The Securities and Exchange Commission (SEC) has charged purported money manager Ronald Feldstein, of New York City, with conducting a “free riding” scheme and using it to defraud several brokerage firms as well as cheating investors out of up to half a million dollars in investment funds.
The complaint, which was filed in U.S. District Court in the Southern District of New York, alleges that Feldstein and two purported investment funds traded using a platform offered by brokerage firms to customers with the understanding that the customer has sufficient funds, usually held by a third party custodial bank, to cover the cost of the trades. This is important for brokerage firms in the event that a customer loses significantly by allowing them to recoup the cost of the stocks, which is precisely what Feldstein intended to avoid. The SEC alleges that Feldstein had no intention of paying for the stocks if they resulted in big losses and simply planned on walking away from any transaction that had a significant price decline. He also planned to use the proceeds of stock sales to pay for the stock purchases should the price increase.
“Without sufficient assets to pay for his stock purchases, Feldstein illegally arranged trades in which he got the profits if he won and left brokerage firms holding the bag if he lost. Then Feldstein used blatantly false promises to lure longtime acquaintances to pour their life savings into his investment schemes that were footing the bill for his luxurious lifestyle.” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.
The SEC alleges that Feldstein and the two investment funds, Mara Capital Management LLC and Vita Health of America LLC, caused more than $2 million in losses to brokerage firms with their free riding scheme. Using three separate brokerage accounts Feldstein was able to trade in shares without ever actually having the money to pay for them, resulting in the brokerage firms having to suffer the losses when Feldstein’s investments did not pan out. The plan was simply to refuse to issue instructions on how to settle the trades, and stick the broker-dealers with the unprofitable positions.
Later, to continue supporting his lavish lifestyle, Feldstein began to illegally solicit investments from business owners at businesses he had frequented for years. These included a dry cleaning company and a car leasing company. Feldstein persuade the owners of these businesses to provide him with funds, which he promised to invest on their behalf. His tall tales included promises of investment in a successful hedge fund company, a promising penny stock, and the initial public offering (IPO) of an up and coming Fashion Company. By 2009, Feldstein was aggressively targeting individual investors to give him their retirement funds or children’s education savings for investment. Feldstein raised approximately $450,000 based on such false investment promises as a hedge fund that he described as substantial and successful, a penny stock issuer that Feldstein described as the next AT&T/Verizon of the rural Midwest, and the IPO of a purported fashion company. The investors would, typically, deposit the money into Feldstein’s personal account or into an account held by one of his entities. Unbeknownst to the investors, Feldstein never invested the money but spent it all on his own lifestyle which included a Bentley, summers in the Hamptons, and casino junkets.
The SEC’s complaint charges Feldstein, Mara Capital, and Vita Health of America with committing violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Feldstein also is charged with violations of Section 17(a) of the Securities Act of 1933. Trademore Capital Management LLC is charged as a relief defendant. The investigation was conducted by the SEC’s New York office and prosecution is imminent.
Too many people fall victims to charlatans posing as legitimate businessmen. Image and the aura of success are not good enough reasons to give anyone money without conducting a level of due diligence and ensuring the safety and security of an investment. Fraudsters are able to trick and connive even institutions such as brokerage firms, who are looking for a profit and are often willing to “look the other way” when it comes to the required due diligence. Care and diligent planning are important when investing something as precious as a retirement fund or a child’s educational money – working with professionals who have made a career out of protecting their clients assets is an important first step.