In the wake of the U.S. Department of Justice revealing a massive investigation into investment managers and financiers, Connecticut”™s lead federal prosecutor vowed to use techniques ordinarily reserved for organized crime investigations, possibly to include telephone and electronic eavesdropping.
At a press conference in early December, U.S. Attorney David Fein said his office has created a Connecticut Securities, Commodities and Investors Task Force to better investigate wrongdoing in the district. Fein said the task force is already resulting in increased case referrals, case coordination and training.
Under Operation Broken Trust, DOJ has brought criminal and civil actions against more than 530 defendants, who are accused of causing more than $10.4 billion in losses from 120,000 investors nationally. U.S. Attorney General Eric Holder said it was the first national operation of its kind to target a broad array of investment fraud schemes that directly prey on investors.
11 charged with stealing from 200 investors
As part of the operation, Connecticut prosecutors charged 11 defendants with stealing $56 million from more than 200 investors. Those cases included two indictments delivered at the end of November: one against Easton resident and Apeiron Capital Management owner Gregory P. Loles and the other against Pierre C. Armand, a Haiti citizen living in New Jersey.
Loles is accused of stealing more than $10 million from investors, including from a church in Orange. Prosecutors claim he instead funneled much of the money to his Farnbacker Loles auto racing business in Danbury.
Armand allegedly bilked investors of more than $350,000 by promising to invest their funds in real estate projects in Fairfield County and Virginia.
If the size of the investigation was stunning, so too were reports in early December of the suicide of Mark Madoff, who owned a house in Greenwich. Bernard Madoff”™s Ponzi scheme remains the largest uncovered to date, but the sheer number of investigations lumped together under Operation Broken Trust raised eyebrows.
Investors keeping closer watch
One local manager says investors today are keeping their advisers on a tighter leash, which should pay dividends in ferreting out mischief before it spirals out of control.
“The deception part with (Bernard) Madoff was the fact that he created his own statements,” said Michael Christie, a partner with Fairfield-based Christie/Coghlan Investment Management LLC. “Today ”¦ lawyers and accountants are saying, ”˜Who is this guy? Can I see where the money goes?”™”
Still, Fein noted that wrongdoers will still be tempted to prey on those who have assets to invest but who lack the financial sophistication to properly monitor those assets.
“Many of the victims of these fraud schemes are particularly vulnerable ”“ retired, elderly, widowed ”“ individuals who simply wanted their hard-earned money to be managed safely so that they could live their lives with a sense of financial security,” Fein said. “Criminal activity around our capital markets has increased, and mortgage fraud, investor fraud, securities fraud and corporate fraud schemes have devastated honest investors and eroded public confidence in the capital markets. The Connecticut U.S. Attorney”™s Office has been hard at work building an effective partnership to address fraud in the marketplace.”
An interagency Financial Fraud Enforcement Task Force included U.S. Attorney offices in New York, Connecticut and other states; the FBI; the U.S. Securities and Exchange Commission; the U.S. Secret Service; and other federal offices, as well as state and municipal authorities such as the Greenwich Police Department.
High return promises fall flat on empty schemes
Prosecutors focused on schemes that promised high returns to investors, but engage in little to no legitimate investment activity. Such schemes include Ponzi schemes, affinity fraud, prime bank/high-yield investment scams, foreign exchange fraud and business opportunity fraud. In some instances, operators of these schemes filed for bankruptcy in an attempt to avoid claims by victim-investors.
Combined with financial reform authored by U.S. Sen. Chris Dodd, investment managers are steeling themselves for increased costs with compliance.
“The pendulum will swing hard, and that will show up in our daily routine,” said Christie. “But we are the most regulated industry of any, ”¦ and we have to flow with it all the time.”
