Hedge Fund Manager Under Investigation Commits Suicide

Paul Welterlen was easy to like. He was charming and handsome, and for a while he made a lot of money for a lot of friends. At 61, he was living the Santa Barbara dream ​— ​a house on the Riviera, a private investment office nearby, frequent trips to New York and Nicaragua, and a socialite wife, who he doted on with Prada shoes and dinners at Lucky’s. On leisurely weekends, he enjoyed cycling, and walking his dog.

Shortly after 3 p.m. on June 8, Welterlen stepped in front of a train at Butterfly Lane. His death was quickly ruled a suicide. For some, the news came as a total shock. For others, it was no surprise.

Last summer, Welterlen’s world came crashing down. After telling his investors he’d lost all their money with bad ​ ​wagers on tricky stocks, police detectives started investigating the former stage and TV actor turned hedge fund manager for running what they suspected was a $4 million Ponzi scheme. They seized forged financial statements from his Puesta del Sol office and contacted the Franchise Tax Board and the California Department of Business Oversight to start their own inquiries. By the time Welterlen took his life earlier this month, he was facing imminent charges of grand theft, securities fraud, and money laundering.

Welterlen’s alleged victims include his mother and a niece working as a San Diego prosecutor, as well as three Santa Barbara psychotherapists who met Welterlen through his wife, also a therapist. Individual losses ranged in the hundreds of thousands of dollars to a million-plus. One investor lost her entire life savings. Another is now unsure how he’ll send his kids to college. “He ruined people financially,” said lead investigator Kristin Shamordola.

David Roth met Welterlen 44 years ago at La Jolla High School, and they had remained close friends since. Eight years ago, not long after Welterlen switched careers and began playing the stock market, he approached Roth with an offer to buy into a small hedge fund he was managing. Welterlen showed him the positive returns he was supposedly getting in business sectors like airlines and oil, which matched what big-name hedge funds were reporting at the time.

“Paul told me, ‘Somebody would have to shoot me in the head for me not to make you 10 percent,’” Roth remembered. “He did a really good job of making it sound legitimate.” So Roth gave Welterlen a sizeable chunk of his savings. “It’s hard to take a dispassionate approach to investing when a friend says it’s a sure thing,” he said. “Plus, I didn’t need anyone to vouch for Paul ​— ​he had just been at my house.”

For a while, Roth’s dividend checks showed up on time and in healthy amounts. Some investors received as much as 20 percent in returns. Welterlen encouraged Roth and the others to reinvest the money, which they often did. (This, it turned out, allowed Welterlen to continue skimming from the account without it dropping to zero.) Eventually, though, the checks start arriving lighter and later. Then, they stopped altogether.

Roth, like the other investors, confronted Welterlen, who employed a series of excuses and delay tactics before going completely silent. In his letter of contrition last August to hedge fund members, Welterlen apologized for his poor performance and promised to make each of them whole again. He made an allusion to “cashing in” his life insurance policy, which at the time seemed like a dark and desperate joke, but now appears foreboding. Soon after, the group was giving statements to detectives.

Roth blames himself for his losses. He noticed a number of red flags early on but failed to act in time, trusting Welterlen would keep his best interests at heart. “I feel like an idiot,” he said, advising would-be investors: “If you have to convince yourself to believe someone, if you’re making yourself believe what they’re saying because you want it to be true, that’s on you.” As much anger as he felt toward Welterlen, Roth said, he never wanted or expected him to commit suicide.

Shamordola warned of the dangers that come with trusting a friend or family member with large sums of money based solely on promises and personal convictions. In Welterlen’s case, it appears his 10 or so investors ​— ​who, though financially unsophisticated, “were smart, educated people with master’s degrees and law degrees” ​— ​failed to perform even basic due diligence to verify his guarantees.

If they had, they would have discovered that he declared personal bankruptcy in the late 1990s, that the state more recently suspended his businesses license for failing to file tax returns, and that the vast majority of their money was being deposited directly into Welterlen’s personal accounts, not a dedicated hedge fund as he had promised. Still, it’s not fair to blame the alleged victims for their losses, Shamordola said. “They made mistakes, true, but he is the criminal.” Welterlen’s attorneys declined to comment for this story.

Welterlen’s suicide was a tragedy in more ways than one, Shamordola went on ​— ​his private pain and shame must have been immense, and he leaves behind a grieving wife. Welterlen’s investors were also robbed of justice and, in all likelihood, any hope of recouping their money. Toward the end as he struggled to pay investors their “dividends” ​— ​which, as is the hallmark of a Ponzi scheme, were actually fresh deposits from other investors ​— ​he fully drained the accounts, eventually pulling just $200 at a time to cover his own utility bills.

In one 10-month period at the height of the scheme, which appears to have dated back to 2008 and possibly even earlier, Welterlen collected $1.4 million and used just $100,000 for actual investments. The rest, said Deputy District Attorney Brian Cota, paid for his and his wife’s “lifestyle” ​— ​monthly credit card bills that ran to the tens of thousands of dollars, expensive jewelry, new cars, and so on. The couple also purchased a large piece of beachfront in Nicaragua, where they hoped to develop a luxury hotel. At the time of his death, Welterlen was actively soliciting partners for the project.

With Welterlen gone, the case is now closed, said Cota. In reporting this story, The Santa Barbara Independent spoke with seven investors, all of whom believe Welterlen’s widow was involved in, or at least aware of, his crimes. However, investigators “found no objective evidence that would prove at any level that she knew about it,” said Shamordola. Some of the investors, who requested anonymity, said they are exploring ways of obtaining the money Welterlen’s wife is collecting through his life insurance policy. All of the sources repeatedly praised Shamordola and Cota for their tireless diligence on the case.

Cota similarly advised against investing with one’s gut and heart. Take your time and do your research, he said. Ask around. Hire a lawyer. Demand original copies of account histories and financial statements. Use common sense. In short, Cota said, if you’re thinking about investing with a friend or family member, take the steps you would normally take if you didn’t know the person as well. “Trust, but verify,” he said.