Accidental Ponzi Scheme Could Have Been Much Worse

An accidental Ponzi scheme took $17 million from 200 investors, according to SEC charges. What if he’d been able to advertise?

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Call it the accidental Ponzi Scheme.

A private Atlanta investment manager used a fund-of-funds structure to orchestrate a Ponzi scheme.

It is also yet another example of a very small fund defrauding unsuspecting investors. Yet another reason to fear small hedge funds being able to advertise under the JOBS Act.

Specifically, the Securities and Exchange Commission charged Angelo Alleca and Atlanta-based Summit Wealth Management with defrauding investors and is seeking an emergency court order to freeze the assets of Alleca and his firm to prevent further investor losses, which the regulator estimates to be $17 million from roughly 200 clients.

The SEC charged Alleca, Summit and three funds with violations of the antifraud provisions of the federal securities laws.

The interesting part of the Ponzi scheme is that Alleca, 42, is not being accused of masterminding the series of actions to enrich himself and bankroll a lavish lifestyle. Rather, it reads like an investment plan gone sour and a desperate attempt to recover the losses and put the firm back on track.

Alas, it just spun further out of control. So, he basically engaged in an extreme game of covering up to hide losses from clients and cover-ups never work. Here is what happened: In 2004, Alleca and Summit peddled investments in Summit Fund, which they said was a fund-of-funds. But by 2006 Alleca actually was engaging in active securities trading with the money and incurred substantial losses, according to the SEC’s complaint. He then hid the trading losses from investors and provided them false account statements. When Alleca received redemption requests from Summit Fund investors, he then created at least two hedge funds to raise money from clients. The plan was to illegally transfer profits to the fund-of-funds in order to cover up the losses. His plan started to unravel when the new funds suffered trading losses as well. Alleca then started sending out false account statements for all three funds, which must have been an exhausting exercise.

Imagine what may have happened if he were able to advertise. Instead of $17 million in losses, we might easily be talking about $170 million in unsuspecting client losses, or even more.

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