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Hedge fund scam nets USD30m

Date: Sunday, September 9, 2007
Author: John Aidan Byrne, Washington Post

Federal agents are investigating a brazen group of New York scam artists who raised about $30 million from unsuspecting investors by posing as principals of a successful hedge fund and then fled with the loot, The Post has learned.

The five principals - who appeared to have received investments of $5,000 to more than $500,000 from about 50 investors, including a number of college professors and administrators and professionals with advanced degrees - worked out of a seventh floor office in downtown Manhattan, records show.

It took the group a little more than three years, from early 2003 September 2006 to raise the $30 million, according to interviews with persons familiar with the alleged scam. The group kept investors at ease by sending out phony statements showing flashy returns.

At least one investor, an 81-year-old retired aerospace engineer, forked over an initial investment of $5,000 after the group, which carried out the suspected boiler room fraud under the name A.R. Capital, cold-called him.

He later added to that investment, building up his account to as much as $700,000. It appears that it is now all lost. "We are angry," said that investor, Edward Bacon, of Las Cruces, N.M. He and his wife, Marty, had hoped one day to divide the money among their children and grandchildren.

"If we ever run across them I don't know what we'd do," Bacon said in a phone interview last week. "Fortunately, I don't carry a gun."

The offices of A. R. Capital are now empty; the phones disconnected. A phone number listed on the business card of one former senior account executive, Edward Veisman, which was obtained by The Post, was not in service.

A grand jury empaneled by Michael J. Garcia, the U.S. Attorney in Manhattan, is said to have handed up a sealed indictment in the case, according to a lawyer hired by 10 of the victims, who said that the FBI was investigating the matter. A spokeswoman for Garcia refused to comment. A spokesman for the FBI also refused to comment.

These stunned investors thought they were buying into the next big hot hedge fund strategy when fast-talking A.R. Capital executives cold-called them at home. One promotional prospectus put together by A.R. Capital and reviewed by The Post pitched the company's Global Fund and showed a 500 percent return over the 10 years ended in 2000.

Instead of fantastic returns, the apparent victims of the fraud are now left holding empty promises.

The limited partnership of A.R. Capital, which comprised a clique of smartly-dressed but sinister individuals, touted the A.R. Capital Global Fund for prowess in a bewildering array of investments. These included stock trading, real estate investments in Russia, OTC foreign currency transactions, fixed-income trading, options, foreign contracts and swaps.

And A.R. played a good but eyebrow-raising game, posting gargantuan returns that stretched the bounds of credulity. Bacon said his initial investment of some $5,000 in mid-2005 doubled to $10,000 by the end of that year - a 100 percent return in some six months.

"All their news was too good to be true," said Bacon, sadly. "The profits A.R. Capital posted were astounding and we didn't think it could ever last."

It didn't. Last year, fearing something was wrong, Bacon and his wife drove cross-country to meet with A.R. Capital executives. Over a pricey Chinese food dinner the executives were able to soothe Bacon's fears.

Weeks later, after driving back to New Mexico, Bacon called the executives only to find the phones disconnected and all the company's brass missing.

"When the phones went dead, I sure knew something was wrong," he said.

Robert S. Banks, Jr., attorney for Bacon and several other alleged victims, describes the case as "perhaps the saddest I have seen since the boiler room days of the 1980s and early 1990s."

"The crooks who ran this operation preyed on trusting, elderly people, who could ill-afford the loss of their life savings," he said. "The promoters knew they were going to steal all the money before they started their cold-blooded, cold-calling campaign."