Fourteen Charged For Ignoring Red Flags Suggesting Fund Was A Fraud

The Commission brought an action naming fourteen individuals as defendants who sold interests in a massive Ponzi scheme. The complaint centers on claims that they ignored red flags indicating that the fund was a fraud. SEC v. Arias, CV 12-2937 (E.D.N.Y. Filed June 12, 2012).

The action focuses on the Agape World, Inc. Ponzi scheme operated by Nicholas Cosmo. Agape sold investment contracts. The securities were suppose to represent participation in short-term, high interest bridge loans made by the fund to specific commercial borrowers in real estate, construction or other industries. The investment contracts, named after the project for which financing were purportedly being extended, promised investors that they would receive from 8% to 19% returns on maturities from thirty to seventy-four days. Only 1% of the investor’s principle was to be at risk. The remaining 99% was represented to be secured by first position asset liens representing 100% of the investment. The investment was to be held in a client custodial account, investors were told.

Agape was a Ponzi scheme. Its shares were never registered with the SEC. By 2009 investors filed an involuntary Chapter 7 petition against the fund. In re Agape World, Inc., 09-70660 (E.D.N.Y.). In October 2010 Mr. Cosmo pleaded guilty to one count each of mail and wire fraud and admitted that the representations made to investors were false. In fact only a small portion of the investor funds were ever invested. In part the money was used to trade futures in personal accounts. Other portions were used to repay investors. In October 2011 Mr. Cosmo was sentenced to serve 300 months in prison and ordered to pay $179, 195, 233 in restitution U.S. v. Cosmo, CR-09-255 (E.D.N.Y.). Prior to the Agape schem he had pleaded guilty to one count of mail fraud in the same district and was sentenced to serve 21 months in prison and pay $177,000 in restitution. In 1999 the NASD (now FINRA) had censured, barred and fined him for stealing funds from customer accounts.

The defendants in the Commission’s action are divided into two groups. The first is the brokers which include Bryan Arias, Hugo Arias, Anthony Ciccone, Salvatore Ciccone, Diane Kaylor, Jason Keryc and Anthony Massaro. The second is the sub-brokers which includes Christopher Curran, Michael Dunne, Martin Hartmann, Michael Kerye, Ronald Roaldsen and Laura Tordy. The brokers represented to investors that they were account representatives and vice presidents for Agape. The sub-brokers worked for the brokers.

According to the complaint, the defendants knowingly, or recklessly, and repeatedly made misrepresentations to investors about Agape securities despite “numerous signs of fraud” which included:

• The prior conviction of Mr. Cosmo for fraud;

• The too-good-to-be-true returns;

• The incredible claims regarding the safety of the principle;

• Agape’s status as a relatively small, unknown, private issuer of securities;

• A series of extensions and defaults by Agape; and

• Warnings about the fund’s financial condition.

The scheme ended in January 2009 when Mr. Cosmo was arrested. Defendants Ciccone, Kaylor, Kerye and Massaro were arrested in April 2012. U.S. v. Karye, 12 mj-000410 (E.D.N.Y.). They were charged with one count of conspiracy to commit mail fraud.

The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.

Program: Webcast by Thomas O. Gorman: How Corporate Officials Can Get A Good Night’s Sleep Despite Current SEC Enforcement Trends, presented by Celesq and West Legal Ed, June 14, 2012 from 12 -1:00 p.m. EST. For further information please click here.