Money Manager Arrested and Charged with Securities Fraud for Operating 30-year Ponzi Scheme
Brooklyn-Based Defendant Induced Hundreds of Individuals Throughout the United States to Invest More than $40 Million
A criminal complaint was unsealed this morning in federal court in Brooklyn charging Philip Barry, a money manager based in Bay Ridge, New York, for operating a long-standing and large-scale Ponzi scheme.1 The defendant’s initial appearance is scheduled to be held later today before United States Magistrate Judge James Orenstein at the United States Courthouse, 225 Cadman Plaza East, Brooklyn, New York.
The charges were announced by Benton J. Campbell, United States Attorney for the Eastern District of New York, and Joseph M. Demarest, Jr., Assistant Director-in-Charge of the Federal Bureau of Investigation, New York Field Office.
As alleged in the complaint, Barry began accepting money in the late 1970s from individuals seeking a return on investment. Operating multiple entities that over time collectively became known as “the Leverage Group,” Barry told potential investors that the Leverage Group invested in stock options. To induce investments and discourage withdrawals, Barry, among other things, (1) guaranteed specified positive rates of return, (2) issued account statements that showed growing account balances, (3) represented that investing in the Leverage Group was safe, and (4) promised that withdrawals could be made easily. In 2006, Barry distributed a letter stating that the Leverage Group had “produced annual returns ranging from the recent 12.55% to a high of 21% back in 1979.”
The complaint charges that Barry actually was running a Ponzi scheme, paying returns to Leverage Group investors not from any profits earned on investments, but rather from existing investors’ deposits or money paid by new investors. Barry never produced or earned the rates of return that he advertised and cited in clients’ account statements. Rather, the positive rates of return were simply pre-determined interest rates made up by Barry.
The complaint further alleges that Barry lied to investors about core aspects of the Leverage Group. For example, Barry did not limit the Leverage Group’s investments to stock options. In fact, Barry eventually stopped investing in options altogether and instead purchased real estate mostly located in Sullivan County, New York. In addition, Barry falsely assured investors about their risk of loss. For example, Barry allegedly made misleading statements regarding whether his clients’ individual investment accounts were covered by the Securities Investors Protection Corporation (SIPC), which is a federally mandated non-profit corporation that protects securities investors from financial harm if a brokerage firm fails. However, according to the complaint, the Leverage Group is not a brokerage firm and thus is not covered by SIPC. Lastly, the complaint details how Barry routinely broke his promise to investors that they could easily withdraw money from their accounts by first discouraging such withdrawal requests, and if that failed, delaying payment by offering a variety of excuses. Even in those instances when Barry actually issued withdrawal checks, they would often be returned due to insufficient funds. In some cases, Barry simply ignored investors’ withdrawal requests altogether.
All told, approximately 800 individuals invested a total of more than $40 million in the Leverage Group. Although many investors succeeded over the years in making full or partial withdrawals (particularly before the Ponzi scheme began to unravel), numerous other investors sustained substantial losses. Although the government’s investigation is ongoing, a preliminary estimate of the cumulative ending balances as listed on the Leverage Group investors’ account statements is more than $45 million, far exceeding the actual value of the assets then held by the Leverage Group.
“This defendant allegedly convinced hundreds of individuals to hand over their savings for what was supposed to be a safe investment that could be easily liquidated,” stated United States Attorney Campbell. “In reality, as charged in the complaint, the defendant’s investment fund was nothing more than a classic Ponzi scheme. We will aggressively prosecute those who perpetrate such crimes.” Mr. Campbell thanked the United States Securities & Exchange Commission for its assistance.
FBI Assistant Director-in-Charge Demarest stated, “This case is fundamentally about deceit. Over a period of three decades, the defendant allegedly misrepresented to investors their guaranteed rate of return, the safety of their investments, and even what it was they were investing in. As a consequence, hundreds of investors stand to lose many millions of dollars in the aggregate, in some instances representing their life savings. To protect the public, the FBI continues to work aggressively to detect and stop multimillion-dollar fraud schemes.”
If convicted of securities fraud, Barry faces a maximum sentence of 20 years’ imprisonment.
The government’s case is being prosecuted by Assistant United States Attorneys Jeffrey A. Goldberg and Karen R. Hennigan.
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