I think many frauds start with a failure to recognize mistakes. Yes, it’s hard to tell your investors that you lost some of their money. It makes it harder to attract new investors and additional investments. It gets really hard to do that when you go to jail.
Martin Silver was the co-founder, managing partner, and chief operating officer of the International Advisory Group LLC. The firm was an investment adviser that specialized in trade finance lending—risky loans to small- and medium-sized companies in emerging markets. The firm also sponsored three private funds to invest in the trade finance loans.
One of the funds had assets of about $300 million. The firm learned that a South American coffee producer had defaulted on a $30 million loan. Fearing that existing investors would flee the fund and that ongoing fundraising efforts would suffer if the loss were disclosed, Silver decided to conceal the loss by incorrectly valuing the loan on the fund’s books. Later, he replaced the defaulted the loan with fake loans to prop up the value of the fund after auditor inquiries.
Then, a second loan in the fund’s portfolio defaulted. Silver continued his actions of not writing down the value of the loan and eventually replacing it with fake loans.
Eventually, faced with liquidity demands for redemptions, Silver formed the second and third funds to buy the fake loans from the initial fund. Eventually, the schemes collapsed and charges were brought.
Of course the scheme collapsed. You can never find the out-sized returns to make up for the big loss.
Mr. Silver pled guilty to one count of conspiracy to commit investment adviser fraud, securities fraud, and wire fraud, which carries a maximum sentence of five years in prison; one count of securities fraud, which carries a maximum sentence of 20 years in prison, and one count of wire fraud, which carries a maximum sentence of 20 years in prison.
Sources:
- Action by the Securities and Exchange Commission: https://www.sec.gov/litigation/litreleases/2021/lr25070.htm
- Action by the US Attorney in the Southern District of NY: https://www.justice.gov/usao-sdny/pr/second-managing-partner-investment-advisory-firm-pleads-guilty-defrauding-clients-and