WILKES-BARRE, Pa. (HedgeWorld.com)–John F. Turant Jr. and Russ R. Luciano raised $4.5 million for two hedge funds they ran by promising more than 100 investors returns ranging from 20% to 120% annually.

But according to a federal indictment filed Sept. 10 in U.S. District Court for the Middle District of Pennsylvania, Harrisburg, and a civil complaint filed Sept. 15 by the U.S. Securities & Exchange Commission, Messrs. Turant and Luciano invested only US$1.5 million of the money they raised in their two hedge funds, Evergreen Investment Group LP and JTI Group Fund LP.

Their investments lost US$685,800 of that money. With the remaining US$3 million, the two men executed an elaborate Ponzi scheme, using about US$2.2 million of the money from new investors to redeem investors who cashed out, according to the SEC complaint.

They also used nearly US$1 million of the money they raised from investors for personal use, SEC officials said.

Between July 1999 and March 2003, Messrs. Turant and Luciano created phony tax documents and account statements to make investors believe the funds were generating monthly returns of between 1% and 4% a month, according to federal authorities and the SEC. Investors even paid taxes on the phantom investment returns based on the phony tax forms Evergreen and JTI sent out to make it appear as though the funds were earning positive returns.

Both men have been arrested and charged with one count each of conspiracy to commit mail fraud and 14 counts each of mail fraud in connection with phony private placement memos, limited partnership subscription agreements, offering questionnaires, account transfer forms and account statements sent to investors, said Bruce Brandler, assistant U.S. attorney for the Middle District of Pennsylvania.

If convicted, the two men face up to 20 years each in federal prison for each count of mail fraud and five years each on the conspiracy counts, Mr. Brandler said.

Messrs. Turant and Luciano were released after posting bail. A trial date has tentatively been set for November, Mr. Brandler said.

Neither Mr. Turant nor Mr. Luciano could be reached for comment. Thomas E. Cook, a Las Vegas attorney listed in the federal indictment as the defense attorney for both men, did not return phone calls.

According to the SEC complaint and the federal indictment, Mr. Turant, 38, of Wapwallopen, Pa., and Mr. Luciano, 45, of Duryea, Pa., set out to defraud investors even before they set up the Evergreen Investment and JTI hedge funds. In January 1999, Messrs. Turant and Luciano started a hedge fund called JT Investment Group Inc., based in Wilkes-Barre, Pa. By July 1999, the Idaho Department of Finance and the Pennsylvania Securities Commission had launched separate investigations of the fund for selling unregistered shares to residents in those states, according to the federal indictment.

The Pennsylvania Securities Commission in July issued a “cease and desist” order against JT Investment Group, which prohibited the sale of shares in that hedge fund to Pennsylvania residents, according to the federal indictment.

Shortly thereafter, Messrs. Turant and Luciano closed JT Investment Group, refunding money to investors. Many of those same investors then received information about the two new hedge funds, Evergreen Investment and JT Group Fund, according to the SEC complaint.

Included in that information were private placement memos, subscription agreements and limited partnership agreements, according to the SEC complaint.

“According to the private placement memoranda for JTI LP and Evergreen that Turant and Luciano provided to investors, the investment objective of the partnership was ‘capital appreciation,’ and each fund would pool investor money for the purpose of day-trading exchange-traded and over-the-counter securities,” according to the SEC complaint. “Despite the representations made in offering documents and orally that funds would be used to day-trade securities, the vast majority of the funds was never invested in securities.”

The private placement memo also indicated Mr. Turant had licenses to sell securities when in fact he did not and failed to mention the action against JT Investment Group taken by the Pennsylvania Securities Commission, according to the SEC complaint.

The memo also said Karl Germick, president of Evergreen’s general partner, New Resource Investment Group Inc., would manage the fund and that he had “extensive experience” in finance and real estate transactions, according to the federal indictment. In reality, Mr. Germick performed lawn care and ordered office supplies for Messrs. Turant and Luciano, who maintained control of both funds. Mr. Germick could not be located for comment.

To hide the losses the actual investments were incurring and to cover the fact that most of the investors’ capital was not invested at all, Messrs. Turant and Luciano took actual monthly brokerage account statements and changed the numbers to show assets were growing. According to the SEC complaint, for example, the semiannual report for JTI Group for the period Jan. 1, 2001 to June 30, 2001 showed US$352,000 in assets when there was only US$12,000 in assets actually in the account; and another entry in that same report indicated the fund had gained 47% during those six months.

The two men also started a telemarketing company, Quality Teleservices. Investors were told the company performed due diligence and consulting work on behalf of potential investors, when actually the company was used only to solicit new investors, according to the federal indictment.

CClair@HedgeWorld.com