A federal jury in Charlotte has convicted certified public accountant Jonathan D Davey, 48, of Newark, Ohio, of four criminal charges relating to a hedge fund investment fraud conspiracy.
The federal indictment, returned in February 2012, charged Davey with serving as the “administrator” for numerous hedge funds for the Black Diamond Ponzi Scheme; with soliciting over USD11m from victims with his own hedge fund, “Divine Circulation Services”; and with tax evasion.
The charges arise from the Black Diamond investigation, which has brought criminal charges against 11 individuals and CommunityONE Bank, relating to conduct that deprived over 400 victims of more than USD40m.
According to evidence presented at trial, Davey lied to collect over USD11m from victims mainly in North Carolina, Virginia, and Ohio for his hedge fund by claiming, among other things, that he had done due diligence on Black Diamond and was operating a legitimate hedge fund with significant safeguards, when, in reality, neither claim was true. Then, as Black Diamond began to collapse, Davey and other hedge fund managers started a derivative Ponzi scheme using a so-called “cash account” that Davey controlled. Davey and his co-conspirators collected over USD5m from new victim investors for the cash account and used the new victim money to make Ponzi payments to old investors and themselves.
The evidence at trial showed that, as administrator for the scheme, Davey controlled most funds and wires for the scheme and published a website for victims that reflected false returns. At trial, the government showed that by the end of the scheme, the website reflected over USD120m in supposed value for victim-accounts when Davey and the hedge fund managers in reality had less than USD1m total in their accounts.
According to evidence presented at trial, Davey used an elaborate network of shell companies to evade taxes and commit money laundering with the proceeds of the Ponzi scheme. In particular, Davey used an offshore shell company in Belize to funnel money to build a mansion in Ohio, creating a sham “loan” by pretending that investors had “loaned” investment money to the Belizean shell company that was then used to build Davey’s personal mansion.
Other defendants convicted in this case are:
▪ Keith Franklin Simmons, 47, formerly of West Jefferson, North Carolina, was convicted following a jury trial of securities fraud, wire fraud, and money laundering. Simmons was sentenced to 50 years in prison on 23 May 2012.
▪ Bryan Keith Coats, 52, of Clayton, North Carolina, pleaded guilty on 24 October 2011 to conspiracy to commit securities fraud and money laundering conspiracy. Coats was sentenced to 15 years in prison on 16 November 2012.
▪ Deanna Ray Salazar, 55, of Yucca Valley, California, pleaded guilty on 7 December 2010 to conspiracy to commit securities fraud and tax evasion. Salazar was sentenced to 54 months in prison on 23 May 2012.
▪ Jeffrey M Muyres, 37, of Matthews, North Carolina, pleaded guilty on 17 May 2011 to conspiracy to commit securities fraud and money laundering conspiracy. Muyres was sentenced to 23 months in prison on 18 January 2012.
▪ Roy E Scarboro, 48, of Archdale, North Carolina, pleaded guilty on 3 December 2010 to securities fraud, money laundering, and making false statements to the FBI. Scarboro was sentenced to 26 months in prison on 4 May 2011.
▪ James D Jordan, 49, of El Paso, Texas, pleaded guilty on 14 September 2010 to conspiracy to commit securities fraud. Jordan was sentenced to 18 months in prison on June 29 2011.
▪ Stephen D Lacy, 53, of Pawleys Island, South Carolina, pleaded guilty on 9 December 2010 to conspiracy to commit securities fraud. Lacy was sentenced to six months in prison on 4 May 2011.
▪ Chad A Sloat, 34, of Kansas City, Missouri, pleaded guilty on 17 October 2012 to conspiracy to commit securities fraud and failure to file a tax return. Sloat is currently waiting to be sentenced.
▪ Jeffrey M Toft, 50, of Oviedo, Florida, pleaded guilty on 26 November 2012 to conspiracy to commit securities fraud, conspiracy to commit wire fraud, and conspiracy to commit money laundering. Toft is currently waiting to be sentenced.
▪ Michael J Murphy, 52, of Deep Haven, Minnesota, pleaded guilty on 22 January 2013 to conspiracy to commit securities fraud. Murphy is currently waiting to be sentenced.
On 27 April 2011, a criminal bill of information and a Deferred Prosecution Agreement were filed against CommunityONE Bank related to its failure to file a suspicious activity report (SAR) and maintain an effective anti-money laundering program. As court records show, Simmons was a customer of CommunityONE and used various accounts with the bank in furtherance of the Ponzi scheme. However, according to filed court documents, the bank did not file any suspicious activity reports on Simmons, despite the hundreds of suspicious transactions that took place in his accounts. The bank agreed to pay USD400,000 toward restitution to victims of the Ponzi scheme that operated through accounts maintained at the bank.
Davey was convicted of all charges following a 45-minute jury deliberation. He faces a statutory maximum sentence of five years in prison for count one (securities fraud conspiracy) and a USD250,000 fine, a maximum of 20 years in prison for count two (wire fraud conspiracy) and a USD250,000 fine, a maximum of 20 years in prison for count three (money laundering conspiracy) and a USD250,000 fine, and a maximum of five years in prison for count four (tax evasion) and a USD250,000 fine. Davey has been released on bond and a sentencing date has not been set yet.