(Bloomberg News) A money manager from Brooklyn, N.Y., ran a 30-year Ponzi scheme that defrauded hundreds of investors, a federal prosecutor told jurors at the start of his securities-fraud trial.
Philip Barry, 53, a resident of the Bay Ridge section of Brooklyn, began accepting money in 1978 from investors, guaranteeing fictional annual profits, according to prosecutors in the office of U.S. Attorney Loretta Lynch in Brooklyn. Instead, he used new investors' money to pay earlier ones, prosecutors said.
"This is a case about a con man," Assistant U.S. Attorney Jeffrey A. Goldberg told jurors in his opening statement. "Philip Barry repeatedly lied to his clients to get their money and now their money is gone."
In a separate action, the U.S. Securities and Exchange Commission said Barry diverted some of the investor money to a mail-order pornography business. On Sept. 7, Barry sued the SEC for libel over the accusation. He has run Barry Publications for 30 years, selling "vinyl LP records, music cassette tapes, compact discs and DVDs," he said.
"'Your house will always go up in value,'" Michael Weil, a lawyer for Barry, told jurors in his opening statement. "Philip Barry bought into that same myth, that you can't lose money in real estate."
Bond Trader
The first witness, Frank J. Monteleone, 47, a bond trader at Cantor Fitzgerald LP in Memphis, Tenn., who grew up in Bay Ridge, told jurors he gave Barry $100,000 to invest and Barry refused to return any money.
Barry was charged in September 2009 and later indicted for securities fraud and mail fraud. If convicted of the securities fraud, he faces as much as 20 years in prison. He is free on $500,000 bail.
Barry, who worked out of a Bay Ridge storefront, is accused of luring more than 800 investors into his Leverage Group, which claimed to be investing in stock options. His reported ending balance of more than $45 million far exceeded assets actually held, producing "substantial losses" for many investors, according to prosecutors.
Each December, Barry would figure a "guaranteed" rate of return for the following year, ranging from 12.55% to 16%, prosecutors said. When investors tried to withdraw money from their accounts, checks would often be returned due to insufficient funds or, in some cases, Barry ignored their requests altogether, prosecutors said.
'Possibilities' Document
U.S. District Judge Raymond J. Dearie, presiding over the criminal trial, ruled that jurors can see a document called "Possibilities" in which Barry wrote that he was running a Ponzi scheme.
He tried to keep the document out of the case, arguing he wrote it to gather his thoughts for investors who were beginning to sue him. He mistakenly handed it over to prosecutors, he said.
In August 2008, Barry went to federal prosecutors and told them he was invested only in land rather than options and that he couldn't get approvals to develop the land, according to court papers. He also admitted he used money from new investors to pay off old ones, according to prosecutors.
Dearie said Barry can't call to the witness stand a Monticello, New York, real-estate broker to testify as an expert that Barry's properties in Sullivan County, New York, about 100 miles north of Manhattan, would be worth $160 million if developed, showing he had no intent to defraud, according to court papers.
Developed Land
At a Nov. 3 pre-trial hearing, the broker, William Rieber, testified that the developed land would be worth about $225 million.
Prosecutors say Barry bought the land for himself. The properties were auctioned off for $6.6 million in 2009, after he declared bankruptcy the previous year, according to the government.
In February 2009, after the scheme unraveled, Barry told his investors that the Leverage Group only held real estate, and not enough to cover account balances, according to prosecutors.
Barry also used investor money for personal expenses, including at home-improvement stores, restaurants and gas stations, the SEC said.
The criminal case is U.S. v. Barry, 09-cr-0833, the SEC case is Securities and Exchange Commission v. Barry, 09-cv-3860, and Barry's suit against the SEC is Barry v. United States Securities and Exchange Commission, 10-cv-4071, U.S. District Court, Eastern District of New York (Brooklyn).