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Count Your Blessings

After starting an investment fund known as Hedged Investments the owner attracted investors by claiming he had developed a sophisticated method of trading in stock options which resulted in substantial returns. Upon enticing someone to invest, he sold them units in one of three limited partnerships that he had established as investment vehicles for the fund.

He told investors he would invest partnership capital from the fund according to his trading strategy. Though he actually did use investors' contributions to trade in stock options, the fund amassed enormous trading losses.

To hide these losses, he reported false earnings and allocated false profits to investors' accounts. He then allowed investors to withdraw cash from their accounts on the basis of these falsely attributed profits. In effect, he ran a Ponzi scheme —he paid these so-called profits to investors who chose to make cash withdrawals, from the contributions of other investors.

While hundreds of people collectively lost hundreds of millions of dollars in the Hedged Investments scheme, one lady, after making over a million dollars over and above her initial investment, sued after it collapsed because she didn't get all that she was promised.

Over the course of her participation she invested about $750,000 in the fund and received transfers totaling a little over $2 million. She was among the very few investors who received more money than they had invested, as opposed to the many who lost every cent they had.

A Cut in Corporate Profits

A well-known Beverly Hills-based money manager convinced a large company to invest some of its excess cash with him. He told them that he could outperform Treasury securities by using certain proprietary strategies.

That year the company's brokerage trading account statements seemed to show large losses but the account statements which the money manager prepared appeared to reflect healthy profits. When questioned, he lied, claiming they definitely had gains. The company became concerned when they learned that his options trading was highly risky.

Unable to determine what he was doing and uncertain whether the company had gains or losses, they asked for their money back. He promptly returned all the company's money with a sizable profit - but not through liquidating their investments, as he claimed. Instead, he raised the money by secretly transferring out other peoples' money through a misallocation scheme.

For two years he misrepresented his strategy as fully- hedged and low- risk. Unbeknownst to anyone he was commingling the company's funds with other investors' funds, placing futures trades, and routinely shifting profitable trades to some clients and losses to other clients through massive trade misallocations, while simultaneously generating enormous commissions, fees, and income for himself.

The following year, the company gave him another shot, by investing $28.1 million, but told him to buy only short-maturity Treasury securities. Instead, he covertly shifted almost all of the company's money back to other clients who wanted to cash out of the accounts which he had previously plundered.

Within six months the company again questioned his trading. When confronted, he admitted that he had engaged in unauthorized options trading. He then told the company that it would have a very sizable $2 million loss if he liquidated their investments right away. In reality, the losses amounted to $26 million.

Relying on his version of events, they instructed him to try to recoup the company's losses, and to do so he placed increasingly risky bets in Treasury options for their account. Finally, when it was determined that he could not recover any more of the company's funds, the company disclosed to its shareholders that it had lost $15.9 million on its investments.

What Did You Learn, Class?

One enterprising fellow offered a "Treasury Bond Futures" trading course to the public, promising to teach a trading methodology that would yield high returns over a short period. He offered a double-your-money-back guarantee if students did not earn at least a certain weekly sum after using the process for a few weeks.

He stated that he was an experienced and successful futures trader whose successes resulted in an opulent lifestyle. He was, however, neither experienced nor successful as a commodity trader and was, in fact, verging on bankruptcy.

He would show account statements for his own account reflecting phony trading profits to reinforce his assertions that he was a profitable, high-volume trader. He claimed to have taught students to become successful traders using his trading methods, when in fact he hadn't. He also never returned any tuition payments.

A Whale of a Lie

09/17/02 WASHINGTON, D.C. - The U.S. Commodity Futures Trading Commission filed an enforcement action in federal court in Florida against defendants Donald C. O'Neill, and eight interrelated companies he owned, controlled, or managed.

The companies named are: Frecom Technology, a Delaware corporation, Shelaley Holdings, LLC, a Nevada Corporation, and Momentum Trading Group, Inc., NDT Fund, LLC, Orca Funds, Inc., Orca Capital Fund A, LLC of Florida, Orca Mohave A, LLC and Orca Hopi A, LLC, all Florida corporations. He referred to some of the companies as a "foreign currency hedge fund" or an "alternative asset management" firm.

They are charged with fraudulent solicitation and with misappropriating at least $10.6 million of $13 million from 29 investors for the purpose of trading foreign currency futures contracts then using the investors' money for business, personal, and luxury expenditures between January 2001 and continuing through at least July 2002.

The complaint also names as relief defendants his wife, mother-in-law and brother who allegedly received investor funds. A federal court order freezes the assets of the defendants and prohibits the destruction of documents.

O'Neill spent at least $5.75 million to finance an extravagant lifestyle that included a nearly $3 million home for himself and two other houses for his wife and mother-in-law in an exclusive Florida coastal community; several high-end automobiles; more than $900,000 in airplane charters; and junkets to Las Vegas over a period of 45 days that resulted in gambling losses of over $800,000.

According to the complaint, defendants even traded some portion of investors' funds and sustained an overall net trading loss of around $487,000.

When soliciting the funds and attempting to lull investors who inquired about their investments O'Neill claimed to have hundreds of millions of dollars under management, although he never did; to have substantial trading experience with a financial firm that did not exist; and to have traded investors' funds at two brokerage firms, when those firms, in fact, were only corporate accommodation addresses that O'Neill created, and never existed as going concerns.

Among the victims of the fraud were two groups of Native American investors -- the Fort Mojave tribe and the Hopi Tribal Housing Authority. Their investments represented nearly $10 million of the total money raised in the scheme.

In its continuing litigation, the CFTC is seeking preliminary and permanent injunctive relief, an accounting, restitution to customers, disgorgement of ill-gotten gains, and civil monetary penalties of $120,000 or triple the monetary gain, whichever is greater, for each violation of the Commodity Exchange Act.

CFTC Division of Enforcement staff responsible for this case include Susan Bovee, Wendy Z. Woods, Ghassan Hitti, Patricia Gomersall, and Alan Edelman. © Crimes of Persuasion 2000 Legal Disclaimer

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