Fund Manager Stein Sentenced to Nine Years for Fraud

Date: Thursday, February 11, 2010
Author: Patricia Hurtado, Bloomberg

New York hedge-fund manager Edward T. Stein was sentenced to nine years in prison for running a $46 million Ponzi scheme that preyed upon friends and acquaintances.

Stein pleaded guilty in June to four counts of securities fraud and one charge of wire fraud. He faced as long as 19 years and seven months in prison, according to a pre-sentencing report filed with the court.

U.S. District Judge Jack B. Weinstein in Brooklyn, New York, said today he would impose a shorter term because he found that the circumstances of the scheme put it outside the “heartland” of fraud cases. He said he didn’t believe Stein, 60, would commit the crime again because of his age.

“I do want to offer my sincere apologies,” Stein told Weinstein before the sentence was imposed. “I do regret the bad decisions I made.”

Stein added later, “Somewhere in the last 10 years I lost my sense of reality and as a result, everyone has suffered.”

Several of Stein’s victims spoke before sentencing, urging the judge to impose a long prison term.

“He has no conscience,” said Ann Kahn, an investor who said Stein repeatedly looked her in the eye and lied to her about the health of her funds. “His was an outrageous betrayal.”

‘Evil, Sly Fox’

Another victim, Adele Reshotnia, urged that Stein be jailed immediately, calling him “a money-hungry, evil, sly fox who preyed on seniors.”

Shelly Anderson said she had been widowed and had lost her job when she entrusted what was left of her life savings -- a retirement fund -- to Stein after he was recommended to her by a mutual friend. She said Stein had financially ruined her.

“I felt like a carcass in the desert with a vulture picking every piece of meat he could find,” she said. “He deserves to be away for a very, very long time.”

Brian Maas, a New York lawyer representing Stein, asked Weinstein to impose a reduced sentence, arguing his client had helped the government locate assets to help repay his victims.

Prosecutors and Stein’s lawyers agreed the fraud scheme, which Stein operated from 1998 to 2009, resulted in $46 million in losses.

“Ed acted out of a desperate need to make a bad situation right and not out of personal greed or predatory impulse,” Maas said in court papers. “Having dug himself an enormous hole, Stein tried to keep the ball in the air until a new business that he was building could generate revenues or create assets sufficient to pay off all of the investors.”

Stein’s Motives

Prosecutors disputed Stein’s motives, saying the fraud scheme only ended with his arrest last April.

The government cited a host of long prison terms imposed in other Ponzi scheme cases, including that of Bernard L. Madoff. A government-appointed receiver said he has only been able to locate $1.1 million in assets that will go toward repaying Stein’s victims.

“The government takes issue with the defendant’s assertion that the sole motivation for his misconduct was his desire to repay investors,” Assistant Brooklyn U.S. Attorney Scott Klugman wrote. “Only a sentence involving a significant term of imprisonment will send the appropriate message to others in the financial community that all Ponzi scheme operators, not just Madoff, will receive substantial punishment.”

SEC Complaint

The SEC, in a separate civil complaint filed in federal court in Manhattan, accused Stein, who controls Gemini Fund I hedge fund, DISP LLC and Prima Capital Management Corp., of moving millions of dollars from at least 83 investors through accounts he controlled.

Stein, who founded DISP, a firm investing in life- settlement policies, deceived clients since 1992 and resorted to stealing their assets, the SEC said in its lawsuit.

Without telling investors, Stein arranged for Gemini to make its main investment in Detour Media Group Inc., the fashion-magazine publisher that filed for bankruptcy in 2003, the SEC said. Since then, he has used money from new investors to pay returns to “selected” Gemini clients, the agency said. He also used investor funds to buy a $1 million condominium in Manhattan, the SEC said.

Stein also ran Prima Capital Management Corp. from his offices in Roslyn, New York. Another company, Prima Capital Management Inc. of Denver, said in a statement that it has “no affiliation in any way” with Stein, his hedge funds or DISP.

Personal Accounts

The initial criminal complaint against Stein alleged that he promised to invest customers’ money in annuities and instead used the money for other purposes, depositing some into personal accounts and bank accounts he controlled.

Stein was ordered by the judge to surrender within 30 days. His lawyer asked that Stein be allowed to serve his time in the federal prison camp in Butner, North Carolina, where Madoff is serving his 150-year term.

The regulatory case is SEC v. Stein, 09-cv-3125, U.S. District Court, Southern District of New York (Manhattan). The criminal case is U.S. v Stein, 09-CR-377, U.S. District Court, Eastern District of New York (Brooklyn).

To contact the reporter on this story: Patricia Hurtado in New York at +1-212-617-5766 or pathurtado@bloomberg.net

To contact the editor responsible for this story: David E. Rovella at +1-212-617-1092 or drovella@bloomberg.net.