Arrests Made As ‘Bizarre’ Calif. Ponzi Scheme Unravels

Mar 24 2009 | 2:00am ET

Yet another hedge fund manager has been arrested and charged with running a Ponzi scheme.

Anthony Vassallo, of the prison town of Folson, Calif., turned himself in to authorities last week and was ordered detained. He has been charged with a bizarre scam that, in addition to the Ponzi element, also includes allegations of an armed shakedown.

According to prosecutors, Vassallo’s Equity Investment Management and Trading promised investors 36% returns with next to no risk. At least initially, he invested the money, although the complaint alleges that he lied to investors about the risks he was taking and put the money into high-risk assets. Prosectors say he lost most of that money by September 2007, and at that point turned Equity Investment into a Ponzi scheme. And as that scheme began to unravel, acting U.S. Attorney Lawrence Brown in Sacramento, Calif., said “bizarre efforts were made to recover at least some of those funds.”

Vassallo has been charged with fraud, money laundering and securities law violations. He faces as much as 30 years in prison. But, according to authorities, he did not act alone.

The 29-year-old hedge fund manager’s former bodyguard has also been arrested, charged in the same criminal complaint with conspiracy, impersonating a federal agent and attempted extortion. Prosecutors allege that Michael Sanders and at least four others attempted to shake down a pair of businessmen who had invested with Vassallo earlier this month. According to the businessmen, the five said they were from the Federal Bureau of Investigation, Securities and Exchange Commission and attorney general’s office—and wore badges and bulletproof vests, and carried handcuffs and guns—and demanded that the two men wire $378,000 to a credit union by noon the next day.

Vassallo is not charged in the alleged armed extortion attempt.

The SEC has also gotten into the action, charging Vassallo and Equity Investment vice president Kenneth Kenitzer with fraud. According to the agency, which shut the firm down last week, Utah regulators ordered Vassallo and his firm to put a stop to their unregistered trading business in 2005.

The SEC has frozen $1.2 million of Vassallo’s assets. He is accused of stealing at least some of the money he raised from investors to fund a lavish lifestyle, and bought, among other things, a $103,000 Lexus for his wife.

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