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SEC halts multi-million dollar Long Island Ponzi scheme

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The Securities and Exchange Commission has halted a multi-million dollar Ponzi scheme and frozen the assets of the Long Island-based investment adviser operating it.

The Securities and Exchange Commission has halted a multi-million dollar Ponzi scheme and frozen the assets of the Long Island-based investment adviser operating it.

The SEC alleges that Edward T. Stein preyed upon long-time friends and acquaintances to move more than USD55m through the accounts of his investment funds – Gemini Fund I and DISP – selling interests in those entities to more than 80 investors.

Stein produced false statements for investors reflecting healthy returns over the life of those investments, while he instead used the money to pay off prior investors, pay personal expenses, and fund a failed magazine venture.

The SEC alleges that in the past several months, Stein resorted to stealing client funds to continue his scheme, converting millions of dollars from a single client to pay off selected investors and purchase a million-dollar condominium for himself in Manhattan.

"Halting Ponzi schemes and freezing assets of the perpetrators continues to be an important enforcement priority for the SEC," says Robert Khuzami, director of the SEC’s division of enforcement. "The SEC has halted more than 75 Ponzi-related schemes in the past two years and charged more than 300 individuals since 2002 in such enforcement actions."

James Clarkson, acting director of the SEC’s New York regional office, adds: "Today’s enforcement action alleges that a trusted adviser defrauded long-standing clients for his personal financial gain. Stein allegedly used false statements to make his clients believe they were earning substantial returns, when in fact he was using their money to pay off prior investors and enrich himself."

According to the SEC’s complaint, filed in federal court in Manhattan, Stein set up Gemini in 1992 as an investment fund and began to market limited partnership interests to clients. Stein described Gemini to prospective investors as a feeder fund to other investment vehicles engaging in arbitrage and hedge trading.

Instead, the primary investment Stein made with Gemini money was in Detour Media Group, an entity that published a fashion magazine called Detour. In a petition signed by Stein as its president, Detour Media filed for protection under Chapter 7 of the bankruptcy laws in 2003. However, Stein continued to solicit investments in Gemini and has continued to issue statements to his investors reflecting healthy returns over the life of their investments.

According to the SEC’s complaint, Stein set up DISP in 2002 as an investment fund to invest in life settlement policies. While DISP did buy some life insurance policies with investor funds, it has not bought any since at least 2004 and Stein transferred the portfolio of policies DISP held to another Stein-controlled entity without disclosing the transfer to existing or prospective DISP investors. Stein also used DISP investor funds to pay off Gemini investors.

The SEC’s complaint charges Stein for violations of the anti-fraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. The SEC has charged Gemini, DISP, and Vibrant Capital as relief defendants along with the following other entities: Edward T. Stein Associates, Ltd.; G&C Partnership Joint Venture; Prima Capital Management; and Vibrant Capital Funding I.

Judge Lynch of the US District Court for the Southern District of New York granted the Commission’s request for an order temporarily restraining Stein, freezing his assets and those of the relief defendants, and ordering accountings of Stein and the relief defendants.

The SEC’s complaint also seeks a final judgment permanently enjoining Stein from future violations of the federal securities laws, ordering him to pay financial penalties and to disgorge ill-gotten gains with prejudgment interest.

The US Attorney’s Office for the Eastern District of New York has also announced criminal charges against Stein.

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