Former RIA Firm’s Co-Founder Arrested, Charged in ‘Ponzi-Like Scheme’

The co-founder and chief investment officer of a former New York RIA firm was arrested Friday. He was accused of involvement in a “string of frauds” designed to “cover up tens of millions of dollars in losses on bad bets in order to keep his investment advisory business, the International Investment Group, “afloat,” according to the Securities and Exchange Commission.

The U.S. Attorney’s Office for the Southern District of New York charged the former executive, David Hu, with investment adviser fraud, securities fraud and wire fraud. The SEC filed a complaint Friday against Hu.

Hu committed fraud as part of a $60 million “Ponzi-like scheme,” the SEC said. Starting in 2013, he “orchestrated multiple frauds on IIG’s investment advisory clients,” the regulator said in announcing the civil complaint, which was filed in the U.S. District Court for the Southern District of New York.

“Beginning in or about 2007, Hu and others at IIG engaged in a practice of hiding losses in” the firm’s Trade Opportunities Fund portfolio “by overvaluing troubled loans and replacing defaulted loans with fake ‘performing’ loan assets,” the SEC said in the complaint.

“When it was necessary to create liquidity, including to meet redemption requests, Hu would cause IIG to sell the overvalued and/or fictitious loans to new investors … and use the proceeds to generate the necessary liquidity required to pay off earlier investors,” according to the regulator.

The complaint charged Hu with violating the antifraud provisions of federal securities laws and seeks permanent injunctive relief, disgorgement and civil penalties.

Hu did not immediately respond to a request for comment on Monday. He is no longer registered as a broker, according to the Financial Industry Regulatory Authority’s BrokerCheck website.

The SEC previously revoked the registration of IIG, after filing a complaint against it in the same court, claiming the firm was operating a Ponzi scheme. At the time, the SEC said the firm hid losses in its flagship hedge fund and sold at least $60 million in fake loan assets to clients.

In the earlier complaint, filed Nov. 21, the SEC said IIG significantly overstated the value of defaulted loans in the fund’s portfolio to conceal losses in TOF. In an attempt to continue its deception, IIG allegedly doctored the firm’s records to indicate the defaulted loans had been repaid and the proceeds were used to make new loans, the SEC charged, noting that, in reality, there had been no repayment and the purported new loans were actually fake.

— Check out Former Morgan Stanley Advisor Pleads Guilty to $6M Fraud on ThinkAdvisor.