A Spider Web Of Hedge Fund And Forex Ponzi Fraud

March 4, 2013

This is a somewhat long and convoluted tale, whose every twist and turn will likely  turn you're your stomach in disgust.  With that warning, let's go back to 2009, when George Sepero, Glen Rock, NJ, Carmelo Provenzano, Garfield, NJ, and Daniel Dragan, Hunterdon County, NJ, claimed to run a series of hedge funds in New Jersey. If you were an unlucky investor who fell into these characters' web, you would have likely been lured their by the dazzling bait of extraordinary profits in foreign currency ("Forex") trading through a chameleon-like assortment of companies with the names of "Pelt Capital," "Caxton Capital Management," "SP Investors Inc." and "CCP Pro Consulting Inc."

Ah yes, another Forex scam. Ah yes, more hedge funds. And, on top of that now somewhat banal bit of investor fraud, lets add that tired label of being offered an investment opportunity that was "too good to be true."

Sepero, Provenzano, and Dragan (the "Co-Conspirators") told their unsuspecting dupes that they owned and controlled a proprietary Forex computer trading algorithm - one that had achieved over 170% returns for the two prior years! Oh, and, of course, if you had asked, you would also be assured that your investment would not only remain highly liquid but could be withdrawn on mere days' notice.

Like I said: Too Good To Be True - and now decked out in the trappings of high tech algorithms.

I mean, seriously? 175% returns for two years in a row? And the reason that the Co-Conspirators continued to work for a living was what?

In any event, this Forex algorithm spiel brought in over $3.5 million to the conspiracy. From the vantage point of 2013, you really shouldn't be surprised, not in this post-Madoff world. And speaking of no surprise, you should have been expecting the revelation that virtually none of the investors bucks were invested in Forex. As these frauds all to often develop, the funds were used, in part, to repay earlier investors a la the infamous Ponzi scheme, and, in part, to pay of personal expenses of the masterminds of this fairly small minded fraud.

Lemme give you a whiff of the stink here. Some of the siphoned funds were diverted as follows:

  • About $25,000 a month in credit card bills
  • $18,241 in bar tabs-including a $4,000 tip
  • $14,034 on separate nights at "Drai's Hollywood" nightclub in Los Angeles;
  • Tens of thousands of dollars for luxury hotel rooms - including over $4,000 a night suites at W Hotels in New York; and flights to Paris, Los Angeles, Chicago fand elsewhere.
  • Over $80,000 for Sepero's customized Ford F-350 "Harley-Davidson Edition" pickup truck
  • Over $71,000 for Provenzano's luxury Range Rover Sport SUV - including a $65,000 down-payment

On top of those splurges, the Co-Conspirators used their victim's funds to make mortgage payments, home improvements, meals at high-end restaurants, jewelry and limousines.

Oh Tannenbaum, Oh Tannenbaum

Having fabricated the whole Forex trading algorithm thing, why stop there? The Co-Conspirators emailed to their victims fake statements showing their principal had been invested in very profitable Forex trades. An nice fillip was the attribution to "Mel Tannenbaum," as the author of some of the reports. Who's Mel Tannenbaum - oh, he doesn't exist; he was made up by Provenzano. Another nice touch was the emailing of "screen shots" of the computer-based Forex trading program, which showed purported real-time action on behalf of the investors (but for the fact that the screen shot was showing fictitious accounts).

Gonna Find Out Who's Been Naughty

A couple of weeks or so shy of Christmas, Sepero and Provenzano got a nasty holiday surprise in the form of special agents from the Federal Bureau of Investigation who arrested the pair on December 14, 2011, pursuant to a criminal Complaint ( USA v. George Sepero, Carmelo Provenzano a/k/a "Mel Tannenbaum, December 13, 2011, DNJ) alleging wire fraud conspiracy. The pair faced a maximum potential penalty of 20 years in prison and a fine of $250,000 or twice the gain or loss from the offense.

Have You No Shame?

On June 27, 2012, a federal grand jury in Newark, NJ indicted George Sepero, then 39, on one count of wire fraud conspiracy and 16 counts of wire fraud. In addition to the gaudy details set forth above, the Indictment adds that Sepero had purchased with his victims' funds a Mini Cooper automobile costing over $37,000 and he had leased a BMW. Also, the Indictment alleges that Sepero became acquainted with an elderly woman from New Jersey who suffered from dementia and multiple sclerosis, and was a paraplegic. Apparently being the charitable guy, Sepero allegedly took charge of the sick, elderly woman's annuity account and convinced her to write checks to entities that he controlled.

Once Sepero had his hooks into the old lady, the Indictment charges that without authorization, Sepero opened accounts in the names of her family members and, thereafter, made numerous phone calls to the financial institution administering the annuity account, impersonating either the victim's son or the victim's late husband. Apparently trying to keep a step ahead of any suspicion, Sepero allegedly delivered to the victim's family a wholly fraudulent statement for the annuity account, which reflected a value of over $750,000 at a time when it had been gutted down to $16.57.

