Kenzie Funds: Separate Funds, the Same Pot of Money

The Securities and Exchange Commission alleged that a St. Thomas manager in the U.S. Virgin Islands raised more than $105 million for foreign-currency funds run as a Ponzi scheme, using new investor money to pay earlier investors. The agency alleged that the operation sold funds with different investment risks, then mixed their money together. If you handled the fund accounts, investor statements or redemption requests, the gap between the product sold and the money moved is the part of this case you would recognize.

The agency’s June 28, 2010 announcement described conduct reaching back to at least 2004. Its complaint put the investor count at approximately 400 and identified the operation’s investment vehicles collectively as the Kenzie Funds. This page follows their sales promises, accounts and payments; our broader comparison of forex futures and trading Ponzi schemes follows the pattern across other operations.

The Foreign-Currency Funds and the People Selling Them

The SEC’s complaint described an investment business with separate trading and administrative roles, all controlled by the same manager. Kenzie Financial Management, based in St. Thomas, purported to manage trading for eleven of the twelve funds. Kenzie Services, with a business address in Nevis, purported to manage SSecurity Fund.

Draseena Funds Group, Aneesard Management and Nerium Management handled administrative functions for different funds, according to the complaint. The SEC alleged that the manager also used these companies to send investors false statements and tax forms. In that account, the same operation controlled the investment story and the documents offered as proof that it was working.

At live presentations, the manager and sales agents promoted capital preservation, conservative currency investing and exceptional risk management, the SEC alleged. A Draseena marketing document claimed an unbroken history of profitable years and a peak annual return of 184.15%.

The complaint described offering documents that gave each fund its own investment plan. Conservium listed foreign-currency forward contracts, stocks, funds of funds and U.S. Treasuries, while SSecurity described money-market investments and time deposits.

Separate Fund Accounts Fed a Shared Payment System

The SEC alleged that the manager initially deposited subscriptions into checking accounts belonging to the particular Kenzie Fund the investor selected. He then sent money collectively from those accounts to First Century Fund, to an offshore entity called Serrano, and to Kenzie Financial’s bank accounts in Anguilla and Puerto Rico. The agency alleged that those transfers mixed the money together and that the manager did not fully carry out the separate strategies advertised to investors.

In the complaint’s account, the initial deposit matched the fund the customer bought. For someone reconciling the accounts, the later transfers reveal the change: money raised for separately described investments entered a common payment system. In the SEC’s account, we see separate sales pitches for the same pot of money.

The complaint identified $71,886,926 in investor proceeds used to make Ponzi payments to other investors. Here, the SEC traced that mechanism through fund accounts, investments that were later liquidated and transfers back to the operation.

Real Investments Could Not Support the Claimed Returns

The SEC’s announcement said the manager invested approximately $30 million of the capital raised. The complaint traced losses and liquidations behind the profitable picture given to investors.

According to the complaint, Serrano invested in a structured financial product and in commodities and other financial instruments. Both sets of investments lost money and were liquidated. Money sent back from Serrano then helped fund investor payments and purported business expenses.

The money-market comparison was especially concrete. The complaint alleged that $16,050,500 went into Goldman Sachs money-market funds through Wachovia Capital Markets, earning $9,081 in dividends. After liquidation, the manager used the returned money toward investor payments and purported expenses. The cash coming back included the investment itself. The dividend was a very different number.

A similar pattern appeared in the SEC’s FOMAC International complaint announcement. The agency alleged significant foreign-exchange trading losses followed by the use of new investor money to pay existing investors’ returns and principal. In both cases, the trading result and the source of the payment tell more than the fact that a payment arrived.

Operating Expenses Took Investor Money Too

The complaint traced $15,208,038 in investor proceeds to purported operating expenses, including payments to the manager and sales agents. Much of that money passed through a bank in Anguilla before reaching Kenzie Financial’s account in Puerto Rico. The SEC alleged that the Anguilla deposits typically stayed there only a few days.

