- The Washington Times - Thursday, February 3, 2011

The D.C.-based Hillcrest Children's Center, a mental health provider that began as an orphanage nearly 200 years ago and was first led by Dolly Madison, is accusing a Washington financial firm of bilking $8 million of its investments.

In what lawyers for the center call a “straight-forward case of theft and fraud,” the center filed a lawsuit in federal court in Washington recently against Gibraltar Asset Management Group LLC, its lawyer and executives.

The complaint says the firm persuaded the center to invest millions from its endowment, promising profits through an “essentially risk-free strategy” despite turmoil in the financial markets.

“Within months of inducing Hillcrest to make the investment, the Gibraltar Defendants had lost or misappropriated almost every dollar of the $8 million investment Hillcrest had entrusted to their care,” the complaint says.

E-mail messages sent to Gibraltar seeking comment Wednesday and Thursday were not returned, and a voice mail was not accepting messages Thursday. A lawyer listed as a defendant in the complaint did not return a phone message Thursday.

Hillcrest continues to operate. On its most recently available IRS nonprofit statement, the center reported about $17 million in total assets. Because of the loss of the $8 million, though, “Hillcrest now faces financial hardship that threatens its ability to fulfill its mission to assist disadvantaged families,” the complaint states.

The 63-page lawsuit said the troubles began in the spring of 2008, when Hillcrest’s board watched mounting losses from the center’s investment portfolio as the financial markets worsened.

Board members were worried that their past investment managers weren’t paying enough attention to the investment portfolio, so they began searching for new advisers.

While nobody at Hillcrest had institutional investment experience, they came up with several possible new advisers through various acquaintances. It was Nathaniel Sims, a board member, who first mentioned Gibraltar. He knew Garfield Taylor, the firm’s chief executive, because he had invested with him and the pair had other “societal connections,” according to the suit.

Mr. Taylor and other executives named in the suit met with Hillcrest Center officials in June and July 2008 to pitch what they called Gibraltar’s “proprietary” trading models, touting their investment experience and an advisory board that included members of the faculty at Howard University School of Business and an investment banker, according to the complaint.

The suit also said that Mr. Taylor led presentations in which Gibraltar executives talked about their “covered call” investment strategy of purchasing stock while simultaneously selling a “call option” on that stock.

Still, two Hillcrest board members wondered how Gibraltar managed to produce such great returns in a weak financial market, and they asked why other investment advisers weren’t following the same “covered call” strategy, the suit said.

Mr. Taylor said the strategy was complicated and that other advisers “did not, and could not,” follow the strategy because of the amount of work and sophistication required to execute it successfully,” the suit said.