Philadelphia Woman Indicted in $68 Million Securities Fraud Scheme
For Immediate Release
U.S. Attorney's Office, District of New Jersey
NEWARK, N.J. – An investment fund manager was indicted today in connection with an alleged $68 million securities fraud scheme, U.S. Attorney Craig Carpenito announced.
Brenda Smith, 59, of Philadelphia, Pennsylvania, was indicted on six counts of wire fraud and one count of securities fraud. Smith was initially charged by complaint in August 2019.
According to documents filed in this case and statements made in court:
Smith managed and controlled Broad Reach Capital LP, a purported investment fund. Broad Reach Capital was a pooled investment fund/hedge fund that was established in February 2016 and was open to accredited investors with a minimum investment of $1 million.
From February 2016 through August 2019, Smith allegedly orchestrated a scheme in which she made misrepresentations to investors and promised that she would invest their funds in particular trading strategies that Broad Reach Capital was optimally situated to execute. Smith referred to these strategies as dividend capture, VIX Convergence, and opportunistic trading. Instead of investing the money as she advertised, Smith diverted tens of millions of dollars of investor funds out of Broad Reach Capital for purposes inconsistent with the trading strategies, including for personal use and to pay out millions of dollars to other investors.
Smith misrepresented the success and performance of Broad Reach Capital to investors and prospective investors. She touted Broad Reach Capital as a trade-focused investment fund that was highly liquid and employed a robust risk management program. Smith distributed written materials about Broad Reach Capital to investors and prospective investors that included purported historical performance information, such as claimed annual returns of over 33 percent in 2017 and positive monthly returns in 2018. In fact, the total cash and securities in the Broad Reach Capital bank and brokerage accounts decreased from December 2016 through June 2019. For example, the written materials claimed that Broad Reach Capital had a 1.76 percent return in February 2018 when in reality, Broad Reach Capital’s brokerage accounts lost over 50 percent of their value.
To lull investors and induce them to continue investing, Smith provided monthly account statements that falsely showed that their investments were safe and earning significant returns. Smith also falsely represented that she was personally invested in Broad Reach Capital and provided a fictitious account statement to at least one investor.
As part of the fraudulent scheme, Smith collected more than $68 million of cash into Broad Reach Capital from approximately 40 investors. At its peak, however, the value of cash and securities in the Broad Reach Capital bank and brokerage accounts did not exceed $32 million. Instead of investing the money as she promised, Smith transferred tens of millions of dollars out of Broad Reach Capital to entities she controlled for purposes inconsistent with its trading strategies, including more than $10 million for mineral mining operations and $2 million for American Express credit card bills. When investors requested redemption of their investments, Smith diverted other investors’ funds to pay the requested redemption amounts.
The wire fraud counts carry a maximum penalty of 20 years and a $250,000 fine, or twice the gross amount of gain or loss from the offense, whichever is greater. The securities fraud count carries a maximum penalty of 20 years in prison and a $5 million fine.
The U.S. Securities and Exchange Commission (SEC) Philadelphia Regional Office previously filed a civil complaint against Smith based on the same conduct.
U.S. Attorney Carpenito credited special agents of the FBI Philadelphia Division, under the direction of Special Agent in Charge Michael Driscoll, and special agents of the U.S. Attorney’s Office with the investigation leading to today’s charges. He also thanked the U.S. Securities and Exchange Commission’s Philadelphia Regional Office, under the direction of Director Kelly L. Gibson, for its assistance.
The government is represented by Assistant U.S. Attorneys Catherine R. Murphy and Andrew Macurdy of the U.S. Attorney’s Office Economic Crimes Unit.
The charges and allegations in the indictment are merely accusations, and the defendant is presumed innocent unless and until proven guilty.
Updated June 2, 2020
Press Release Number: 20-164
Securities, Commodities, & Investment Fraud