The SEC separately alleged $4,819,024 in third-party business expenses paid directly from the funds’ checking accounts. It also described the manager spending more than $900,000 in cash at a Las Vegas casino. For someone who approved expenses or sales-agent payments, those records connect the cost of running and selling the operation to the investor deposits financing it.

False Statements and Tax Forms Kept the Profits Alive

The SEC alleged that monthly and quarterly statements, followed by annual Schedule K-1s, told investors their money was profitably invested in foreign currencies. Those communications helped delay or avoid redemption requests. An employee preparing the statements or tax forms would see the earnings the operation wanted customers to believe, while the underlying account records showed what the investments actually produced.

The complaint also alleged inflated assets under management. It described the balance sheets this way:

The SEC put the funds’ collective bank-account balance that same month at $4,101,807. The complaint contrasted that balance with the inflated assets reported to investors. The person who knows how an account balance became a statement balance can explain the entries behind that picture.

An offering, a subscription deposit, an investment result and a distribution each describe a different part of a fund’s business. The useful evidence connects those records to the explanation given to investors. In this case, the additional document was the tax form: the SEC alleged that it repeated the false return the account statement had already sold.

A Conservative Fund Paid Other Investors

The complaint’s SSecurity example shows the payment system operating inside a new sales pitch. While other investors were waiting for redemptions, the manager approached an existing USFirst Fund investor about a more conservative investment in SSecurity. He described overseas bank-secured notes and told the investor that banks would protect the principal, according to the SEC.

Offering materials arrived on Aneesard letterhead in March 2010, and the investor put in $100,000 that month. The complaint alleged that the manager used part of the money in April to make payments to four other investors, transfer money to Puerto Rico and pay third-party expenses. The SEC’s account tied the new subscription to actual outgoing payments. In the SEC’s allegation, the conservative label had not kept the money out of the common pot.

Redemption communications supplied another view of the same operation. The SEC alleged that investors received different explanations for delays, including pending asset valuations, new FINRA regulations and positions being held to maturity. Someone handling those requests could connect what customers were told to the transfers being made while they waited.

The Geography Followed the Money

The complaint placed Kenzie Financial’s offices in St. Thomas, Kenzie Services’ business address in Nevis and Serrano’s receiving bank account in the Netherlands Antilles. It also described investor solicitation in Illinois, where two defendant companies were incorporated. For an insider handling cross-border investment records, the account holder, transfer destination and fund purpose connect those locations to the conduct.

In its announcement, the SEC said the court had frozen the manager’s and companies’ assets and ordered overseas assets brought back to the United States. The complaint sought to stop further fraud and prevent remaining investor assets from being dissipated. Those measures addressed the same problem visible in the transfers: the operation could keep moving investor money beyond the fund account where it first arrived.

What a Fund Insider Can Explain

The different jobs inside an investment adviser and fund operation expose different parts of the payment story. A salesperson knows the risk description, an accounting employee knows the reported earnings, and someone handling transfers knows which account funded a distribution. In the Kenzie complaint, the connection between those views was the substance of the allegation.

The 2018 study The Significance of Whistleblowing as an Anti-Fraud Measure, published in the Journal of Forensic & Investigative Accounting, examined occupational-fraud survey data and found whistleblowers detected 35.9% of the cases with complete data, compared with 21.4% detected through internal controls. Your knowledge of who supplied a number, authorized a transfer or approved an explanation gives the documents their context.

For securities fraud, an eligible SEC whistleblower can receive 10% to 30% of the sanctions collected in an action imposing more than $1 million in sanctions. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. The False Claims Act concerns fraud against the government, while this case concerns investor money. We assess the program that fits your information with you.

You Know Where the Fund’s Money Went

If you saw one fund’s deposits paying another investor, or returns entered on statements without earnings behind them, speak to our whistleblower experts about building your strongest case. We develop the case strategy with you, bring in securities fraud whistleblower lawyers who understand pooled investments and cross-border transfers, and stay beside you through the decisions ahead.