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Regulation and Compliance > Federal Regulation > SEC

SEC: Ex-Broker Sold Clients Fake CDs With 12% Interest

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The Securities and Exchange Commission on Wednesday charged Malcolm Segal, a former rep of a dually registered broker-dealer and investment advisor, with running a Ponzi scheme over five years in which he fraudulently sold bank CDs—some real, some imaginary—to at least 50 clients and redeemed them early to keep the scheme going. In addition, Malcolm allegedly stole directly from client accounts “in a last-ditch effort to keep funding the Ponzi payments,” and used the proceeds to “finance his lifestyle,” which allegedly included the purchase in March 2010 of a Florida condominium for $142,000 and “vacations and other luxuries.”

In addition to the SEC complaint, Civil Action No. 15-3668, the U.S. Attorney for the Eastern District of Pennsylvania announced criminal charges against Segal, a resident of Langhorne, Pennsylvania and Boynton Beach, Florida.

The SEC alleges that Segal told investors they could purchase through him CDs with higher interest rates than they could get elsewhere, and after they did so, in some instances he “secretly redeemed them early and took the proceeds.” In one instance, he offered CDs to investors with a 12% interest rate.

At other times, the SEC charges, Segal didn’t buy any CDs for his investors. Of the $15.5 million total, the SEC said he sold $8.1 million in nonexistent CDs. Then, Segal “eventually started stealing directly from his customers’ brokerage accounts” as he found it more difficult to keep the Ponzi scheme going. He did so by forging letters of authorization to transfer client funds to accounts he controlled. In one notable instance, the SEC complaint says, Segal forged the signature of “one customer’s wife who had died before the date of the transfer.”

The scheme began in 2009, the SEC said, and fell apart in July 2014.

In its complaint, the SEC said Segal sold the CDs through J&M Financial and National CD Sales, “entities which were effectively Segal’s alter egos and that existed in name only and shared a Post Office Box address that he controlled.”

Segal joined a broker-dealer, identified by the SEC only as ‘Broker-Dealer A’ in 2011, with the complaint saying he falsely told investors that “Broker-Dealer A sponsored and oversaw the CD program and was responsible for the custody of the CDs.” Segal’s record on FINRA BrokerCheck says he was associated with New York-based Aegis Capital Corp. from April 2011 to July 2014.  One particularly egregious piece of fraud concerned a Segal client, called ‘Investor A,’ whom the SEC said in December 2009 wired $1.49 million to a J&M Financial account, which at the time had a balance of $11,000. Segal then sent Investor A a letter saying four CDs had been purchased for $240,000 each. However, the SEC alleges that “these CDs never existed,” and the “four banks that Segal claimed were the issuers of the CDs each had been closed” by federal and state bank regulators “six weeks before the purported purchases took place.”

The coup de grace, according to the SEC? “On the same day he received the funds from Investor A, Segal used $60,000 of those funds to “pay down his personal home equity line of credit.”

The SEC said it is seeking disgorgement of “any and all ill-gotten gains” that Segal derived from his “illegal conduct, together with prejudgment interest.”

In addition, the Financial Industry Regulatory Authority has already barred Segal, 69, from associating with any broker-dealer.

Segal’s BrokerCheck listing says he had spent 25 years in the investment business before being barred by FINRA from the industry on Nov. 25.

— Check out PE Firm KKR to Pay SEC $30M for Misallocating ‘Broken Deal’ Expenses on ThinkAdvisor.


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