Two Executives At Investment Advisory And Management Firm Charged In Manhattan Federal Court In Connection With Multimillion-Dollar Securities Fraud Scheme
Founder and Chief Operating Officer of Florida-Based Elm Tree Investment Advisors LLC Charged with Defrauding Investors Out of More Than $17 million
Preet Bharara, the United States Attorney for the Southern District of New York, and Angel M. Melendez, the Special Agent in Charge of the Department of Homeland Security, Homeland Security Investigations, New York Field Office, announced today that FRED ELM, a/k/a “Frederic Elmaleh,” the founder and manager of Elm Tree Investment Advisors LLC, was arrested this morning in Florida on securities fraud and wire fraud charges stemming from his and Chief Operating Officer AHMAD NAQVI’s scheme to defraud investors in multiple funds created and controlled by ELM and NAQVI. Among other illicit activity, ELM and NAQVI fraudulently induced more than 50 investors to invest over $17 million based on the false representation that ELM and NAQVI would invest that money, through the funds, in the shares of privately held technology companies, like Twitter, Inc., Alibaba Group Holding Limited, and Uber Technologies, Inc. ELM was presented this morning in federal court in Fort Lauderdale, Florida, before United States Magistrate Judge Alicia O. Valle. NAQVI remains at large.
U.S. Attorney Preet Bharara said: “Fred Elm and Ahmad Naqvi claimed that through their business relationships with elite venture capital firms they could generate profits from well-timed investments in privately-held technology companies. But as alleged, Elm and Naqvi never returned a penny of profit, spending much of the $17 million of investor money to fund their own high life and pay back other defrauded investors. As alleged, while promising investors high performing returns, Elm instead took the money and put high-performance sports cars – a Bentley, Maserati and Range Rover – in his own garage. Thanks to the dedicated Homeland Security Investigations agents with the El Dorado Task Force and our partners at the SEC, Elm and Naqvi are now done defrauding investors.”
Special Agent in Charge Angel M. Melendez said: “These individuals allegedly defrauded investors out of more than $17 million dollars by falsely representing the ability to invest in privately held technology companies, when in reality they used the money to buy homes, luxury cars, and expensive jewelry. HSI and its El Dorado Task Force partners are committed to fighting financial frauds and to hold accountable the people that commit them.”
According to the four-count Complaint unsealed today in Manhattan federal court:
From at least June 2013 through December 2014, ELM and NAQVI engaged in a scheme to defraud investors in funds that ELM and NAQVI created and controlled at Elm Tree Investment Advisors LLC (“ETIA”), where ELM was the founder and manager, and NAQVI was the chief operating officer. ELM and NAQVI raised more than $17 million from over 50 investors in four limited partnerships for which ETIA acted as the fund manager: Elm Tree Investment Fund, LP; Elm Tree Emerging Growth Fund, LP; Elm Tree ‘e’Conomy Fund, LP; and Elm Tree Motion Opportunity, LP (collectively the “Elm Tree Funds”).
ELM and NAQVI falsely represented that the Elm Tree Funds used investor capital to purchase shares in privately held technology companies before their initial public offerings (“IPOs”). These companies included Twitter, Inc., Alibaba Group Holding Limited, Uber Technologies, Inc., Square, Inc., Pinterest, Inc., and GoDaddy Group, Inc. Moreover, ELM and NAQVI falsely represented that they had access to these pre-IPO shares because of their business relationships with leading venture capital firms, such as Kleiner Perkins Caufield & Byers, Benchmark Capital, and Silver Lake Management, L.L.C. In truth and in fact, ELM and NAQVI did not invest in the pre-IPO shares of these companies and did not have relationships with these venture capital firms.
ELM and NAQVI comingled the approximately $17 million that was invested in the Elm Tree Funds in a single investment account, and then invested only a portion of the money, approximately $7.1 million. At no point did any of the Elm Tree Funds return a profit. Instead, for example, between January 2014 and November 2014, the Elm Tree Funds lost approximately $3.9 million in trading.
