SEC: Claimed Investment Adviser Defrauded Brokers, Investors

SEC: Claimed Investment Adviser Defrauded Brokers, Investors

 The Commission has brought a number of suits against investment advisers, money managers and their affiliates in recent weeks. See, e.g.,SEC v. Falcone, Civil Action No. 5027 (S.D.N.Y.)(recently settled action against Philip Falcone); SEC v. Dearman, Civil Action No. CV-553 (N.D. Okla. Filed Aug. 27, 2013)(action against former representative of investment adviser); In the Matter of Carl D. Johns, Adm. Proc. File No. 3-1544 (Filed Aug. 27, 2013)(proceeding against employee of Bolder Investment Advisers). In filing an action against Ronald Feldstein and his controlled entities, however, the agency names as a defendant a would be, but not an actual, money manager. SEC v. Feldstein, Civil Action No. 13 CV 61681 (S.D.N.Y. Filed September 3, 2013).

Mr. Feldstein, Mara Capital Management LLC and Vita Health of America, LLC executed two consecutive fraudulent schemes. One left three broker-dealers with over $2 million in losses in a matter of weeks. A second bilked investors out over $450,000 in a short period.

The first scheme took place from December 2008 and continued through February 2009. During that period Mr. Feldstein and his two entities, also named as defendants in the Commission’s action, opened accounts for trading at three brokerage firms. The accounts opened did not require that funds or securities be deposited. Rather, the defendants opened “delivery versus payment” or DVP accounts. That type of account does not require that funds be deposited. It operates on the understanding that the owner has sufficient cash that is held with a third party custodial bank. When trades executed through the account require settlement, the funds are to be wired in from the custodial account. The defendants here represented to the three brokers, or at least lead them to believe, that there were custodial accounts and the required wire transfers would be made in a timely fashion to settle trades.

Mr. Feldstein, Mara and Vita did not have any custodial accounts, according to the complaint. The DVP accounts at the three brokerage firms were in fact part of a free riding scheme. Accordingly, when securities were purchased and the price increased, the position was liquidated. The sale proceeds would be used to pay for the purchase. In contrast, if the trade was not profitable, it would be abandoned. The repeated implementation of this scheme over a period of weeks left the three brokers where the defendants opened accounts which huge losses.

After defrauding the brokerage firms, the defendants moved on to individual investors. Later in 2009 Mr. Feldstein induced several individual investors to give him a total of $450,000 for investment. Under the plan the funds would be used to purchase select penny stocks and invest in an IPO and a hedge fund that was represented to be successful. In fact none of the money was invested. Mr. Feldstein converted it to his personal use.

The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.

For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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