With new fraudulent schemes devised and perpetrated against individuals and businesses on a daily basis, the Association of Certified Fraud Examiners created International Fraud Awareness Week, running from November 13-19, 2016, to remind us that fraud is not just an abstract concept, but has tangible – and devastating – consequences for those businesses and individuals alike. While the effects of fraud can damage the direct victim terribly, the organizations and advisors charged with protecting that victim's interests can also suffer. Capable and thoughtful advisors and attorneys who vigilantly anticipate, recognize, and guard against these schemes can preserve clients' personal and financial well-being, and protect businesses' bottom lines.
On October 25, 2016, a venture capital fund manager, Gregory Gray, was sentenced to two years in federal prison, ordered to pay $5 million in restitution, and required to forfeit another $5 million. Gray pled guilty to securities fraud and perjury for orchestrating a Ponzi scheme that involved fake purchases of social media securities, the use of investors' funds to pay prior investors, and efforts to cover up the scheme.[i] Gray admitted in open court that he initially solicited more than $5 million from investors, promising to invest the money in 200,000 shares of pre-IPO Twitter stock. Gray subsequently diverted more than half of the $5 million into accounts for other investment vehicles that he managed, and only purchased about $1.875 million in Twitter stock. When the stock price later rose, investors expected large yields from their $5 million investment, but Gray could not deliver those profits.
Rather than confess his mismanagement of investors' funds, Gray raised an additional $5 million from one of the investors, a business professional who had previously invested $1.2 million to buy the Twitter shares. Gray pledged that the funds would be used to purchase privately held shares in Uber and that the investment would yield $5 million in profits. However, Gray did not purchase the Uber shares, but instead used the money to repay the investors who thought they owned stock in Twitter and to buy the additional Twitter shares for those investors. When pressed by the investor for proof of the Uber purchase, Gray fabricated a stock transfer agreement to convince the investor that the purchase had indeed occurred. Eventually, the scheme unraveled, but not before Gray had defrauded sophisticated, knowledgeable professionals out of more than $10 million.
The SEC has also filed a separate lawsuit against Gray, alleging that he mismanaged approximately $20 million raised from 140 individuals, many of them wealthy, experienced investors.[ii]
High-net-worth individuals are invariably the targets of fraud, regardless of how sophisticated they may be. Because these individuals typically are educated and intelligent, perpetrators know that the schemes must also be sophisticated. Attorneys, counselors, investment professionals, and other trusted advisors can help ward off and manage threats posed by unscrupulous fraudsters to high-net-worth individuals and others by learning to recognize and mitigate fraudulent schemes.
___________________
[i] For further detail, see United States v. Gray, No. 1:15-CR-297-SHS-1 (S.D. N.Y. May 15, 2015). A copy of the criminal complaint is also available through the Department of Justice here.
[ii] See Sec. and Exch. Comm'n v. Gray, No. 15-CV-1465 (S.D. N.Y. Feb. 27, 2015), available here.
