Accused Ponzi schemer and St. Thomas and Illinois resident Daniel Spitzer was arrested Monday in Illinois on mail fraud charges and is being held pending a status hearing scheduled for Aug. 9.
The criminal complaint, filed by the U.S. Postal Inspector on behalf of the U.S. Government, alleges a massive Ponzi scheme in which Spitzer raised about $105 million from roughly 400 investors. Rather than invest the funds as investors were told in periodic mailed statements, Spitzer "used the vast majority – approximately $71 million – to make Ponzi payments to keep his scheme afloat," U.S. Postal Service Inspector Natalie Reda writes in the complaint.
The criminal complaint largely mirrors allegations made in a civil complaint filed June 17 by the U.S. Securities and Exchange Commission, but offers up different details, aimed at showing how the U.S. Postal System was used to further fraud.
One of the central companies in the case is Kenzie Financial Management, a V.I corporation, with offices in St. Thomas. Spitzer is the sole shareholder and principal of Kenzie Financial, according to the SEC. The corporation purportedly acted as the trading manager for 11 of the 12 bogus investment funds that Spitzer also controls. Until very recently, Kenzie Financial was a beneficiary of V.I. Economic Development Commission tax breaks. The EDC was already in the midst of a compliance review of Kenzie Financial when the SEC case broke "and was in the process of terminating EDC benefits for the company," Percival Clouden, CEO of the V.I. Economic Development Authority said in a statement on July 1.
The landlord of Kenzie’s St. Thomas office told the U.S. Postal Inspection Service the office was vacated around May 28, according to the complaint. Kenzie’s Clearwater, Fla. office was shut down on June 30.
The complaint details what happened to several individual investors, gives several case studies of what happened, how they invested their money, their efforts to get documentation for how it was invested and their ultimate inability to get their money back.
The broader alleged criminal conspiracy is a massive Ponzi scheme, in which faked periodic statements and Schedule K-1 forms lead investors to believe they were making money but when investors cashed out, "Spitzer either used funds raised from other, newer investors, to pay off these redemptions ("Ponzi payments") or was unable to pay," Reda wrote in the complaint.
As part of the evidence the complaint cites June 2009 Kenzie Funds balance sheets claiming $249 million under management. "In reality, the SEC’s analysis shows that, as of June 2009, the Kenzie Funds only collectively had ($4.1 million) in their bank accounts," Reda said.
Ultimately, the criminal charge is specifically that Spitzer committed federal mail fraud for using the U.S. mail to deliver a faked quarterly statement to "Investor C" in Riverwoods, Ill., claiming a fund balance of just over $300,000. "Investor C" invested $250,000 in 2007 and tried to cash out the investment, but, after many phone calls and letter, has received one check for $58,000 to date.
If found guilty, Spitzer faces a maximum of 30 years in prison.