Moreover, of the investor funds that ELM and NAQVI did not lose in securities trading, ELM routinely converted investor funds to his own use in the form of cash withdrawals and to pay personal expenses, including to purchase a $1.75 million home, high-end furnishings, and other personal items, such as jewelry, daily living expenses, and luxury automobiles, including a Bentley, a Maserati, and a Range Rover.
The conversion of investors’ funds was contrary to the representations that ELM and NAQVI made to investors concerning their and ETIA’s fees. ELM and NAQVI falsely represented that they and ETIA would take a two percent annual management fee plus 20 percent of any profits that the Elm Tree Funds earned. In truth and in fact, ELM converted investor money that far exceeded the two percent management fee. Moreover, because the Elm Tree Funds never returned a profit, ELM, NAQVI, and ETIA were not entitled to a percentage of any profits.
ELM and NAQVI also used approximately $5.2 million of new investor funds to make payments to earlier investors in a Ponzi-like fashion.
To prevent or forestall redemptions, and continue to raise money to fund their scheme, ELM and NAQVI also generated fictitious account statements and also made oral and written misrepresentations that their trading strategies were generating consistently positive returns.
For example, beginning in mid-2013, ELM and NAQVI began to solicit Victim-1 to invest with ETIA in the Elm Tree Funds. On June 11, 2013, NAQVI sent Victim-1 a series of e-mails regarding the Elm Tree Emerging Growth Fund, in which he falsely represented, among other things, that the fund would invest in pre-IPO Twitter shares, and that ELM, NAQVI, and ETIA had “key contacts” with venture capital firms like Kleiner Perkins Caufield & Byers and Benchmark Capital. ELM and NAQVI subsequently had in-person meetings and telephone calls with Victim-1 about this investment. On October 9, 2013, Victim-1 invested approximately $52,500 in the Elm Tree Emerging Growth Fund. Following Twitter’s IPO on November 6, 2013, Twitter’s stock price rose, and NAQVI subsequently told Victim-1 that ELM, NAQVI, and ETIA had used an options strategy to lock in Victim-1’s profits in Twitter. Because the fund had not invested in pre-IPO Twitter shares, there were no profits to lock in. Thereafter, ELM and NAQVI sent fraudulent account statements to Victim-1, including one sent on March 7, 2014. The statement falsely indicated that Victim-1’s investment in the fund was valued at $274,550 (up from $52,500), and that the Elm Tree Emerging Growth Fund was valued at $68,115,855.
ELM and NAQVI made similar misrepresentations with respect to Victim-1’s subsequent investments in the Elm Tree ‘e’Conomy Fund and the Elm Tree Motion Opportunity, falsely indicating that those funds invested in Alibaba Group Holding Limited, Uber Technologies, Inc., Square, Inc., Pinterest, Inc., and GoDaddy Group, Inc., and that Victim-1’s investments were growing. ELM and NAQVI also falsely represented that the value of the Elm Tree ‘e’Conomy Fund as of December 12, 2014, was $125,484,750 and that the value of the Elm Tree Motion Opportunity as of December 18, 2014, was $77,286,220 – falsely claiming that the total value of the Elm Tree Funds was more than $270 million.
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ELM, 46, was arrested this morning at his home in Hollywood, Florida. NAQVI, 47, remains at large. ELM and NAQVI are each charged with one count of securities fraud, one count of wire fraud conspiracy, and one count of wire fraud, each of which carries a maximum sentence of 20 years in prison. Each is also charged with one count of securities fraud conspiracy, which carries a maximum sentence of five years in prison. The charges carry a maximum fine of $5 million, or twice the gross gain or loss from the offenses. The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendants will be determined by the judge.
Mr. Bharara praised the work of HSI New York’s El Dorado Task Force, and thanked the U.S. Securities and Exchange Commission for its assistance.
The charges were brought 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. 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. Since fiscal year 2009, the Justice Department has filed over 18,000 financial fraud cases against more than 25,000 defendants. For more information on the task force, please visit www.StopFraud.gov.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorney Joshua A. Naftalis is in charge of the prosecution.
The allegations contained in the Complaint are merely accusations, and the defendants are presumed innocent unless and until proven guilty.
 As the introductory phrase signifies, the entirety of the text of the Complaint, and the description of the Complaint set forth herein, constitute only allegations, and every fact described should be treated as an allegation.