled Julius Caesar: The Fall and Rise of a Wall Street Star, Todd’s play, which Buddy helped finance, told the story of a black chief executive of a securities firm called Rome, Inc. who is murdered by white business partners.

After the bitter end at Kidder, Fletcher rented office space from Bear, Stearns and began soliciting investors for a firm of his own, Fletcher Asset Management, or FAM. Over the next four years, Fletcher, acting as a broker-dealer — meaning that he could buy and sell equities for himself and his clients — built a business around his secret investment strategy. By 1994 the press was reporting that Fletcher was an investing wunderkind. BusinessWeek touted his audited financial statements, which established triple-digit returns. Fortune wrote that “math wizards at his ten-person firm use complex computer programs to do an arcane form of stock trading timed to dividend payouts.” And, the magazine added, “His firm achieved average annual returns of over 300 percent over the past two years….”

Fletcher later moved on from his dividend strategy to one of investing in cash-poor companies, giving them capital infusions in exchange for stock priced below market value. (Investment clients provided most of the cash; Fletcher would take a management fee and a slice of the profits.) That stock was likely to go up, Fletcher explained to clients, because he would invest only in companies with strong underlying fundamentals and because FAM would help the company grow. Fletcher’s deals were immensely complicated — hard even for financial professionals to decipher — but they seemed to work. Starting in 1991, the year it was founded, FAM would report an unbroken string of profitable quarters that lasted more than a decade.

In 1995 Fletcher registered FAM with the SEC as a hedge fund, a move that allowed him to conduct a broader range of investment activities. Most new hedge funds are hungry to raise capital, but FAM insisted that it would not take money from just anyone. Potential investors in FAM were “screened” to make sure that they were “friends and allies,” Fletcher explained in Stock Market Wizards, a 2003 book by Jack Schwager. As Fletcher put it, in language that called to mind Bernie Madoff, “If we were just looking to raise as much money as we could, sure, the more the merrier. [But] at this point, we just want supportive investors. It’s not worth the trouble having an investor who would be a distraction.”

Fletcher told Schwager that he’d had a talent for investing since childhood. In junior high, he said, he wrote a computer program that could pick winners at a local dog track. By analyzing everything from finish times to weather conditions, the program could predict with 80 percent accuracy whether a dog would finish in the money. When an impressed Schwager asked Fletcher how much he’d made from his bets, the hedge fund manager demurred, saying that the racetrack took such a significant cut of his winnings, “even though we won 80 percent of the time, it still wasn’t enough to make money.” Had Fletcher thought of a similar program for beating the S & P 500? “Oh, sure,” Fletcher told Schwager. So why hadn’t he implemented it? “We’ve been very busy.”

In the mid-’90s, Fletcher moved FAM from Bear, Stearns to the GM Building, and then later to an Upper East Side townhouse. (It’s now at 48 Wall Street.) He set about hiring friends and family to help him manage his growing portfolio. Several of Fletcher’s Harvard chums — classmates Angela Dorn, Stephen Cass, Michael Meade, and Paul Ryan — would join him at FAM during the ’90s. He appointed his mother, Bettye, a director of FAM’s philanthropic activities. As a director of international investor relations, he hired his youngest brother, Todd. And for a vice president, he turned to his own boyfriend, Hobart Fowlkes Jr., who worked in European furniture at the auction house Christie’s.