California Private Investment Operation Ponzi Scheme Case: The Swiss Statements Came From Santa Fe

A Santa Barbara adviser ran a private investment operation in California that paid investors with other investors’ money, according to the Justice Department’s criminal-case account of the Ponzi scheme. Fictitious account statements made the payments look like investment success, and a bookkeeper manufactured statements for a supposed Swiss brokerage. If you prepared investor statements or handled requests for the accounts behind them, this case turns on work you would recognize.

The Justice Department’s account of the bookkeeper’s criminal case put the amount solicited at more than $593 million from approximately 800 investors, during an operation running from 1986 until May 2001. This page follows the cash and fabricated records inside that business. Our broader page on investment adviser and fund Ponzi schemes compares the pattern across other operations.

Investment Returns Supplied by Other Investors

The operator presented himself as a successful financial adviser and sent investors fictitious account statements showing average annual returns of approximately 24%, according to the Justice Department’s criminal-case account. He used the bulk of investor funds to pay some investors purported returns made up primarily of money raised from other investors. The statement credited investment performance for money supplied by the people investing.

Payment records show where the cash actually came from. In the Justice Department’s account, the money arrived. The explanation for it was invented.

The Justice Department also described investor money going toward real estate, corporate jets, automobiles, artwork and other luxury items for the operator’s personal benefit. Some went to people who assisted him. The same incoming funds supported payments dressed as returns and spending that benefited the people running the operation.

The bookkeeper’s role joined the paperwork to the investor relationship. According to the same account, she prepared investor statements and communicated with investors from her office in Santa Fe, New Mexico. The supposed Swiss brokerage added an invented institution to that geography.

The Swiss Brokerage Statements Were Made in New Mexico

The Justice Department’s criminal-case account describes a fictitious brokerage called NAA Financial, supposedly in Zurich, Switzerland. The operator claimed to hold over $500 million in securities in brokerage accounts there. His bookkeeper created and revised statements to support that claim, knowing the documents would be submitted to the Securities and Exchange Commission.

The SEC had asked for the most recent statements from every financial institution where the operator owned or controlled accounts. The operator instead directed his own bookkeeper to manufacture the evidence that the assets existed.

The details were remarkably physical. At his direction, she designed the statements on her computer and printed them on European-sized stationery bearing NAA’s name and purported Swiss address. He then instructed her to fold the statements into thirds so they would look as though NAA had mailed them from Switzerland. We call that an unusual brokerage service: the client supplied the balance, the letterhead and the postal creases.

The same account says he then instructed her to erase the statements from her computer so the SEC would not discover that she had created them. She continued helping prepare bogus NAA statements for submission to the SEC throughout 2000. For someone familiar with the statement-production process, the origin of the document was part of the evidence: the supposed outside confirmation had been made inside the operation.

The Operator Admitted Sending False Records to the SEC

In his plea agreement, the operator admitted that he and others supplied false documents to the SEC to conceal the Ponzi scheme and obstruct its investigation, according to the SEC’s account of the criminal plea. Those documents included fabricated correspondence and account statements. He also admitted lying under oath about investment success, the accuracy of account statements and his intention not to accept additional investor funds.

The Justice Department reported that the bookkeeper pleaded guilty to obstructing the SEC investigation and concealing the scheme to deceive the SEC about the statements’ authenticity. She knew the operator intended to make the SEC believe NAA had created the statements. Yet she testified under oath that she had never heard of NAA Financial and knew of no direct or indirect authority the operator held over foreign financial accounts. The person who made the statements disclaimed knowledge of the institution printed on them.

The SEC’s Civil Action Targeted the Advisory Business

The SEC alleged that the operator defrauded hundreds of clients through an unregistered investment advisory business in Santa Barbara. Its litigation release says the agency obtained an asset freeze and that the federal district court in Los Angeles entered a permanent order barring future fraud and violations of investment-adviser registration requirements.

A Different Investment Story Can Hide the Same Payment Source

The SEC alleged that Woodbridge Group of Companies offered a different explanation for investor payments: interest from supposedly independent commercial-property borrowers. In its December 2017 charging announcement, the SEC alleged that most borrowers were companies controlled by Woodbridge’s owner and lacked the income to pay. The SEC alleged that new investor money funded payments to earlier investors.

The useful parallel is the comparison between the claimed income source and the actual cash source. In Woodbridge’s case, the SEC challenged the borrower story. In the Santa Barbara operation, the Justice Department described purported investment returns funded primarily with other investors’ money and brokerage records manufactured to conceal the scheme. Someone handling the payments or supporting records may know where the business explanation parts company with the transactions.

What Evidence Shows a Private Investment Ponzi Scheme?

In an investment operation like this one, useful securities fraud evidence connects what investors were told with the accounts, documents and instructions behind it. Here, the criminal accounts describe who prepared the statements, whose institution the documents purported to represent, who directed the fabrication and what was said when the SEC asked about them. An employee familiar with those decisions may be able to explain a document’s meaning in a way the finished statement never could.

The investment industry’s records let us examine different parts of that story. Subscription records and bank destinations connect incoming investor money to where it went. Payment records connect a distribution to its cash source, while confirmations and the authority to move assets help test what an account statement represents. We work with you on the records you know and the decisions you saw behind them.

A study of occupational-fraud survey data, The Significance of Whistleblowing as an Anti-Fraud Measure, published in the Journal of Forensic & Investigative Accounting in 2018, found that whistleblowing became more likely to detect fraud as more people participated in the scheme. That finding helps explain why the people drawn into preparing documents or answering questions can matter. The investor sees the finished account statement; someone inside knows how it was made.

The SEC says whistleblower awards can range from 10 to 30 percent of the money collected when monetary sanctions exceed $1 million. We assess the securities fraud evidence you hold and any separate fraud involving government money. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. We work with you on which program fits what you know.

You Know How the Statements Were Made

If you saw investment results invented, outside statements created in-house or investor money used to fund supposed profits, speak with our whistleblower experts about what happened behind the accounts. We develop the evidence with you and bring in securities fraud whistleblower lawyers who understand investment operations and fabricated financial records. You have a partner from the first conversation through the pursuit of your whistleblower case.