Former Stockbroker Charged With $15.5 Million Ponzi Scheme
A Pennsylvania former stockbroker was hit with civil fraud charges by the Securities and Exchange Commission and accused of operating a Ponzi scheme that sold fake certificates of deposit ("CDs") and raised more than $15 million from victims. Malcolm Segal, 69, was charged with multiple violations of federal securities laws in a complaint filed earlier this month by the Commission. The Commission is seeking injunctive relief, disgorgement of ill-gotten gains plus pre-judgment interest, and civil monetary penalties.
According to the Commission, Segal began purchasing numerous CDs in 2009 on behalf of clients of an unnamed registered investment adviser (the "Adviser"). During this time period, Segal worked as a financial adviser at Cumberland Brokerage Corporation. In 2009 alone, Segal purchased at least 134 CDs with interest rates ranging from 1.14% to 2.75% for a total of nearly $11.7 million. The CDs were not purchased in the names of the individual investors, but rather in the name of "Clients of [the Adviser]." As such, Segal retained control over the redemption of the CDs, and subsequently redeemed at least 76 of those CDs for sales proceeds of over $5 million. Instead of returning those proceeds to the relevant investors, Segal paid Ponzi-style proceeds to investors and also financed lavish lifestyle.
In April 2011, Segal moved from Cumberland to Aegis Capital Corp. ("Aegis") At or around that time, Segal began soliciting investors to purchase CDs that in reality did not exist. Investors were instructed to wire funds to a bank account in the name of J&M Financial, which Segal controlled, and were told that Segal would purchase the CDs and subsequently keep them in his vault for "safe keeping." To assure potential investors of the safety of the program, Segal represented that Aegis sponsored and oversaw the CD program. After wiring their funds to the bank account directed by Segal, investors would receive a "confirmation" from Segal that included, among other things, the issuer, settlement date, rate, and location of the CD purchased on that investor's behalf. For some investors, the names of the banks provided by Segal that issued the purported CDs had actually been closed by federal and state banking authorities weeks before the transaction.
As the scheme continued and Segal's obligations to existing investors ballooned, he increased the promised "interest rates" promised on the CDs. To explain the increase, Segal claimed that Aegis was offering the lucrative rates through their "Bulk CD Program," and that the significantly large number of CDs offered by the bank allowed him to offer 12% annual rates.
However, Segal ceased purchasing CDs on behalf of investors beginning in 2011. Instead, Segal misappropriated investor funds for a variety of unauthorized purposes, including the payment of fictitious returns to earlier investors - a classic hallmark of a Ponzi scheme - as well as the payment of personal expenses and even the purchase of a south Florida residence. In late 2013, faced with the prospect of dwindling available cash and mounting investor redemptions, Segal allegedly began misappropriating funds from customer accounts to meet his rising obligations. His scheme ultimately collapsed when an investor reported missing funds from their account to Segal's employer.
The Commission's complaint is below: