Two Hedge Fund Managers Sentenced To Three-Year Prison Terms For Defrauding Investors Of Nearly $1 Million
Preet Bharara, the United States Attorney for the Southern District of New York, announced today that MICHAEL KATZ and CHRISTOPHER FARDELLA, two former hedge fund managers, were each sentenced to three years in prison for their roles in defrauding investors out of nearly $1 million. KATZ and FARDELLA each pled guilty in October 2011 to one count of conspiracy to commit securities fraud and mail fraud and one count of securities fraud before U.S. District Judge Laura T. Swain, who also imposed today’s sentences.
Manhattan U.S. Attorney Preet Bharara said: “In order to lure investors, Michael Katz and Christopher Fardella created resumes and marketing materials for their phony investment fund out of whole cloth. Their sentences demonstrate to those who may consider similar schemes that smoke and mirrors will not fool law enforcement, and you will be held accountable for such fraudulent activity.”
According to the Information filed in Manhattan federal court, as well as statements made in court proceedings:
From April 2005 through November 2006, KATZ, FARDELLA, and two other co-conspirators were partners in KMFG International, LLC (“KMFG”), a hedge fund located primarily in Florida with ties to New York. KATZ was KMFG’s Portfolio Manager, and FARDELLA was KMFG’s Treasurer.
KATZ, FARDELLA, and their co-conspirators used “cold calls” to solicit approximately $1.03 million from investors across the country. Investors were misled about KMFG’s principals, and about the firm’s financial performance. For example, KMFG’s marketing materials falsely claimed that KMFG was operated by “a management team consisting of hedge fund managers, traders, and top level executives from independent oil and gas companies” with a track record of generating substantial trading profits for KMFG’s investors. In fact, KATZ, FARDELLA, and their co-conspirators had no genuine experience running a hedge fund and were never top level executives in the oil and gas industry. KMFG’s marketing materials also falsely claimed that KMFG had generated “cumulative returns for 30 months of over 165 percent.” In truth, KMFG had no prior financial track record, and never made a profit for any of its investors.
The defendants used investor funds for their own personal benefit without investor knowledge. Specifically, KATZ and FARDELLA used investors’ funds to finance a lavish lifestyle by making personal cash withdrawals, and using the funds for expensive meals and trips to Las Vegas.
To conceal the fact that KATZ, FARDELLA, and their co-conspirators were misappropriating investor funds, and the fact that KMFG was never profitable, the defendants submitted false financial statements to their clients that indicated their investments were making profits when they were not. KMFG clients continued to invest hundreds of thousands of dollars with KMFG after receiving the false financial statements.
In total, KATZ, FARDELLA, and their co-conspirators either lost or spent $981,000 out of the $1,031,086.16 collected in investor funds.
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In addition to their prison terms, KATZ, 33, of Brooklyn, New York, and FARDELLA, 34, of Fort Lauderdale, Florida, were each sentenced to three years of supervised release, and ordered to forfeit $981,000.
Co-conspirator Kristian Murphy-Fuhse, who was charged in a separate Information for his role in the same scheme, pled guilty in January 2012 and is awaiting sentencing before U.S. District Judge Thomas P. Griesa.
Mr. Bharara praised the work of the United States Postal Inspection Service.
These cases were brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force, on which Mr. Bharara serves as a Co-Chair of the Securities and Commodities Fraud Working Group. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorney Jason P. Hernandez is in charge of the prosecution.