A Brooklyn, N.Y., money manager has settled charges that he ran a $40 million Ponzi scheme in which he promised approximately 800 investors guaranteed high returns from safe, liquid investments, but instead spent their money on real estate and a pornography mail order business, the Securities and Exchange Commission announced today.
The SEC alleges that Philip G. Barry, 52, and his firms Leverage Group, Leverage Option Management Co. Inc., and North American Financial Services defrauded investors, including senior citizens and retirees, by selling securities in Leverage investment funds. According to the SEC's complaint, Barry provided fake account statements to investors that recorded growing account balances and concealed that Barry had not been trading securities at all for several years. Neither Barry nor any of his related firms is registered with the SEC in any capacity.
"Barry was an unscrupulous and unregulated investment manager who lured victims with false promises of investment safety, lofty performance, and liquidity," said George S. Canellos, director of the SEC's New York Regional Office. "While Barry guaranteed investors high returns and provided them with false account balances, he was secretly diverting the funds into unauthorized ventures and for his personal use."
From at least January 1978 to February 2009, Barry acted as an unregistered investment adviser and exercised sole trading authority and control over the Leverage investment funds, the SEC says.
The SEC alleges that Barry and his firms made numerous and varied misrepresentations to induce investors to invest in or to maintain their investments with the Leverage investment funds. For example, Barry falsely represented that he would use the investors' funds to trade in options or other securities, the SEC says. In addition, Barry falsely told investors that he would use a proven trading strategy to protect investors' principal and generate guaranteed returns of as much as 21% per year. Barry also misrepresented to some investors that their investments in Leverage would be protected from loss by privately obtained insurance and/or by the Securities Investors Protection Corporation (SIPC). Barry told investors that they could liquidate their investment at any time and withdraw their funds, after providing Leverage with a few weeks notice.
By approximately 1999, Barry had ceased investing any of his investors' funds in options or other securities, the SEC complaint says. Instead, the SEC alleges that Barry ran a Ponzi scheme in which he used incoming investor money to repay other existing investors and diverted the remaining investor funds for his own personal use. According to the commission's complaint, Barry spent the money by purchasing real estate in his own name and those of other entities he controlled, paying expenses of a separate mail order business that sold pornographic materials, and supporting his lifestyle.
Barry misappropriated millions to acquire interests in at least 60 different real estate ventures, including an office building in Brooklyn, New York and property located in Sullivan and St. Lawrence counties, N.Y., the SEC says. He also also transferred investor money into a bank account in the name of Barry Publications, a mail order business through which Barry sold pornographic materials, the SEC alleges. Barry used Leverage investor funds to purchase inventory for Barry Publications, and to pay telephone, postage, and certain other overhead expenses incurred by the company.
Without admitting or denying the allegations in the complaint, Barry, Leverage Group, Leverage Option Management Co. Inc and North American Financial Services agreed to settle the SEC's claims against them and consented to the entry of a judgment, subject to approval by the court, that enjoins them from future violations of the above provisions of the securities laws and orders them to pay disgorgement, prejudgment interest and a civil penalty, the amounts of which will be determined at a later date. Barry also has consented to the issuance of an SEC order barring him from association with an investment advisor.
Separately, the U.S. Attorney's Office for the Eastern District of New York today announced criminal charges against Barry for the same misconduct alleged in the SEC's complaint.