The Securities and Exchange Commission announced fraud charges and froze the assets of St. Thomas resident Daniel Spitzer Monday, alleging he bilked investors out of $105 million in an elaborate Ponzi scheme.
The SEC filed a complaint June 17 alleging Spitzer used a slew of customized financial entities under his control and their sales agents to misrepresent to investors that their money would be invested in investment funds that, in turn, would be invested primarily in foreign currency.
“Daniel Spitzer ran an elaborate Ponzi scheme that he disguised by moving investor money through a complex network of foreign bank and brokerage accounts,” said Merri Jo Gillette, director of the SEC’s Chicago Regional Office in a statement on the complaint issued Monday. “He deceived investors into believing that he was using a sophisticated investment strategy that didn’t really exist,” Gillette said.
One of the central companies in the case is Kenzie Financial Management, a V.I corporation, with offices in St. Thomas. Spitzer is the sole shareholder and principal of Kenzie Financial, according to the SEC.
The corporation purportedly acted as the trading manager for 11 of the 12 bogus investment funds that Spitzer also controls.
The SEC documents do not mention it, but Kenzie Financial is a current beneficiary of V.I. Economic Development Commission tax breaks. Hence, if the SEC allegations are correct, Kenzie Financial received very large tax breaks—90 percent reduction in corporate income tax, for example—while carrying out a massive fraud scheme.
One Kenzie financial company applied for tax breaks under the EDC’s predecessor as far back as 2000, and Kenzie Financial applied in 2006. It could not immediately be determined whether Kenzie received EDC tax exemptions and reductions for that entire time.
According to the SEC’s complaint, from 2004 to 2010, Spitzer defrauded about 400 investors, claiming never to have lost money and to have made returns over 180 percent one year. Following the well-trod path of the classic Ponzi scheme, Spitzer claimed to be making conservative investments but instead used money raised from new investors to pay earlier investors, and misappropriated investor funds to pay unrelated business expenses.
The complaint alleges Spitzer hid the sleight of hand by issuing phony documents to investors that led them to believe their investments were profiting. Of the $105 million he raised from investors, Spitzer only invested about $30 million. Of that, Spitzer used about $13.5 million to invest through MeesPierson Curacao Bank in Netherlands Antilles, losing money. He invested another $16 million in money market funds, making a few thousand dollars.
Most of the rest of the money has been siphoned away. According to the SEC’s complaint, Spitzer’s scheme is on the verge of collapse as he has attempted to delay and avoid paying investor redemptions. As recently as March, Spitzer took $100,000 from an investor to invest in purportedly conservative investment funds. Rather than invest the money, Spitzer used this investor’s money to make $9,000 in Ponzi payments to four other investors, transferred $27,000 to the First Bank of Puerto Rico, and paid $26,000 for inappropriate third-party expenses, according to the SEC complaint. The SEC argued any remaining funds were at risk of "dissipation" because Spitzer’s fraud was continuing as recently as a month or two ago.
Spitzer also spent extravagantly as a rule. Between March 2006 and October 2009, Spitzer made 14 trips to the Wynn Las Vegas Casino, where he spent over $900,000 in cash, according to the SEC complaint. For those reasons, the SEC sought and obtained an emergency court order freezing the assets of Spitzer and his companies.
