ASHLAND, Ohio (HedgeWorld.com)–A stockbroker who used money he raised for a purported hedge fund to run a coffee shop instead, pay bills and make donations to a community art center run by his wife was sentenced last week to five years in prison after he earlier pleaded guilty to one count of mail fraud.

Gregory A. Applegate also was ordered by a federal judge to pay $2.9 million in restitution to investors, according to a news release from the Securities and Exchange Commission. In October 2005, the SEC accused Mr. Applegate of running a Ponzi scheme.

He raised at least $5.8 million from about 140 investors who believed they were buying shares in a fund that would invest in tax-exempt securities and generate returns of between 7% and 8%. Mr. Applegate had promised those investors he would make up any investment losses out of his own pocket.

According to the SEC, Mr. Applegate used the investors’ money to finance the coffee shop, pay bills and pay out “returns” to early investors. To help cover his tracks, Mr. Applegate mailed out false monthly client statements showing securities holdings and returns that didn’t exist, according to the SEC.

One of his investors discovered that market values in the statements did not match market prices, which is how the scheme began to unravel.

CClair@HedgeWorld.com

Contact Bob Keane with questions or comments at bkeane@investmentadvisor.com.