SEC charges purported money manager with defrauding brokerage firms and investors
The Securities and Exchange Commission (SEC) has charged a purported money manager in New York with conducting a free-riding scheme to defraud three brokerage firms, and then bilking several investors out of nearly a half-million dollars.
The SEC alleges that Ronald Feldstein caused more than USD2m in losses for the brokerage firms that he victimised in the free-riding scheme, which occurs when customers buy or sell securities in their brokerage accounts without having the money or shares to actually pay for them. The funds were used to his luxurious lifestyle that included a Bentley automobile, summers in the Hamptons, and casino junkets.
Feldstein opened three separate brokerage accounts in the names of two purported investment funds that he created. He had no intention to pay for the stocks that he purchased if they resulted in big losses. Feldstein planned to walk away from any transactions where the price declined substantially after the trade date, and planned to use sales proceeds to pay for the purchases if the price of a stock increased.
The SEC further alleges that Feldstein later began soliciting investments by targeting owners of businesses that he had frequented for decades, including a dry cleaner and a car leasing and servicing company. Feldstein convinced them to provide funds for him to invest on their behalf, promising such profitable opportunities as a successful hedge fund, a promising penny stock, and an initial public offering (IPO) of a fashion company. However, Feldstein never invested this money, instead converting it for his personal use without their knowledge.
“Without sufficient assets to pay for his stock purchases, Feldstein illegally arranged trades in which he got the profits if he won and left brokerage firms holding the bag if he lost,” says Andrew M Calamari, director of the SEC’s New York regional office. “Then Feldstein used blatantly false promises to lure longtime acquaintances to pour their life savings into his investment schemes that were footing the bill for his luxurious lifestyle.”
According to the SEC’s complaint filed in US District Court in the Southern District of New York, Feldstein and the two purported investment funds – Mara Capital Management LLC and Vita Health of America LLC – traded through a type of account that brokerage firms offer to customers with the understanding that the customer has sufficient assets held with a third-party custodial bank to cover the cost of the trades. Feldstein and the funds never disclosed to three broker-dealers that they were simply gambling with the brokerage firms’ money. Their plan was to refuse to issue instructions to settle the trades, and stick the broker-dealers with the unprofitable positions. The free-riding scheme began in September 2008 and continued until February 2009.
According to the SEC’s complaint, Feldstein shifted his fraudulent conduct to individual investors later in 2009. He induced investors to give him money they typically had saved for their retirement or their children’s education. Feldstein raised approximately USD450,000 based on such false investment promises as a hedge fund that he described as substantial and successful, a penny stock issuer that Feldstein described as the next AT&T/Verizon of the rural Midwest, and the IPO of a purported fashion company. The investor funds were typically deposited into Feldstein’s personal bank account or the bank account of an entity that he owned so he could spend their money on his personal expenses.
The SEC’s complaint charges Feldstein, Mara Capital, and Vita Health of America with committing violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Feldstein also is charged with violations of Section 17(a) of the Securities Act of 1933. Trademore Capital Management is charged as a relief defendant.
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