Enforcement News: SEC Brings Fraud Charges Against Co-Founder of IIG For Role In A $60 Million Ponzi-Like Scheme

• Posted on: Jul 20 2020

Risk. Every investment decision carries with it some degree of risk. The greater the risk, the greater the reward. Of course, the flip side is also true. The greater the risk, the greater the potential to lose some or all of the money invested. Thus, when it comes to investing, there is no such thing as a sure thing.

Notwithstanding, there are people who promise no risk, no loss investing. They claim that they can place a person’s money into a “can’t miss” investment, where the risk of loss is minimal, if not non-existent, and the returns are above market. Sounds too good to be true. Not for the Ponzi scheme organizer.

What is a Ponzi Scheme?

“A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. With little or no legitimate earnings, Ponzi schemes require a constant flow of money from new investors to continue. Ponzi schemes inevitably collapse, most often when it becomes difficult to recruit new investors or when a large number of investors ask for their funds to be returned.” See https://www.sec.gov/spotlight/enf-actions-ponzi.shtml.

Shutting down Ponzi schemes and holding the organizers accountable for such frauds is an important part of the SEC’s enforcement mission. Recently, the SEC announced action it had taken against an alleged Ponzi-like scheme organizer responsible for bilking investors out of $60 million.

The SEC Files Charges Against Chief Investment Officer Behind a $60 Million Ponzi-Like Scheme

On July 17, 2020, the Securities and Exchange Commission (“SEC” or “Commission”) announced that it charged David Hu (“Hu”), the co-founder and chief investment officer of Manhattan-based International Investment Group LLC (“IIG”), with fraud for his role in a $60 million Ponzi-like scheme.

In its complaint, the SEC alleged that, from October 2013, Hu orchestrated multiple frauds on IIG’s investment advisory clients (here). According to the SEC, Hu grossly overvalued the assets in IIG’s flagship hedge fund, resulting in the fund paying inflated fees to IIG. In addition, through IIG, Hu allegedly sold at least $60 million in fake trade finance loans to other investors and used the proceeds to pay the redemption requests of earlier investors and other liabilities – a classic form of a Ponzi scheme. The SEC alleged that Hu deceived IIG clients into purchasing these loans by directing others at IIG to create and provide to the clients fake loan documentation to substantiate the non-existent loans, including fake promissory notes and a forged credit agreement.

“As alleged, Hu’s deception caused substantial losses to a retail mutual fund, and other funds IIG advised,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office. “The SEC remains committed to holding accountable individual wrongdoers who seek to take advantage of investors for personal gain, including when they employ elaborate means to cover up their fraud.”

The SEC’s complaint, filed in the United States District Court of the Southern District of New York, charged Hu with violating the antifraud provisions of the federal securities laws. The SEC is seeking permanent injunctive relief, disgorgement, and civil penalties.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Hu (here). The Government alleged that, over a period of more than 10 years, HU perpetrated an over $100 million scheme to defraud investors in IIG’s funds, including by creating fictitious investments and overvaluing investments used to generate funds to pay off earlier investors in a Ponzi-like manner. Hu was charged with investment adviser fraud, securities fraud, and wire fraud. A copy of the Information can be found here.

Acting Manhattan U.S. Attorney Audrey Strauss said: “As alleged, David Hu directed a multimillion-dollar, years-long scheme to defraud investors.  Putting profit ahead of his fiduciary duties, Hu allegedly mismarked millions of dollars of loan assets to cover up millions in losses. Hu also created fake entities and loans, and falsified paperwork to deceive auditors and avoid detection.  Now David Hu stands charged with federal crimes and faces time in federal prison.”

The SEC previously charged IIG with fraud on November 21, 2019, and revoked IIG’s registration as an investment adviser on November 26, 2019 (here).  On March 30, 2020, the SEC obtained a final judgment (here) on consent that enjoined IIG from violating the antifraud provisions of the federal securities laws and required IIG to pay more than $35 million in disgorgement and prejudgment interest.