Question

Case Study.

Please explain how this is an example of an investment scam?

Sept. 20--The Securities and Exchange Commission on Wednesday said it froze the assets of a $345 million investment fund, alleging that it was a Ponzi scheme that used money from hundreds of investors across the United States to fund lavish lifestyles.

An SEC complaint unsealed Tuesday, Sept. 18, alleged that the three -- Kevin B. Merrill, Jay B. Ledford and Cameron Jezierski -- attracted investors to their scheme by promising profits from buying and selling consumer debt portfolios, starting in January 2013.

But in fact, they used a "web of lies, fabricated documents, and forged signatures in an elaborate scheme to entice investors and perpetuate the fraud," the SEC said in a press release. Rather than buying and servicing debt portfolios as promised, the three used funds from new investors to make payments to earlier investors.

The SEC also alleged that Merrill and Ledford stole at least $85 million of the investor funds to maintain lavish lifestyles, spending millions of dollars on luxury items, including $10.2 million on at least 25 high-end cars, $330,000 for a 7-carat diamond ring, $168,000 for a 23-carat diamond bracelet, millions of dollars on luxury homes, and $100,000 to a private fitness club.

"We allege that the defendants engaged in a brazen fraud, deceiving investors to perpetuate their wrongdoing and line their pockets with ill-gotten gains," said Kelly L. Gibson, associate regional director of the SEC's Philadelphia regional office, which filed the complaint.

"Investors should be warned that low-risk, high-return investments that never lose should be a red flag," she added.

In a parallel case, the U.S. Attorney's Office for the District of Maryland also announced criminal charges against Merrill, 53, of Towson, Md.; Ledford, 54, of Westlake, Tex., and Las Vegas, Nev.; and Jezierski, 28, of Fort Worth, Texas.

The SEC's complaint, filed on Sept. 13 in federal district court in Maryland, charges Merrill, Ledford, and Jezierski, along with their investment entities, Global Credit Recovery LLC, Delmarva Capital LLC, Rhino Capital Holdings LLC, Rhino Capital Group LLC, DeVille Asset Management LTD, and Riverwalk Financial Corp., with violations of federal securities laws.

The SEC won an asset freeze, temporary restraining order, and the appointment of a receiver. The SEC's ongoing investigation is being conducted by Norman P. Ostrove, Dustin E. Ruta, and Scott A. Thompson in the Philadelphia Regional Office and supervised by Gibson.

Answer 1

The given case is an example of an investment scam. Investment scams are those investment schemes that entice individuals to part with their money by luring them with a promise of a questionable financial opportunity. In this case the investors were promised high returns by claiming that the funds collected will be used to buy and sell consumer debt portfolios and profit from these transactions. In reality, however, no such transactions were made and the funds were used in part to repay the earlier investors and to maintain a lavish lifestyle of the three key personnel of the fund.

Thus the case is an investment scam as prospective investors were lured on the basis of a false promise and the purpose for which the funds were collected was never fulfilled. Investors were duped and the fund never attempted to create a scenario in which there will be low risks and high returns.

The three people involved - Kevin B. Merrill, Jay B. Ledford and Cameron Jezierski – were fraudsters and they convinced people to part with their money by offering them above average returns at minimal risk levels. The Ponzi scheme relied on investments from the new investors to stay afloat and had no legitimate trading and investment activity. Thus it was an investment scam.