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Seven Years Of Smoke And Mirrors In $1 Million Hedge Fund Scam
Written: September 20, 2012

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Preet Bharara

U.S. Attorney for the Southern District of New York Preet Bharara (Photo credit: Wikipedia)

From April 2005 through November 2006, Michael Katz, Christopher Fardella and two other individuals were partners in a pretty impressive sounding Florida-based hedge fund: KMFG International, LLC.  Katz was the Portfolio Manager and Fardella the Treasure.

For starters, just consider that august name: KMFG International, LLC.

You got four initials making up the first name of this hedge fund.  Any organization that goes by initials must be pretty big, right?

Then you got that whole “International” thing which means that this is, you now, something worldwide, not just a rinky dink operation in a lousy office in some strip mall in suburbia.

Also, it’s one of those LLC thingamajigs which are a lot more important than a Corp. or Inc. – I think.

And let’s not forget that this whole thing was run out of the Sunshine State where there isn’t any fraud . . . well, that’s unless you’re counting pennystock hustlers and Medicare mills but then who’s counting?

SIDE BAR: To new readers of “Street Sweeper,” yes, the above is all dripping sarcasm.  Please stand back lest you be splashed by my acid drool

Anyways, Katz, Fardella, and two others pitched the KMFG story to a batch of folks out of the blue and managed to get those individuals to part with some $1.03 million.  Some folks – prosecutors and regulators, for example – would pejoratively characterize this solicitation effort as “cold calling.” Oddly, it seems to work. Repeatedly.

Fudging

The illustrious KMFG’s marketing materials stated that the hedge fund was operated by “a management team consisting of hedge fund managers, traders, and top level executives from independent oil and gas companies” with a track record of generating substantial trading profits for KMFG’s investors.  Whoa – no wonder the pigeons lined up for this investment of a lifetime. When you got a chance to invest with a management team (as opposed to an odd gathering of talented folks operatin’ on their own) and these savvy folks have a track record of profits, what’s not to like or trust?  Forgetting the fact that you were cold called by the promoters, it’s not as if any old group of folks could just pretend to be part of a team that generates profits.  Well, okay, maybe that could happen but not to you, right?

Of course there’s all that puffery that came up during the cold calling and then there’s the truth.  Some might say, in this case, for example, that the difference between the truth and the pitch was fraud.  For example, the four folks supposedly running KMFG had no genuine experience running a hedge fund . Well sure, not necessarily a big deal unless you thought you were investing with qualified professionals – and, of course, there was the added fact that not a single one of the folks pitching this hedge fund had ever been the claimed  top level executive in the oil and gas industry.

So, where we at with this? You were cold called, and then the promoters lied about their hedge fund experience and about their oil and gas industry credentials. Geez, who the hell can you trust these days?  Still, to be fair, ya gotta give folks a shot.  Everyone’s gotta start somewhere, someplace.  After all, even if these folks did fudge a bit about their experience, the profits speak for themselves.

Profits

Well, about those claimed profits — cumulative returns for 30 months of over 165 percent — never happened. A big fat lie. Apparently, Katz, Fardella, and their two cronies actually lost or spent $981,000 out of the $1,031,086.16 collected in investor funds.  Katz and Fardella diverted the invested funds for their personal use and towards such lavish outlays as expensive meals and trips to Las Vegas. Of course, if you were one of the victims, you did get lots of bogus statements showing growing profits.  Oh my.

And so it goes, yet again.

Reckoning

In October 2011, Katz and Fardella each pled guilty to one count of conspiracy to commit securities fraud and mail fraud and one count of securities fraud. On September 19, 2012, Katz, 33, Brooklyn, NY, and Fardella, 34, Ft. Lauderdale, FL, were each sentenced to three years in prison , three years of supervised release, and ordered to forfeit $981,000.

Co-conspirator Kristian Murphy-Fuhse, who was charged in a separate Information for his role in the same scheme, pled guilty in January 2012 and is awaiting sentencing. 

In commenting on the sentences, U.S. Attorney Preet Bharara said:

In order to lure investors, Michael Katz and Christopher Fardella created resumes and marketing materials for their phony investment fund out of whole cloth. Their sentences demonstrate to those who may consider similar schemes that smoke and mirrors will not fool law enforcement, and you will be held accountable for such fraudulent activity.

Of course, that’s one way to look at this case – or spin it.  Another view, far less optimistic, is that the smoke and mirrors did fool a lot of folks for some 6 to 7 years — the time it took to catch, prosecute, and convict these guys.  Not exactly setting a speed record. Moreover, in 2012 we’re only first taking care of the mess from 2005 and 2006. Of course, for a failed bit of chicanery, someone want to tell me where the missing million bucks are?

The scary thing about the case is that it got underway in 2005 and 2006, the goold old days when WAll Street was booming and everyone was flush with cash.  Just imagine what's gonna happen when Bharara and his colleagues catch up to Labor Day 2008, when the Great Recession crashed down upon us!


 
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