Canada- Canada’s hedge fund industry has its share of rogues, but few are as colourful as Paul Eustace.

By his own admission in a deposition filed in court, Mr. Eustace lied to investors, lost $208-million (U.S.) in his hedge funds and stole roughly $2-million of client cash. He has also acknowledged cheating on his wife with a stripper for years and using investor money to give his lover $1-million worth of gifts including paying for breast augmentation surgery.

Now Mr. Eustace, 42, faces the prospect of going to jail over allegations he violated court orders and used money that belonged to creditors to cover personal expenses such as tuition for his children’s private school.

“Eustace’s varied and endless acts of fraud were perpetrated on such a grand scale that it has not only cost innocent investors hundreds of millions of dollars, but has helped to cast a dark cloud over the entire hedge fund industry,” alleges a motion filed in a U.S. court this week by a receiver who is searching for assets.

Mr. Eustace, who lives in Oakville, Ont., was unavailable for comment but in court filings he said he didn’t know about some of the court orders and was only trying to pay legal bills.

Little was known about Mr. Eustace until June 23, 2005, when regulators in the United States and Canada shut down his company, Philadelphia Alternative Asset Management Co. (PAAM), and froze his bank accounts.

Mr. Eustace is an American and while he ran PAAM out of Oakville, it had operations in Philadelphia. The U.S. Commodity Futures Trading Commission has since banned Mr. Eustace for life from “engaging in any commodity-related activity.”

The company collapsed into receivership in Philadelphia and the receiver, Clark Hodgson, has filed a series of lawsuits in a bid to recover assets. Hundreds of pages of documents filed in court this week by the receiver’s lawyers revealed new details about Mr. Eustace and how he allegedly operated.

Mr. Eustace grew up in Connecticut and got a job with an accounting firm after graduating from the University of Pennsylvania in 1987.

In 1990, he joined Trout Trading Co., a Chicago-based hedge fund founded by his childhood friend Monroe Trout. Mr. Trout sent him to Toronto to set up a subsidiary and Mr. Eustace moved to Oakville with his wife and two children.

In his spare time, Mr. Eustace frequented the Locomotion Cabaret in Mississauga where he met Denise Nadeau, a 21-year-old stripper. [pictured]

Soon Mr. Eustace was buying Ms. Nadeau expensive gifts, paying for her breast surgery and taking her on trips to New York and Bermuda, where Trout had an office. But Ms. Nadeau’s presence in the Bermuda office rankled Mr. Trout and in 1998 he fired Mr. Eustace.

In court filings, Mr. Eustace said he left Trout with nearly $10-million and set up a company called Windas Ltd., naming Ms. Nadeau as a director. Windas didn’t last long and in 2000 Mr. Eustace founded a hedge fund called Option Capital Fund with the backing of a few investors including the estate of his dead mother.

It wasn’t long before he set up PAAM and opened an office in Philadelphia with the help of a university friend who was in the commodity business. The company managed to attract some prominent directors including John Wallace, vice-chairman of the Philadelphia Stock Exchange.

Mr. Eustace was a generous boss. Salaries for some junior employees reached $275,000 and many received free cars, according to the court filings. When a friend told him about her difficult divorce, Mr. Eustace bought her a new Volvo. His own salary topped $2-million annually.

While PAAM grew, Mr. Eustace’s personal life deteriorated. His relationship with Ms. Nadeau soured and she allegedly threatened to tell his wife about their affair unless he gave her money. Mr. Eustace allegedly paid Ms. Nadeau as much as $50,000 at a time and bought her a house and appliances. He also allegedly gave $87,000 to a man named Zack who had threatened to kill Ms. Nadeau unless she repaid a loan.

The receiver estimated the total amount he spent on Ms. Nadeau exceeded $1-million.

By 2005, Ms. Nadeau wasn’t his only problem. His funds, which had nearly $300-million in total assets, tanked mainly because Mr. Eustace had made a wrong call on U.S. interest rates.

Rather than tell investors the truth, Mr. Eustace admitted in court filings that he sent fake monthly statements showing strong growth. He also acknowledged taking investor money to pay his salary.

By the time the CFTC moved in, more than $200-million had evaporated. Mr. Eustace insisted he could have turned things around by August if regulators had held off.

The receiver alleges Mr. Eustace hid assets that belonged to investors after PAAM collapsed. He allegedly sold a Rolex watch, a Porsche and company computers containing reams of client data, pocketing all the cash. The receiver wants him jailed until he provides a full accounting for his assets.

While the legal saga plays out, Mr. Eustace remains in Oakville with his family. He also has a job, working for $25 an hour (Canadian) as a bookkeeper at a law firm.