CEO of MDL Capital Management failed to tell investor of risk, court finds. Earlier this month, fixed-income manager Mark Lay was sentenced in federal court to 12 years in prison and ordered to pay $212.9 million in restitution and a $590,000 forfeiture for fraud related to the loss of $213 million by the Ohio Bureau of Workers' Compensation (OBWC) in a Bermuda-based hedge fund he ran.

Lay was CEO of Pittsburgh-based MDL Capital Management, which is no longer in business.

Failure to communicate

The firm, which espoused a "conservative but opportunistic" investment strategy, managed $790 million, mainly for pension and profit-sharing plans and government agencies, at the time of its last ADV filing with the SEC. In June 2003, MDL managed $3.5 billion for a roster of institutional clients that included the National Basketball Association. That year Ernst & Young named Lay its financial-service entrepreneur of the year for Western Pennsylvania.

Lay's sentencing this month followed his conviction in U.S. District Court for investment-advisory fraud, two counts of mail fraud, and conspiracy to commit mail and wire fraud. The essence of the court's find was that Lay failed, over about four years starting in 2003, to inform Ohio state officials of the amount of risk he'd undertaken on bureau's behalf.

MDL received $1.7 million in fees from the OBWC. The $590,000 forfeiture is based on Lay's 35% ownership of MDL.

The fund itself seems to have been conceived as a hedge for the OBWC's $10-billion bond portfolio. The OBWC was the fund's only investor.

Lay's lawyers had "argued that he was scapegoat for a legitimate investment loss that wasn't a crime," according to an Associated Press report. Prosecutors said the risk he took with the fund and went far beyond limits Ohio officials had set.

Lay had earlier agreed to pay Ohio $5 million to settle a civil suit in the matter. -FWR

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