Ponzi Scheme of the Week

It’s a little depressing that there are so many Ponzi schemes to report. The bright spot I suppose is that the Securities and Exchange Commission is on the case. This week the SEC charged Moises Pacheco, Advanced Money Management, Inc. (AMM), and Business Development & Consulting Co. (BD&C) with fraudulently raising $14.7 million from more than 200 investors over a 3½-year period.

According to the SEC’s complaint, Pacheco told investors that he had developed a lucrative investment strategy involving the purchase and sale of covered call options, and that the hedge funds exclusively relied upon this strategy to generate trading profits ranging from 30 percent to 48 percent per year. In reality, Pacheco did not generate the returns he claimed to have made, and instead used investor principal to pay purported returns until the scheme collapsed.

“Pacheco disseminated monthly statements reflecting purported profits and trading activity, but providing little detail about how those returns were generated,” said Rosalind Tyson, Director of the SEC’s Los Angeles Regional Office. “These investors were principally solicited through word-of-mouth, which serves as a reminder to beware of opaque investment opportunities that promise unusually high payoffs even if it’s a referral coming from family or friends.”

According to the SEC’s complaint, filed in U.S. District Court for the Southern District of California, the hedge funds generated trading profits of only about $367,000, but paid investors purported returns of more than $9.7 million. The SEC alleges that the defendants thus operated a Ponzi-like scheme and further misused investor principal by transferring their money to Pacheco, entities under his control, or numerous third parties for reasons having nothing to do with the purported trading.

The SEC alleges that Pacheco claimed that the hedge funds had generated returns ranging from 2.5 to 4 percent per month during their existence, and continued to claim that they generated returns in that range until January 2008, when he reduced the returns to 1.25 percent per month. Pacheco told fund investors that the reduction was due to deteriorating economic conditions. Most fund investors live in the Chula Vista area, and know either Pacheco, one of his friends or family members, or another investor. The SEC alleges that Pacheco made no effort to determine whether the hedge fund investors were accredited or sophisticated, and did not provide investors with financial statements. Neither Pacheco nor his entities were registered with the SEC.

The SEC’s complaint alleges that Pacheco, AMM, and BD&C violated the securities registration and antifraud provisions of the federal securities laws and seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest and financial penalties. Additionally, the complaint names the hedge funds and various third parties receiving investor money as relief defendants, and seeks from them the disgorgement of all such amounts. The complaint also seeks the court’s appointment of a receiver over AMM and BD&C.

Image Credit: kevindooley, Flickr