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No joke: Tonga says jester-investor cost island kingdom $26 million
- RON HARRIS, Associated Press Writer
Wednesday, August 7, 2002
(08-07) 22:17 PDT SEBASTOPOL, Calif. (AP) --
Jesse Bogdonoff was both the investment adviser and court jester of Tonga, but the Pacific island kingdom isn't laughing anymore.
The king says in a lawsuit that Bogdonoff's foolhardy strategies and ridiculous commissions drained a Tongan royal trust fund of $26 million -- almost half the country's annual budget.
Bogdonoff blames the Tongans for the losses, saying they got cold feet and pulled out before he could recoup their money. "It turns out they are like most people because most people panic," he said.
The dispute has landed in federal court in San Francisco, with lawyers for the Tonga Trust Fund suing the American it once entrusted to "fulfill his royal duty sharing mirthful wisdom," according to a decree by King Taufa'ahau Tupou IV.
Bogdonoff, 47, only took the jester title to avoid a spat with his former employer, the bank where he first started managing the fund. He really had a higher duty in Tonga: making money.
For a time, during the technology boom, he did. But things went bust after he invested in riskier ventures -- a dot-com film distribution start-up, a speculative energy company and a business that hoped to profit from the unused life insurance of the terminally ill.
Now the fund has only $2.2 million, and the king claims Bogdonoff and two associates lied about the investments and helped themselves to large fees.
Tonga -- a 170-island archipelago that has about 100,000 subjects and relies heavily on pumpkin and vanilla exports -- has little hope of regaining its fortune, reaped from fees on passports sold to nervous Chinese living in Hong Kong before the Chinese takeover. Bogdonoff says he is practically broke.
Bogdonoff, who earned his MBA at night school, stumbled upon the trust fund when he was selling securities for Bank of America. The money -- $21 million at that point -- was languishing in a checking account, earning a steady if not exhilarating 1.7 percent interest.
Bogdonoff persuaded the bank and the king to let him manage the money in 1994, then switched it to low-risk bonds earning 7 percent interest. Later he added Bank of America mutual funds to the portfolio.
"The market was taking off. We made $11.5 million in the next three years," Bogdonoff said.
Bogdonoff quit Bank of America in 1999 but wanted to keep the Tongan account, which was now at $26.5 million after occasional expenditures by the king. Promising a flat fee of $250,000 a year, he won the deal, according to the lawsuit.
Bogdonoff then persuaded the Tongan trustees to make riskier investments, including putting $20 million into a deal with Millennium Asset Management Services of Nevada, which bought viatical settlements. In viatical settlements, terminally ill people sell their life insurance policies for cash up front.
Bogdonoff projected a 30 percent return in two years, pitching the deal as "the perfect no-risk investment," the lawsuit claims. But with AIDS patients living longer through drug therapy, many viaticals proved to be poor investments.
Tonga is also suing Donald Kaplan, president of Services International Corp., which marketed the viaticals to the king, and Hershel Hiatt, then head of Millennium Asset.
Tonga claims Bogdonoff conspired with the two men and other associates to take $6.25 million in secret commissions and fees on the viatical investments.
Bogdonoff says his contract entitled him to commissions and did not limit the fees to any particular amount. He says he squandered his share of the money on other poorly performing investments.
Kaplan did not return repeated calls for comment, and Hiatt could not be located. Tonga's San Francisco lawyers did not return calls.
The court has assigned the case to a dispute-resolution program, with an eye toward a settlement. No trial date has been set.
Meanwhile, Bogdonoff still has his fool's cap, but the mirth is a memory.
"This was really rough. My whole identity had been built up through my success," he said. "I love these people, and I tried to help them."
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