A Philadelphia investment advisor who raised $105 million from investors by promising up to 30% returns through her hedge fund used "the vast majority" of the money for her own investments and to pay off prior investors, the Securities and Exchange Commission charged on Tuesday.
Brenda Smith, 60, and three companies she controlled defrauded 40 investors, according to a civil suit filed by the SEC. Smith also used new investors’ money to pay early investors, the SEC said.
In addition to facing SEC civil charges, Smith was arrested Tuesday and faces criminal charges filed by the U.S. Attorney's Office for the District of New Jersey. She is charged with four counts of wire fraud and one count of securities fraud.
Smith told investors she would invest their money in publicly traded securities through various trading strategies that she championed as providing consistently high returns, the SEC said. The complaint said Smith, and the companies she controls, gave out false statements touting positive returns. She also fabricated documents in an attempt to inflate her firms’ assets to lull her investors into believing their capital was safe, the complaint said.
The scheme, which started February 2016 and continued up until her arrest, cost investors $63 million in principal, the SEC said. To solicit and retain investors, Smith said her fund employed several profitable, sophisticated trading strategies involving highly liquid securities. She said her fund was uniquely positioned to pursue the strategies because of its access to the Philadelphia Stock Exchange trading floor. In reality, only a small fraction of the investors’ money was used for these strategies, the complaint said.
"An investment advisor serves in a position of trust, and has a fiduciary duty to speak truthfully to clients," said G. Jeffrey Boujoukos, regional director of the SEC's Philadelphia Regional Office. "We allege that Ms. Smith breached her clients' trust by misleading investors with false claims of how she invested their money and how those investments performed."
The complaint, filed in U.S. District Court in Newark, N.J., named Smith and the three entities she controlled, Broad Reach Capital, Broad Reach Partners and Bristol Advisors, all located in West Conshohocken, Pa., with violating the anti-fraud provisions of the federal securities laws.
The court granted the SEC's request for an asset freeze and temporary restraining order, the SEC said. The SEC complaint seeks disgorgement of ill-gotten gains and prejudgment interest, and civil penalties against the defendants.