On September 3, 2013, the SEC announced that it had charged a purported money manager in New York with conducting a free-riding scheme to defraud three brokerage firms, and then bilking several investors out of nearly a half-million dollars that he stole to fund his luxurious lifestyle that included a Bentley automobile, summers in the Hamptons, and casino junkets.

The SEC alleged that Ronald Feldstein caused more than $2 million in losses for the brokerage firms that he victimized in the free-riding scheme.  Free-riding occurs when customers buy or sell securities in their brokerage accounts without having the money or shares to actually pay for them.  Feldstein opened three separate brokerage accounts in the names of two investment funds that he created.  He allegedly had no intention to pay for the stocks that he purchased if they resulted in big losses.  Feldstein planned to walk away from any transactions where the price declined substantially after the trade date, and planned to use sales proceeds to pay for the purchases if the price of a stock increased.

The SEC further alleged that Feldstein later began soliciting investments by targeting owners of businesses that he had frequented for decades, including a dry cleaner and a car leasing and servicing company.  Feldstein convinced them to provide funds for him to invest on their behalf, promising such profitable opportunities as a successful hedge fund, a promising penny stock, and an initial public offering (IPO) of a fashion company.  However, Feldstein allegedly never invested this money, instead converting it for his personal use without their knowledge.

According to the SEC’s complaint, Feldstein and the two purported investment funds – Mara Capital Management LLC and Vita Health of America LLC – traded through a type of account that brokerage firms offer to customers with the understanding that the customer has sufficient assets held with a third-party custodial bank to cover the cost of the trades.  Feldstein and the funds never disclosed to three broker-dealers that they were simply gambling with the brokerage firms’ money.  Their plan was to refuse to issue instructions to settle the trades, and stick the broker-dealers with the unprofitable positions.  The free-riding scheme allegedly began in September 2008 and continued until February 2009.

The SEC alleged that Feldstein shifted his fraudulent conduct to individual investors later in 2009.  He induced investors to give him money they typically had saved for their retirement or their children’s education.  Feldstein raised approximately $450,000 based on such false investment promises as a hedge fund that he described as substantial and successful, a penny stock issuer that Feldstein described as the next AT&T/Verizon of the rural Midwest, and the IPO of a purported fashion company.  The investor funds were typically deposited into Feldstein’s personal bank account or the bank account of an entity that he owned so he could spend their money on his personal expenses.

The SEC’s complaint charged Feldstein, Mara Capital, and Vita Health of America with committing violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Feldstein also is charged with violations of Section 17(a) of the Securities Act of 1933. Trademore Capital Management LLC is charged as a relief defendant.  It was unclear from the SEC announcement whether customers have initiated FINRA arbitrations, or any other type of securities arbitration.