Ponzi circa 1920 (Photo credit: Wikipedia)
On September 13, 2012, the Securities and Exchange Commission filed a Complaint in the United States District Court in the District of Connecticut against defendants Deer Hill Financial Group, LLC and Stephen B. Blankenship, SEC v. Deer Hill Financial Group, LLC (12-Civ-01317), alleging that from no later than 2002 through at least November 2011, Blankenship engaged in a scheme to misappropriate at least $600,000 from at least 12 brokerage customers by falsely representing that he would invest their funds in securities through Deer Hill.
The Complaint charges the defendants with engaging in:
Purportedly, the victims believed that Blankenship was investing their money in established securities; however, Blankenship is charged with:
In an effort to hide his fraud, the Complaint alleges that Blankenship created and provided to his customers fictitious Deer Hill account statements showing nonexistent investments.
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Deer Hill Financial Group, LLC, a Connecticut limited liability company, was formed by Blankenship, who is the sole member. Deer Hill has never been registered with the Commission in any capacity.
Blankenship, 63, New Fairfield, CT, was a registered representative with Syndicated Capital, Inc., a registered broker-dealer based in Santa Monica, CA, and subsequently with Vanderbilt Financial Services, Inc., a registered broker-dealer based in Melville, NY, until that firm terminated him in November 2011. As of November 2011, Blankenship was responsible for approximately 90 Vanderbilt brokerage accounts, the majority of which had been serviced by him at that brokerage firm or its predecessor for some two decades. In addition to purchasing and selling securities products through his affiliated broker-dealers, Blankenship also sold insurance products and provided tax preparation services. Blankenship was never an SEC registered investment adviser.
At least 10 of the subject accounts came to Blankenship through relationships he had formed at the Walnut Hill Community Church in Bethel, CT.
Tales of Woe
The Complaint offers several specific examples of Blankenship's victims:
Starting around 2001, a retired senior citizen who met Blankenship at church wanted to use the proceeds from the sale of his family home to purchase a mobile home and a small cottage - and to use the remaining $165,000 for investment. Blankenship told the retiree that he would invest the $165,000 in the stock market through Deer Hill at a guaranteed return of $1600 per month. When the market began to drop in 2008, Blankenship advised the customer that his account had sustained a $20,000 loss but that the stockbroker would "build it back up" by transferring the assets to municipal bonds and mutual funds. In reality, Blankenship made none of the promised investments.
By 2006, another retiree had opened brokerage accounts and an Individual Retirement Account at Vanderbilt Securities with Blankenship, and in 2007, the stockbroker persuaded the customer to close his IRA and some other of his Vanderbilt accounts to the tune of a $185,000 investment with Deer Hill. Blankenship allegedly claimed that Deer Hill held a "house account" at Vanderbilt (which was a fabrication) through which the retiree would realize better returns. Blankenship is charged with furthering this fraud through fabricated Deer Hill statements purporting to show by September 27, 2011, for example, a bogus balance of $263,862, all of which was purportedly invested in a bogus Pacific InvestmentManagement Company, LLC (better known in the market as PIMCO) account. At the time of that alleged misrepresentation, the Complaintalleges that the actual balance in the customer's Vanderbilt Securities account was $330.
One customer of Blankenship's for ten to fifteen years moved with Blankeship every time he changed brokerage firms, and, sometime around 2009/2010, the customer was informed by Blankenship that he was leaving Vanderbilt to join PIMCO, where the customer's assets would be transferred. In response, this customer agreed to the transfer and wrote about $200,000 in checks to Deer Hill pursuant to the transfer. TheComplaint alleges that Blankenship never opened PIMCO accounts on behalf of this or any customer and that the stockbroker never had an affiliation with that company. In fact, the deposited funds from this investor were used to undertake Ponzi payments to other customers or for Blankenship's personal expenses.
After servicing one customer for a few years, on August 5, 2010, Blankenship called her with the bad news that her Vanderbilt account was not doing well and suggested that she transfer her business with him to PIMCO, which the customer agreed and wrote a $44,000 check to Deer Hill in furtherance of the transfer. At some point, the customer stopped receiving account statements and became concerned - Blankenship allegedly sent to her what the Complaint characterizes as "crude typed pieces of papers with numbers on them.: When the customer asked to have her account closed and money refunded, she received a check from Blankenship that bounced, which Blankenship then replaced with a bank check - this appears to have cleared but was funded from Ponzi payments.
In the fall of 2010, a husband and wife customers of Blankenship since 2002 told the stockbroker that the husband had an additional $50,000 that he wanted to invest in a liquid account such as a money market type fund. On or about November 18, 2010, Blankenship wrote the husband hat the Janus Flexible Bond Fund was "an excellent investment vehicle for money that you are holding in cash," and that it was "considered an All weather fund." The customer sent $50,000 payable to Deer Hill for investment in the Janus fund and was told that the investment was made away from Vanderbilt and subsequently sent a Deer Hill statement showing his ownership of 4,66.18 shares in the fund. The Complaint alleges that the investment was never made but the funds were used to make Ponzi payments to other customers.
Finally, the Complaint alleges that a semi-retired senior citizen who met Blankenship through church and had been his client for over a decade invested at least $100,000 with Blankenship through Deer Hill, purportedly in a bond fund, which was documented by yet more fictitious Deer Hill statements. The Complaint alleges that Blankenship used these funds for Ponzi payments and his personal expenses.
As a result of the allegations noted above, the SEC seeks:
On September 12, 2012, Blankenship pleaded guilty in federal court in Hartford, CT to one count each of mail fraud and securities fraud involving at least eight investors of more than $500,000. At his sentencing in December 2012 he faces a maximum term of imprisonment of 20 years on each count.
On December 6, 2012, Blankenship was sentenced t0 41 months in prison, three years of supervised release; and ordered to pay a $7,500 fine - a restitution order is pending.
And as to the unending world of Ponzi scams: