More Ponzi Schemes: A Sign of the Times Or Renewed Enforcement?

Ponzi schemes. Enforcement officials typically claim that these schemes are difficult to detect. In the wake of Ponzi scheme king Bernard Madoff, and one who may be vying for the top spot in fraudulent investment scheme world, Robert Allen Stanford, things have changed. Now, the SEC and the Department of Justice appear to be finding a fraudulent investment operation at every turn. Wednesday, for example, the SEC filed two more Ponzi scheme cases, and DOJ one.

SEC v. Regan & Company, Civil Action No. 09-CIV 5799 (S.D.N.Y. Filed June 24, 2009) is an action brought against Michael Regan and his firm Regan & Company. A one count information alleging securities fraud was filed in the Eastern District of New York, naming Mr. Regan as a defendant.

According to the court papers, over an eight year period, Mr. Regan sold shares in his defunct investment fund — River Stream — to more than 70 investors. Mr. Regan falsely told investors their money would be safe, invested in the stock market under the supervision of his expertise in an $18 million fund. In fact Mr. Regan has not invested in the stock market for several years. To conceal the fraud, investors were furnished with periodic statements documenting their returns at 12%. Over a period of years, Mr. Regan paid more than $9 million in redemptions to investors using new investor funds. Part of the funds were used to support Mr. Regan’s extravagant life style. By the time the fund collapsed it had only about $101,600 under management.

In the criminal case, Mr. Regan pled guilty to the one count information. In the SEC’s case, Mr. Regan and his company consented to the entry of permanent injunctions prohibiting future violations of the antifraud provisions. They also agreed to be jointly and severally liable for the payment of approximately $8.7 million in disgorgement and prejudgment interest. Payment is deferred pending the resolution of the criminal case. See also U.S.A.O. (E.D.N.Y). Press Release (June 24, 2009); SEC Lit. Release No 21102 (June 24, 2009).

SEC v. Pacheco, Case No. 09-CV-1355 (S.D. Cal. June 24, 2009) is an action brought against Moises Pacheco and his controlled entities. According to the complaint, Mr. Pacheco claimed to operate five hedge funds which generated returns ranging from 2.5% to 4% per month until January 2008, when he reduced the rate of return to 1.25% per month because of the market crisis. Mr. Pacheco raised about $14.7 million from over 200 investors. Many of those investors were his family members and friends. In fact, Mr. Pacheo’s hedge funds generated only about $367,000 in trading profits despite claims that he used a proprietary option trading methodology. Prior to the collapse of the funds investor returns were paid using other investor money.

The SEC’s complaint alleges violations of the antifraud and registration provisions of the securities laws. The case is in litigation. See also Lit. Release No. 21101 (June 24, 2009).

These cases represent what has become a continuous stream of investment fund fraud cases. Clearly, these once-difficult-to-detect cases are no longer so hard to find. The reason is unclear. It may be that the market crisis has caused these fraudulent funds to surface. It may also be a sign that the enforcement division is moving past some of its recent difficulties and returning to its former watch dog self.