Financial Fraud Enforcement Task Force Credited With Bust In Bizarre Ohio Ponzi Involving ‘Unique Momentum Filter’; Enrique F. Villalba Charged With Wire Fraud

An Ohio man who graduated from West Point and earned a law degree in Washington state has been charged in a bizarre Ponzi and investment-fraud scheme that allegedly combined the science of physics with a unique “momentum filter” that purportedly enabled him to predict how the futures market would behave with “an uncanny degree of certainty.”

Enrique F. Villalba, 47, of Cuyahoga Falls, was charged in the scheme, which was conducted from Beachwood Ohio, prosecutors said.

Villalba is a graduate of the United States Military Academy at West Point and  the University of Puget Sound School of Law, prosecutors said. Separately, he was sued by the SEC and the CFTC.

Prosecutors said investors losts millions of dollars in the scheme, and that Villalba used some of the money to fund coffee shops he owns in Hudson and Stow, Ohio. The coffee shops are known as “Rico Latte,” and the investment business was known as “Money Market Alternative LP.”

Villalba called his investment methodology “Money Market Plus,” saying clients could realize long-term gains averaging between 8 percent and 12 percent, prosecutors said. The scheme collapsed last year, after perhaps operating for more than a decade.

“Villalba represented that his knowledge of physics, when combined with his application of a unique ‘momentum filter,’ allowed him to predict with ‘an uncanny degree of certainty’ how the futures market would trend at various times during a given month, thereby allowing him to purchase and sell futures contracts to maximize gains,” prosecutors said.

Investors were told Villalba would place stop orders as a hedge against losses, but he did not place the orders, causing investors to lose “millions of dollars,” prosecutors said.

Money from investors was “converted” by Villalba to fund the coffee shops, buy property in Vermillion, Ohio, and also to make Ponzi payments to clients, prosecutors said.

The scheme netted about $29.7 million, prosecutors said.

“This case serves as an example to the public that the Department of Justice and the Financial Fraud Enforcement Task Force will fight fraud in order to protect the integrity of the financial markets,” said U.S. Attorney Steven M. Dettelbach.

“If you lie to investors, there will be a steep price to pay,” Dettelbach said. “This case resulted from tremendous coordination between the Department of Justice and civil enforcement agencies to protect the rights of investors all over the country.”

President Obama started the Financial Fraud Enforcement Task Force in November.

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15 Responses to “Financial Fraud Enforcement Task Force Credited With Bust In Bizarre Ohio Ponzi Involving ‘Unique Momentum Filter’; Enrique F. Villalba Charged With Wire Fraud”

  1. Patrick,

    We see once again a promoter of fraud trying to twist the reality of business mathematics to draw people in to their scams, making them believe that there is such a thing as a “foolproof mathematical system” for beating market averages. The statistics tell us that this is not possible, although there can be the appearance of market-beating returns. There are ways to eke out amazingly small fractions of returns better than the market, but that is not a game for the not-so-well capitalized (like Villalba). Instead, major investment banks hire true mathematical geniuses to devise ways of seeking out short-term (as in seconds or less) fundamental imbalances between essentially equal value assets. The banks trade billions upon billions in assets, hoping to make a small fraction of a percent per day. These market quantitative geniuses (Quant’s colloquially, are usually PhD MIT/Caltech types) devise automatic trading algorithms that identify and trade against these imbalances, and then cash in on the inevitable rectification of these imbalances. In theory, two essentially identical assets will have the same valuation, but in practice there are short-term, very temporary differences; essentially the valuation noise in the system. Since several large investment banks chase these vanishingly small returns, the noise level has dimished over the years but cannot get to zero. They still make good money, but nothing like it was in thye 90’s and early part of the 21st century.

    Bottom line, there is no such thing as “momentum” in the market, and anyone who tries to tell you otherwise either is a scammer (like Villalba, who btw has nowhere near the chops to be a successful Quant), or doesn’t understand the underlying math…..

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  2. Entertained: We see once again a promoter of fraud trying to twist the reality of business mathematics to draw people in to their scams, making them believe that there is such a thing as a “foolproof mathematical system” for beating market averages.

    Hello Entertained,

    Indeed, it has been another news-making day in the Ponzi sphere. There was so much news — including a $60 million case in Alberta brought by the Royal Canadian Mounted Police — that I could not get to it all.

    One of the Canadian defendants was 73, Andy Bowdoin’s age when the Secret Service brought the ASD case. Each of the other three defendants, including a woman and two men, were at least 53.

    Back in the United States, the Villalba case in Cleveland struck me as just plain odd. An alleged “method,” talk of “physics” and the unique “momentum filter.”

    Some of these cases read like fiction; it might even be most of them.

    Get rich by clicking on ads; get rich by using a momentum filter . . .

    Who’d have thunk two years ago there would be so many Ponzi flavors. The toxicity from mortgage fraud was bad enough, and now we have “momentum filter” Ponzis to go along with “advertising” Ponzis and “promissory note” Ponzis and “Nanny” Ponzis and “concert” Ponzis and “printing” Ponzis and CD Ponzis and “billboard” Ponzis and “uniform” Ponzis and “kiosk” Ponzis and “Big Box” retailer Ponzis and more.

    Any bets that the Ponzi pushers in the autosurf world are taking the pulse of the “momentum filter” phrase and making calculations about whether it will “work” for the newest, bestest autosurf?

    I appreciate your note, Entertained. Thank you.

    Patrick

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  3. Entertained: Patrick,We see once again a promoter of fraud trying to twist the reality of business mathematics to draw people in to their scams, making them believe that there is such a thing as a “foolproof mathematical system” for beating market averages. The statistics tell us that this is not possible, although there can be the appearance of market-beating returns. There are ways to eke out amazingly small fractions of returns better than the market, but that is not a game for the not-so-well capitalized (like Villalba). Instead, major investment banks hire true mathematical geniuses to devise ways of seeking out short-term (as in seconds or less) fundamental imbalances between essentially equal value assets. The banks trade billions upon billions in assets, hoping to make a small fraction of a percent per day. These market quantitative geniuses (Quant’s colloquially, are usually PhD MIT/Caltech types) devise automatic trading algorithms that identify and trade against these imbalances, and then cash in on the inevitable rectification of these imbalances. In theory, two essentially identical assets will have the same valuation, but in practice there are short-term, very temporary differences; essentially the valuation noise in the system. Since several large investment banks chase these vanishingly small returns, the noise level has dimished over the years but cannot get to zero. They still make good money, but nothing like it was in thye 90’s and early part of the 21st century.Bottom line, there is no such thing as “momentum” in the market, and anyone who tries to tell you otherwise either is a scammer (like Villalba, who btw has nowhere near the chops to be a successful Quant), or doesn’t understand the underlying math…..  (Quote)

    OK, now in English please. LOL! Actually I understood all of what you just said. Either I am getting smarter after reading all your posts, or you dumbed it down to my level. I am going with the first option and sticking to it no matter what you say. Thanks for the informative piece as always. Between you and Patrick, as well as several others here, I can count on an education every time I come here.

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  4. Patrick & Entertained:

    Your highly intelligent ejaculations are too copious for my diminutive applications! I and others would appreciate putting all into plain English for those of us with a less than PH.D Degree can and will be able to comprehend.

    You both are beginning to sound like the very people that all of us despise and are continuing to bring down. It is mumble jumble just like that which you both wrote that has so many people falling for these scams. When put into plain English the comprehension level goes up several degrees and I do believe that what is said sinks into those less educated.

    Just remember that some of the dumbest people who continue to follow and join Ponzi’s are some of the smartest people in the land.

    Just my two cents worth.

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  5. What a co-incidence, I am actually aquainted with this guy. When I was in the Army I roomed with a guy who went to West Point and they knew each other, so on a few occasions I ended up going out on the town with him in a group while at Fort Benning in Georgia. Small world.
    As to “momentum trading” I know very little about, but there was concept put forward in the 80s by a guy we all know now, Timothy Gietner, who ran a company called long Term Capitol Management. LTCM hired PhDs to model the difference in bond yields, mostly Treasury Bonds. There was at the time a slight discount on the off one year notes, so, a freshly issued T note would yield a fraction of a percent more than one that was 30 days or 1 year old. As the new notes aged, the yeild fell and it was entirely predictable, or so they thought. They took I think $30 miliion and leveraged it to a sum large enough that when they went through a bad time, it threatened the entire banking system, because they were counter party with large amounts and almost every brokerage in Wall St. There is a good book about it if you are interested, called “When Genius Failed”.

    But to get back on point, yes there are true arbitrage positions that occur every day, but they are so small (usually less than one one hundreth of a percent) that you have to risk huge amounts to make it worthwhile, and large banks and brokerages DO run them which makes them disappear in nanoseconds when they do happen. No two bit ponzi scheme could make money from them.

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  6. Gregg Evans: But to get back on point, yes there are true arbitrage positions that occur every day, but they are so small (usually less than one one hundreth of a percent) that you have to risk huge amounts to make it worthwhile, and large banks and brokerages DO run them which makes them disappear in nanoseconds when they do happen. No two bit ponzi scheme could make money from them.

    Au Contraire, hundreds if not thousands of “forex” HYIP operators make money off them each and every day, but not by any form of arbitrage. They make their money the old fashion way, from fleecing the mathematically illiterate (innumerate?).

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  7. GlimDropper: They make their money the old fashion way, from fleecing the mathematically illiterate (innumerate?).

    To be completely politically correct,

    that would be “mathematically CHALLENGED” :-)

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  8. littleroundman: To be completely politically correct,

    that would be “mathematically CHALLENGED”

    But “challenged” has such a negative connotation, wouldn’t “differently abled” be nicer?

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  9. This ponzi scam sounds a bit like PIPS – Marsden had a super-fantastic formula that could work the markets, and he opened coffee bars & restaurants.

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  10. Now I am at comedy central, when I thought I was going to the Patrick Pretty blog. Too funny. Actually I say kill the PC nonsense, and tell it like it is. Kleenex, Puffs, or Scotties are available for those who can’t handle the truth.

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  11. Tony H: This ponzi scam sounds a bit like PIPS – Marsden had a super-fantastic formula that could work the markets, and he opened coffee bars & restaurants.  (Quote)

    You forgot Fashion House. Were you aware he actually had a folder he put in his safe that was supposed to be his big secret formula on how he could obtain all those incredible returns to have the illusion it was all real? While he would not let anyone see it, he said if anything happened to him, the program would continue. Ah, yes the good ole days of PIPS.

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  12. Jack Arons: Patrick & Entertained:Your highly intelligent ejaculations are too copious for my diminutive applications! I and others would appreciate putting all into plain English for those of us with a less than PH.D Degree can and will be able to comprehend.You both are beginning to sound like the very people that all of us despise and are continuing to bring down. It is mumble jumble just like that which you both wrote that has so many people falling for these scams. When put into plain English the comprehension level goes up several degrees and I do believe that what is said sinks into those less educated.Just remember that some of the dumbest people who continue to follow and join Ponzi’s are some of the smartest people in the land.Just my two cents worth.  

    With the greatest respect, Jack, I would have to disagree with your basic premise.

    Put simply, he reason “it” sounds complicated is that it IS complex.

    The unfortunate fact is that fraudsters have managed to convince the average “punter” that they (the fraudsters) have managed to make things simple enough for the man in the street to not only understand but to profit from.

    “Advertising” can be a simple ad in the local newspaper or it can be a multi million dollar campaign involving the collaborative efforts of an army of university educated marketers, designers, statisticians, sociologists, psychologists and “gurus”

    Similarly, participating in the stock markets can be Joe Average sitting at his or her kitchen table with a newspaper and a pin or a multi squillion dollar enterprise on Wall Street employing hundreds, if not thousands of highly trained (and paid) professionals.

    Even then, professional advertising campaigns flop and we all know what can happen to Wall Street.

    IM(very)HO overly complex debunking is not the reason people fall for these beasts, it’s more a matter of oversimplification.

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  13. Jack,

    Duly noted and thx for the feedback!

    Jack Arons: Patrick & Entertained:…SNIPY… ….Just my two cents worth.  (Quote)

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