Owner Of Gemstar Capital Group Private Equity Company Sentenced To 120 Months In Federal Prison For Role In $40 Million Ponzi Scheme
Defendant Jeffrey J. Sykes Also Ordered to Pay Nearly $17 Million in Restitution
FORT WORTH, Texas — Jeffrey J. Sykes, 54, of San Bernadino County, California, was sentenced this morning by U.S. District Judge John McBryde to 120 months in federal prison and ordered to pay $16,867,037 in restitution, following his guilty plea in January to two counts of securities fraud stemming from a Ponzi scheme he ran. Sykes, who was the owner of Gemstar Capital Group, Inc. (Gemstar), a California-based private equity company, was ordered to surrender to the Bureau of Prisons by May 24, 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.,” of 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. solicited 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 more than $20 million. 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 nor 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 more than $20 million 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 investor funds were held in these accounts, investors were able to recover some of their investments.
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 $16,867,037. 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.
This prosecution is in connection with the President’s Financial Fraud Enforcement Task Force. The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. Attorney’s offices and state and local partners, it’s 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 nearly 10,000 financial fraud cases against nearly 15,000 defendants, including more than 2,900 mortgage fraud defendants. For more information on the task force, please visit http://www.stopfraud.gov/.
The case was investigated by the U.S. Postal Inspection Service and the FBI.