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Message Ponzi Schemes

John Collins1/19/2013 9:58:00 PMIsaac Ovid knew he had messed up. Bad.

The 24-year-old day-trading enthusiast and church minister had been entrusted with investing nearly $10 million of his parishioners' money in the spring of 2005. He soon lost or spent nearly all of it, and then compounded his errors by starting a Ponzi scheme, raising $3 million in new money, some of which was used to partially repay initial investors before he lost a pile of the rest. Devastated, in November 2005, he appeared before the congregation, the Local Christian Assembly in Queens, and begged for forgiveness.
A few weeks later, Mr. Ovid turned himself in to the Securities and Exchange Commission and the U.S. Justice Department.
"It was scary to go that route, but Isaac accepted responsibility and wanted to confess," recalls his lawyer, Brian King. "I thought, 'Are we really going to do this?' "
Over several meetings with federal authorities through January 2006, Mr. Ovid "confess[ed] his wrongdoing," states a court document. That wrongdoing entailed cheating about 70 church members and their families—including the founding minister, who lost his life savings.
But rather than arresting and charging Mr. Ovid, the feds let him go free, according to a recent review of his case file by Crain's. Mr. Ovid returned to his native Trinidad, where he enrolled in an M.B.A. program and got a job at a construction management firm.
It wasn't until three years later—while on a business trip to Florida in March 2009—that Mr. Ovid was arrested. This time, the government threw its full weight at him. The U.S. Attorney's Office in Brooklyn charged him and four associates with three counts of fraud and conspiracy, and the SEC filed a lawsuit.
It can take time for prosecutors or the SEC to file charges in an investment fraud because they're chronically short-staffed and the criminal details can be complex. But in Mr. Ovid's case, he had offered full details of his crimes, raising a big question: What took the feds so long?
"It's hard to explain why the government would wait three years to charge someone who confessed to a $10 million fraud and why that person was allowed to leave the country," says Robert Mintz, a partner at McCarter & English and a former federal prosecutor. "In my experience, $10 million is certainly significant enough to pursue a case."
The prosecutors who brought the case declined to comment. Linda Chatman Thomsen, the SEC enforcement director when Mr. Ovid confessed, didn't return repeated calls, nor did Mark Schonfeld, who headed the SEC's New York office when Mr. Ovid came forward.
The SEC said in a statement: "As a general matter, numerous factors determine the timing of enforcement actions, including the number of potential defendants, the number of agencies conducting investigations, and whether assets are further at risk or financial recoveries are likely."
One unstated factor that may have played a role in Mr. Ovid's delayed arrest: the egg on government officials' faces after the Bernie Madoff case burst forth in late 2008.
Humiliated by their failure to detect the decades-long investment fraud, officials pledged to crack down on similar cases with particular rigor. In an August 2009 speech to the New York City Bar Association, SEC Director of Enforcement Robert Khuzami stated, "In recent months, Ponzi schemes have become an even higher priority."
Last year, the SEC brought 60 such cases, double 2008's figure, and it's on pace for an equally busy 2010.

"Surely the day is coming"
The community on which Mr. Ovid preyed, the Local Christian Assembly in posh Forest Hills, draws several-hundred congregants each week, some from as far away as Pennsylvania. The church's website says its members are devoted to a portion of the Book of Malachi that reads: "Surely the day is coming; it will burn like a furnace. All the arrogant and every evildoer will be stubble, and that day that is coming will set them on fire."
Mr. Ovid moved to New York and joined the church, where his father was a minister, after graduating from the University of the West Indies in 2002 with a bachelor's degree in management. At the church, young Mr. Ovid preached, played guitar and edited the newsletter.
He also took courses with Pristine Capital Management, a White Plains firm that teaches investors to divine market movements by using charts and darting into and out of stocks. He began day-trading to help support himself, and by 2004 he was managing $445,000 of his own and his friends' money.
Word got around church members that an investing savant was in their midst. "People in the church thought he was the chosen one," says lawyer Mr. King, "when all he'd done was gotten lucky day-trading."
Later that year, Mr. Ovid joined with the son of church founder Joseph Coleman and three others to launch a hedge fund called Logos Multi-Strategy I and began soliciting parishioners, promising fantastic returns of as much as 75%. The Rev. Coleman even held a prayer service to drum up publicity. By the spring of 2005, congregants had invested $9.5 million in Mr. Ovid's fund.
Mr. Ovid and his colleagues hoped the money represented the start of a new business and quickly began spending it to look the part of high-flying hedge fund managers. They used $1.6 million to renovate and furnish their office in Uniondale, L.I. Mr. Ovid and a partner even spent $200,000 of parishioner money on a Bentley Motors automobile.

Out of luck
Lag between Isaac Ovid's confession (2006) and delayed arrest
Unfortunately, Mr. Ovid's day-trading luck abandoned him, and he lost $2 million within weeks of raising the money. He ordered that the news be concealed, and potential customers were told he was up 15% for the year. Another investor was located in Panama, who was willing to pour $3 million into a new hedge fund. Some of that new money was used to help church members partially recoup their losses
"It sounds like a classic sort of Ponzi scheme," observes Mr. Mintz, the former prosecutor.
But the new funds didn't save Mr. Ovid. In August 2005, he suffered losses yet again. By October, all but $166,000 raised from parishioners was gone.
The next month, Mr. Ovid came before the congregation seeking forgiveness. Then he turned himself in to the government—to no avail.
Nearly five years later, he sits in a cell in the Metropolitan Detention Center in Brooklyn after pleading guilty earlier this year to one count of conspiracy. He is 29 now, waiting to begin a five-year sentence in a New Jersey federal prison, after which he is to be deported. Four hedge fund colleagues have also pleaded guilty.
Calls to the church weren't returned, and several victims of the fraud declined to comment when reached. Mr. King observes that the feds capped Mr. Ovid's sentence at five years, rather than the 19 for which he was eligible, suggesting that they recognized his client's cooperation and accepted that he didn't intend to cheat clients.
"Isaac has suffered and pained over this mistake," his mother wrote to the court this year. "He now has to come to terms with the ... consequences that lay ahead."