Where did all the elderly woman's savings go? C'mon, you know the routine by now. The Indictment says the dollars were converted for Sepero's personal use.

As to the Indictment, Sepero faced a maximum potential penalty of 20 years in prison and a fine of $250,000, or twice the gain or loss from the offense on each of the 17 counts.

Due Diligence - Did Anyone Else Do?

I dug behind this story to see what, if anything, I could find for a "George Sepero" and was shocked at how easy the troubling disclosures surfaced. If you were to log on to the Financial Industry Regulatory Authority's ("FINRA") BrokerCheck you would find a jaw-dropping list of prior regulatory incidents.

  • 2003, a customer of Sepero's at a brokerage firm where he was registered alleged that he "misrepresented the return on mutual fund investments."
  • 2004 another customer at the same firm alleged that Sepero "made misrepresentations regarding the purchase of mutual funds at net asset value."
  • 2005, at another brokerage firm, a customer of Sepero complained about poor investment recommendations.
  • 2006, at this same firm, another customer complained about non-disclosure of commissions, and a second customer complained about unauthorized trades.
  • 2007, at the second brokerage firm, another customer complained that Sepero misrepresented the risk of investments.

To be fair to Sepero, all of the above cases are reported under a BrokerCheck section titled: "Customer Dispute- Closed-No Action/Withdrawn/Dismissed/Denied" and the accompanying summaries indicate that the allegations were denied or found by the employing firm to be baseless.

Of course, then there's the section in which BrokerCheck discloses the settled cases involving Sepero. Here we learn that in:

  • 2003, one of Sepero's customer complaints involving misrepresentation of risks and fees was settled for just under $800 versus a $7,379 claim;
  • 2004 a different employer firm settled a customer complaint alleging Sepero's failure to accurately disclose the tax consequences of a variable annuity surrender for $19,059, the full amount sought.

Then there is the section in BrokerCheck about regulatory action taken against Sepero. On February 13, 2008, without admitting or denying the findings, but consenting to the sanctions and the entry of findings, Sepero was barred by FINRA for effecting "unauthorized securities transactions in customers' account and he gave false testimony during an on-the-record interview with FINRA." FINRA Dept. of Enforcement V. George Sepero, Respondent (AWC 2006005804301 , February 13, 2008 ).

What does all of the above teach us? The frightening fact is that Sepero appears to have been barred in 2008 by FINRA but by 2009 was involved in what the feds characterize as a multi-million dollar securities fraud! And it took until nearly July 2012 to indict someone with that background

Guilty Pleas

On August 10, 2011, in separate criminal Informations, Co-Conspirators Provenzano and Dragan pleaded guilty to wire fraud conspiracy  The wire fraud conspiracy count carries a maximum potential penalty of 20 years in prison and a fine of $250,000 or twice the gain or loss from the offense.

On March 01, 2013, Sepero, 40, pleaded guilty to a Superseding Information charging him with wire fraud conspiracy, wire fraud, and tax evasion. The wire fraud conspiracy count to which Sepero pleaded is punishable by a maximum potential penalty of 20 years in prison and a fine of $250,000 or twice the gain or loss from the offense. Also, Sepero pleaded guilty to:

  • conducting a wholly separate fraud scheme involving the elderly client; and
  • tax evasion for the tax year 2010, as he derived income from his fraudulent activities, but did not file a tax return and deposited his victims' money into his companies' accounts.

Bill Singer's Comment

What's the Difference: Complaint, Indictment, and Information?

Generally speaking, if there is a perceived need to arrest someone who is believed to have committed a crime, a prosecutor will ask a judge to issue an arrest warrant based upon a sworn statement that is usually set forth in a Criminal Complaint. If the judge determines that the standard of probably cause has been satisfied, the warrant will be issued.

In situations where there may not be a pressing need to arrest an individual prior to the completion of an investigation, a prosecutor will present evidence to a grand jury and seek its vote on the proposed criminal charges in an Indictment. Under the Constitution, if you are accused of a crime punishable by over one year's imprisonment, you have a right to be indicted by a grand jury.

Following a defendant's arrest, that party is either released on bail or held subject to trial. Following arrest, a defendant is brought before a judge, who informs the individual of the charges against him and asks for a plea of guilty or not guilty. This appearance is an Arraignment.

Should a defendant and prosecutor agree on a plea, those terms are generally set forth in a Plea Agreement. If an individual agrees to waive the right to Indictment, the terms of the plea are normally set forth in an Information.

In federal criminal practice, an Information or Indictment must be filed within 30 days from the date of arrest or service of the summons; and trial must start within 70 days from when the Information or Indictment was filed, or from the date when a defendant appears before an officer of the court in the court where the charge is pending, whichever is later. The resulting trial may not begin less than 30 days from the date the defendant first appears in court, unless the defendant agrees in writing to an earlier date.

Also see these "Street Sweeper" FOREX Ponzi cases: