SEC Goes After $42 Million In Alleged Ill-Gotten Gains From Arthur Nadel Ponzi; Neil And Christopher Moody Accused Of A Reckless Lack Of Due Diligence And Misleading Investors

UPDATED 5:12 P.M. ET (U.S.A. JAN. 12) So, you want to mislead your clients about your role in your business, rely on the assertions of your business colleague and not perform thorough due diligence and double-check his claims that your investors are making enormous profits? Want to say later — after a Ponzi scheme collapses — that you didn’t know it was a Ponzi scheme?

Those dogs won’t hunt, the SEC said today. A year after the alleged $350 million-plus Arthur Nadel Ponzi scheme collapsed, the agency has charged a father-and-son investment team — Neil and Christopher Moody of Sarasota, Fla. — with civil securities fraud for claiming they were managing hedge funds when the funds actually were being managed by Nadel, an attorney who was disbarred in the 1980s for using client funds to pay off loan sharks.

“The Moodys led investors to believe that they were faithfully managing funds invested with them,” said Glenn S. Gordon, associate director of the SEC’s Miami Regional Office. “Instead, they abdicated their responsibilities to investors and ignored warning signs that should have alerted them to the fraud that was occurring all around them.”

Neil Moody is 71; Christopher Moody is 35. They operated three hedge funds — Valhalla Investment Partners LP, Viking IRA Fund LLC and Viking Fund LLC. — all of which collapsed with the collapse of Nadel’s operation. The SEC said today that it is seeking the return of $42 million in ill-gotten gains from the Moodys.

The Moodys distributed offering materials, account statements and newsletters to investors that misrepresented the hedge funds’ historical investment returns and overstated their asset values by as much as $160 million, the SEC charged.

“[They] based their materials on grossly overstated performance numbers that Nadel created and provided to them, the SEC said. “The Moodys failed to independently verify the accuracy of the figures despite multiple red flags, and relied exclusively on Nadel’s inaccurate information when communicating with investors.”

Christopher Moody’s attorney said his client is working to help recover assets.

“The SEC’s complaint does not allege that Chris Moody knowingly intended to harm investors,” said Jeffrey L. Cox. “The complaint alleges recklessness which Mr. Moody neither admits nor denies. Mr. Moody has cooperated from the outset with the receiver in the recovery of assets and will continue to do so.”

The SEC alleged that the Moodys lied about their roles in managing the assets of the three hedge funds by claiming that they controlled all of the investment and trading decisions.

“In truth,” the SEC said, “under an arrangement that the Moodys had with Nadel, [Nadel] controlled nearly all of the funds’ investment and trading activities with no meaningful supervision or oversight by the Moodys.”

NOTE: The next several paragraphs are taken verbatim from the SEC’s complaint against the Moodys. We added the italics.

“During the relevant time period, the Moodys also recklessly relied on false information Nadel gave them to misrepresent the value of the Moody Funds’ assets in account statements provided to investors and in verbal communications with investors.

“For example, one investor from Virginia who invested in Valhalla Investment Partners received a statement for October 2008 indicating his investment was valued at $1,170,363.92, and a November 2008 statement indicating his investment was valued at $1,176,848.66. These statements were false because the total value of the entire Valhalla Investment Partners’ holdings was only $9,425.66 at the end of both months.

“Another investor who invested in the Viking IRA Fund received a statement for
November 2008 indicating his investment was valued at $1,327,660.50. This statement was false because the total value of the entire Viking IRA Fund’s holdings was $629,728.01 at the end of November 2008.

“Finally, another investor who invested in the Viking Fund received a statement for November 2008 indicating her investment was valued at $651,327.18. This statement was false because the total value of the entire Viking Fund’s holdings was only $30,929.70 at the end of November 2008.

“At the time the Court appointed the Receiver in mid-January 2009, the account values for the Moody Funds were as follows: (a) Viking IRA Fund – securities worth $2,923.58 and cash of $77,025.20; (b) Viking Fund – securities worth $917.70 and cash of $65,708.33; and (c) Valhalla Investment Partners – securities worth $4,413.66 and cash of $16,158.05.

Investigators said the Moodys did virtually no checking to protect investors from getting fleeced out of millions of dollars

“The offering materials represented that the funds generated investment returns ranging from 10% to 46% between 2002 and 2008, the SEC said in the complaint against the Moodys. “These claimed returns were utterly bogus because the Moody Funds actually lost significant sums of money during those years.

“The Defendants relied exclusively upon Nadel’s fictitious performance information when they represented to prospective investors the yearly historical returns of the Moody Funds,” the SEC said. “However, they failed to verify the accuracy of the information although they had ready access to documents and information that would have revealed that Nadel’s information was false.”

Ignoring Red Flags

NOTE: The next several paragraphs are taken from the SEC’s complaint against the Moodys. We have added the italics.

“While claiming to actively manage and oversee the assets of the Moody Funds, the Moodys, in fact, relied exclusively on Nadel’s fictitious information when they provided the bogus account statements and baseless offering materials to investors. They failed to take any adequate measures to ensure the account statements and offering materials were accurate, and ignored several red flags that should have alerted them that Nadel was engaged in a massive fraud.

“For example, the Moodys never reviewed the Moody Funds’ securities account statements to verify the accuracy of the information Nadel was providing.

“In addition, they allowed Nadel to provide investment advice to the Moody Funds even though he repeatedly threatened to stop providing investment advice if the Moodys insisted on auditing the funds.

“The Moodys furthermore allowed Nadel to exercise sole control over the Moody Funds’ securities accounts and account statements even after he refused to provide the statements to the Moodys accountant.

“Despite knowledge of these facts, the Moodys never audited or examined the Moody Funds’ securities accounts. Nor did they review the monthly securities account statements, or implement any policies or procedures to monitor Nadel’s control of the Moody Funds’ assets. To the contrary, they allowed Nadel to exercise complete control of the Moody Funds’ assets and trading activities without any meaningful oversight or supervision.”

The SEC’s actions against the Moodys occurred just three days after U.S. Attorney General Eric Holder gave a major speech in Florida on the Obama administration’s Interagency Financial Fraud Enforcement Task Force. The Justice Department and the SEC are among the agencies assigned to the Task Force, which is designed to coordinate the government’s response to fraud schemes that are plaguing the United States.

Florida — perhaps more than any other state — has been plagued by financial fraud. In Sarasota alone, three major Ponzi scheme investigations are under way.

Nadel, who was arrested last year after fleeing Sarasota, is jailed in New York. His trial is scheduled for April. Investigators say he employed an unlicensed accountant and simply made up numbers out of then air to keep the Ponzi scheme afloat.

When investors requested redemptions late last year, Nadel fled.

While Nadel was operating the fraud, “the Moody’s received management and performance fees from the Moody Funds totaling approximately $42 million,” the SEC said.

In addition to the SEC’s actions, the Moodys have been sued by investors.

The Moodys have not been charged criminally. Without admitting or denying the allegations in the SEC civil complaint today, they consented to permanent injunctions against future securities fraud violations and agreed to an order that will bar them for five years from associating with any investment adviser.