The US Securities and Exchange Commission has filed civil charges against Michael Scronic, a New York-based investment adviser accused of defrauding retail investors in a $19M Ponzi scam. According to the regulator, beginning in 2010, Scronic raised funds from 42 friends and acquaintances for a “risky options trading strategy” involving the Scronic Macro Fund, a fictitious hedge fund in which he was supposedly selling shares. Many of the investors he approached were from the community where he lives. Their investments ranged from $23K to $2.4M.
The SEC contends that Scronic lied to them about his investing track record, claiming he had a long history of proven returns while touting that the investments he was selling were liquid and easily redeemable. In reality, claims the Commission, the investors’ money was draining away because of massive trading losses.
Scronic is accused of not segregating the funds according to investor and transferring their money into his personal brokerage account. His investment agreements with investors stipulated that their funds would be placed in a hedge fund, in which he would serve as acting investment adviser, and he would send them quarterly reports. Scronic also noted in these agreements that he had a fiduciary obligation to investors and would comply with all state and federal laws.
The hedge fund was supposed to invest in the options market and charge a 1% of assets under management fee. Investors were supposed to be able to redeem their investments within three business days. Instead, Scronic invested in high risky options on futures contracts and equity and index options using his own account, as well as investors’ money.
The SEC is reporting at least $15M in investment losses. However, for the period ending on June 30, which is when Scronic told investors that there were assets of at least $21.8M, the balance in his brokerage account was actually less than $27,500. The SEC said that between April 2010 and August 2017, Scronic lost 88% of net investor deposits through trading losses and had suffered 79 losses in 89 months.
When some investors tried to redeem their investments, Scronic allegedly did not tell them that he could not pay them back. Instead, he gave them “implausible excuses.” He tried to get more funds from new and earlier investors to satisfy some of these redemption requests.
This week, prosecutors in New York charged Scronic in a parallel criminal case with wire fraud and securities fraud. They claim that he spent $2.9M of investor funds on his own expenses, including $180K a year on country club membership, beach fees, credit cards, and mortgage payments for a Vermont vacation home. Among the excuses authorities say that he gave investors for why he could not redeem their investments as promised, Scronic purportedly attributed the lack of redemptions to a relative’s health issue, a vacation, and a new quarterly redemption policy.
Previously, Scronic worked at Morgan Stanley (MS).
Unfortunately, fraud does happen in which the person bilking the investor is a friend, family member, or trusted community member. This type of fraud has been called affinity fraud.