NEWARK, NJ—A man who allegedly bought securities without being able to pay for them and claimed to run a phony hedge fund was arrested this morning at his Boca Raton, Fla., office by FBI agents after being charged for allegedly orchestrating the securities and investment fraud schemes, New Jersey U.S. Attorney Paul J. Fishman announced.
Scott Kupersmith, 46, formerly of Alpine, N.J., and currently of Boca Raton, is charged by complaint with one count each of securities and wire fraud. He is scheduled to appear Friday, Oct. 28, 2011, before U.S. Magistrate Judge Ann E. Vitunac in federal court in West Palm Beach, Fla.
According to the criminal complaint unsealed today in Newark federal court:
Kupersmith engaged in a securities fraud scheme commonly referred to as “free-riding,” in which a customer buys or sells securities in a brokerage account without the cash or securities to cover the trades. To perpetuate the scheme, Kupersmith and his associates opened more than half a dozen brokerage accounts at multiple brokerage firms located in New Jersey and elsewhere. In order to induce the brokerage firms to open these accounts, Kupersmith falsely represented that he had a personal net worth of approximately $5 million and that he controlled a hedge fund in Manhattan with assets of as much as $20 million.
Kupersmith also misappropriated the personal identification information of a family member and a friend and used that information to open additional brokerage accounts. Once these accounts were opened, Kupersmith used them to make large-dollar-value securities trades.
The defendant then failed to pay for or “settle” the trades he made that were not profitable. As a result, the brokerage firms were forced to settle the trades on Kupersmith’s behalf, leading to approximately $1 million in losses.
To induce investors to invest in a hedge fund he claimed to control, Kupersmith falsely represented to investors that they would receive extraordinary returns—representing to at least one prospective investor that he would receive a return on his investment of approximately 43 percent every three months—and told prospective investors that their principal investment was “guaranteed.”
Based on these, and other, misrepresentations, Kupersmith raised approximately $500,000 from investors in New Jersey and elsewhere. Kupersmith did not use investors’ funds to make legitimate securities trades. He used a small portion of the investments to fund his freeriding scheme, and spent the bulk of the funds either on personal expenditures—such as private limousine services, luxury hotel rooms, and adult entertainment clubs—or to make principal and interest payments to existing investors in Ponzi-scheme fashion.
If convicted, Kupersmith faces a maximum potential penalty per count of 20 years in prison, as well as a $5 million fine on the securities fraud count and a $250,000 fine on the wire fraud count.
The Manhattan District Attorney’s Office worked with the New Jersey U.S. Attorney’s Office in conducting the investigation, and is charging related violations of New York state law.
The SEC is also filing a parallel civil action.
“According to the complaint, Scott Kupersmith managed to defraud both investors and brokerage firms of least a million dollars by making trades he couldn’t pay for and promises he couldn’t keep,” said U.S. Attorney Fishman. “‘Free riders’ and Ponzi schemers who live large on others’ money do so on borrowed time.”
“The alleged conduct undermines the confidence investors place in the markets,” said FBI Acting Assistant Special Agent in charge Douglas Veivia. “Kupersmith’s alleged defrauding of investors is even more troublesome in this time of economic stress.”
“Financial markets are governed by rules that keep investors safe. This defendant, skilled in the technicalities of market function and bank operations, allegedly came up with a clever scheme to create risk-free investments,” said District Attorney Cyrus R. Vance Jr. “The illegal scheme he is accused of was little more than a confidence game using offshore banks, shell companies, and fraud, and ultimately cost legitimate broker-dealers hundreds of thousands of dollars.”
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