Another “Too Good To Be True” Investment Fund Scheme

Is it the market crisis or something else? It seems like one investment fund fraud after another keeps appearing. Day after day, investors keep losing their money in what look like respectable ventures that turn out to be fraudulent. Almost as fast as the SEC can find them and get an emergency court order freezing all the assets to save something for the just-fleeced investors, another scheme pops up that separated others from their hard-earned savings. All of this must leave the average investor wondering if there is any place but under the mattress to put their money.

The latest alleged scam is run by Texas A&M finance professor Robert Watson and Houston attorney and CPA Daniel J. Petroski using Global One. SEC v. PrivateFX Global One Ltd., S.A., Case No. 09-CV-1541 (S.D. Tex. Filed May 26, 2009). According to the complaint, from mid-2006 to the present, defendants Watson and Petroski have raised at least $19.5 million from more than 60 investors in this country and others.

Investors purchased shares in Global One under a private placement memorandum. The PPM claimed that investor money would be used to speculate in foreign currency inter-bank markets using a proprietary intra-day and weekly dealing model called Alpha One. One graph in the PPM depicts profits ranging from 6% to 10% between January 2000 and June 2006. Another graph shows that “Simple Cumulative Returns” were over 180% in client accounts during the same period. Overall, from August 2006 to February 2009, defendants claim that Global One never had a losing month. From inception through February 2009 the Fund claimed it had annualized returns of over 23%.

Bank records for the Fund however, failed to substantiate the claims in the PPM. During the SEC’s investigation, defendants produced records apparently from Deutsche Bank and LGT Bank. The records appeared to support the claims in the PPM. Both sets of records were fake, according to the SEC’s complaint.

Actual bank records establish that investor funds were not used in accord with the PPM. The funds were supposed to be 80% held in Swiss Banks and 20% in various other banks and brokerages. In fact, the funds were scattered about and commingled in various accounts.

The Commission sought and obtained an emergency asset freeze order. The case is in litigation.

Fake records, coupled with the identity of the defendants – a professor from a well-known university and an attorney/CPA – certainly helped induce investors to purchase shares. Fake bank records and the phony account statements sent to investors periodically also facilitated the fraud.

At the same time, this scheme has a common thread with many others: Investment returns that are not only better than those of most others, but which are incredible. Nobody wins every time. Everyone knows that. Yet such claims are a recurring theme in these cases. Every investor wants safety with good returns. What every investor needs to remember however is that when the returns are too good – like never losing through the worst market crisis in decades – then they probably are not true.