An investment fund manager was sentenced today to 109 months in prison for orchestrating a $100 million securities fraud scheme.
Brenda Smith, 61, of Philadelphia, previously pleaded guilty by videoconference before U.S. District Judge Madeline Cox Arleo to Count Seven of an indictment charging her with securities fraud.
Arleo imposed the sentence today in Newark federal court.
According to U.S. Attorney Philip R. Sellinger, documents filed in this case and statements made in court, Smith managed and controlled Broad Reach Capital LP, a pooled investment fund/hedge fund that was established in February 2016 and was open to accredited investors with a minimum investment of $1 million.
From February 2016 through August 2019, Smith orchestrated a scheme in which she made misrepresentations to investors and promised that she would invest their funds in particular trading strategies that Broad Reach Capital was allegedly optimally situated to execute.
Smith referred to these strategies as dividend capture, VIX Convergence, and opportunistic trading.
Smith misrepresented the success and performance of Broad Reach Capital to investors and prospective investors. She touted Broad Reach Capital as a trade-focused investment fund that was highly liquid and employed a robust risk management program.
Smith distributed written materials about Broad Reach Capital to investors and prospective investors that included purported historical performance information, such as claimed annual returns of over 33 percent in 2017 and positive monthly returns in 2018.
In fact, the total cash and securities in the Broad Reach Capital bank and brokerage accounts decreased from approximately December 2016 through June 2019.
For example, the written materials claimed that Broad Reach Capital had a 1.76 percent return in February 2018 when in reality, Broad Reach Capital’s brokerage accounts lost approximately 50 percent of their value.
To lull investors and induce them to continue investing, Smith provided monthly account statements to investors that falsely showed that their investments were safe and earning significant returns.
Smith also falsely represented that she was personally invested in Broad Reach Capital and provided a fictitious account statement to at least one investor.
Over the course of the scheme, Smith collected more than $100 million of cash into Broad Reach Capital from approximately 40 investors.
At its peak, however, the value of cash and securities in the Broad Reach Capital bank and brokerage accounts did not exceed approximately $32 million.
Instead of investing the money as she promised, Smith transferred tens of millions of dollars out of Broad Reach Capital to entities she controlled for purposes inconsistent with the trading strategies, including more than approximately $10 million for mineral mining operations and approximately $2 million for American Express credit card bills.
When investors requested redemption of their investments, Smith diverted other investors’ funds to pay the requested redemption amounts.
In addition to the prison term, Judge Arleo sentenced Smith to three years of supervised release and ordered her to pay restitution of $47.2 million.
The U.S. Securities and Exchange Commission (SEC) Philadelphia Regional Office previously filed a civil complaint against Smith based on the same conduct.