New York-based hedge fund manager Michael Scronic, who previously served as an equity trader at Morgan Stanley for 7 years, was arrested and charged by federal prosecutors with running a
USD20 million Ponzi scheme.
The Securities and Exchange Commission on Thursday charged Scronic with committing securities fraud as he told investors that he had nearly $22 million of assets in his fund by the end of H1 2017, while the balance in his brokerage account at this date was just under $27,500.
U.S. prosecutors claim that Scronic, who has degrees from Stanford University and the University of Chicago, committed mail and wire fraud by misleading investors about the fund’s performance. He diverted millions of dollars of investors’ money and used it for personal expenses including beach and country club memberships and mortgage payments, the SEC said in a statement.
Liquidity Constraints in 2021 – What is the Best Path Forward?Go to article >>
Specifically, the SEC alleged in its complaint that since April 2010, Scronic engaged in a fraudulent scheme that netted nearly more than $19 million from 45 investors. While he was actually running a Ponzi scheme, the defendant claimed that these funds would participate in his Scronic Macro Fund for trading in a portfolio of financial instruments.
In connection with the promotion of his pool, Scronic made a series of materially false claims to lure investors interested in his investment vehicle. The claim was made that fund participants could get extraordinary investment returns as the pool made profits in 21 of 22 quarters, with the highest reported quarterly return being 13.4 percent in the Q4 2014. In reality, he lost money in 28 out of 29 quarters of its operation, with a total net loss of about $15.7 million before commissions.
Instead of using the investors’ monies in trading, the fraudster misappropriated all of the pool participants’ funds, which was largely spent on personal expenses. As also alleged, he used some new investors’ funds to pay back other investors in a Ponzi-like fashion, so that they would invest or refer additional money, thereby allowing the scheme to continue for a longer period of time.
According to court papers, Scronic lured investors by claiming he has an impressive track record and that his investments are very liquid. He told one victim that “what’s cool about my fund is that i’m [sic] only in publicly traded options and cash so any redemptions are met within 2 business days so if you do need to withdraw for your business needs it will be quick and painless.”
The regulator further stated: “When certain investors attempted to redeem their investments, Scronic did not disclose his inability to repay them. Rather, he allegedly provided investors with a steady stream of implausible excuses for why he could not pay them back. In other instances, Scronic sought to obtain additional investment funds from new and existing investors in order to satisfy redemption requests from other investors.”