San Bernardino County Man Pleads Guilty to Securities Fraud Charges Related to $40 Million Ponzi Scheme
- Created on Saturday, 12 January 2013 21:06
- Written by FBI
San Bernardino, Califfffornia - Jeffrey J. Sykes, 54, of San Bernardino County, California, pleaded guilty this morning before U.S. District Judge John McBryde to two counts of securities fraud stemming from a Ponzi scheme he ran in connection with his ownership of Gemstar Capital Group Inc. (Gemstar), a California-based private equity company. For each count of securities fraud, Sykes faces a maximum statutory penalty of five years in prison, a $250,000 fine, and restitution.
Sentencing is set for April 26, 2013. Today’s announcement was made by U.S. Attorney Sarah R. Saldaña of the Northern District of Texas.
According to documents filed in the case, Sykes owned and operated Gemstar out of Redlands, California. In 2006, Sykes and “M.K.,” an individual who lived in Westlake, Texas, met at a golf tournament. Sykes told M.K. that Gemstar was a venture capital company interested in investing in emerging growth companies and that Gemstar was looking to supplement its planned venture capital operations by engaging a brokerage firm to assist it in buying and selling U.S. Treasury Bills (T-Bills).
M.K. asked Sykes whether he could participate, and, in April 2007, Sykes and M.K. entered into an agreement in which M.K. would solicit investors to participate in the T-Bill trading program described by Sykes. The next month, M.K. formed a limited liability company, known as KCG, and began to solicit investors. Using information Sykes provided, M.K. secured approximately 37 investors who invested approximately $24,617,441. M.K. sent the money, minus fees he withheld for himself, to Gemstar to be invested by Sykes. However, unbeknownst to the investors, neither KCG or Gemstar was engaged in any T-Bill trading program at the time of M.K.’s solicitations.
In addition to the funds that M.K. raised, Sykes personally raised approximately $22,488,539 from investors by making representations about a T-Bill trading program that were materially false or omitted material facts. In fact, none of the money was invested in a T-Bill trading program. Instead, Sykes and M.K. used some of the money for personal expenses. Some of the money was invested in ventures that the investors were unaware of and had not given their consent to participate in. Some of the money was returned to investors, although in some cases, Sykes falsely claimed that the funds represented the return of capital and/or profits from the T-Bill trading program.
Although Sykes used some of the investments he received for personal expenses, to pay partners, and for other purposes, he held a large portion of the invested funds in low-risk money market accounts. Because a substantial portion of the funds received from investors were held in these accounts, investors were able to recover some of their investments.
All told, accounting for payments made to investors during the course of the scheme and money returned to investors after the termination of the scheme, investors collectively lost approximately $12,981,597. This amount includes losses incurred by the investors solicited by M.K., whose funds he subsequently sent to Sykes after taking a fee for himself.
The two counts of securities fraud to which Sykes is pleading specifically stem from false Gemstar account statements that Sykes used to deceive investors about the value of their investments.
Today’s announcement is part of efforts underway by President Obama’s Financial Fraud Enforcement Task Force (FFETF) which was created in November 2009 to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. attorneys’ offices and state and local partners, it is the broadest coalition of law enforcement, investigatory, and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state, and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions, and other organizations. Over the past three fiscal years, the Justice Department has filed more than 10,000 financial fraud cases against nearly 15,000 defendants, including more than 2,700 mortgage fraud defendants. For more information on the task force, visit www.stopfraud.gov.
The case is being investigated by the U.S. Postal Inspection Service and the FBI. Assistant U.S. Attorney Jay S. Weimer is in charge of the prosecution.