Feds Say Ex-Stockbroker Used Fictitious CD Sales to Buy Florida Condo

On July 1, the U.S. Securities and Exchange Commission and the U.S. Attorney’s Office in Philadelphia filed civil and criminal charges, respectively, against Malcolm Segal, a former stockbroker accused of running a Ponzi scheme. These actions come after a November 2014 order by the Financial Industry Regulatory Authority which permanently barred Segal from working as a broker or associating with any securities dealer. Segal admitted no wrongdoing in the FINRA order, and as always, the current civil and criminal charges are simply accusations; Segal is innocent unless and until convicted in a court of law.

United States v. Segal/SEC v. Segal

Although Ponzi schemes often involve complicated-sounding (and fictitious) investments designed to confuse investors, Segal allegedly sold one of the most common financial products—certificates of deposit. CDs are a fixed-term deposit that pay a predetermined interest rate. Unlike stocks or other securities, CDs are insured by the Federal Deposit Insurance Corporation. This makes CDs a safe, if not necessarily high-yield investment. The typical two-year CD currently offers an interest rate around 1.2%.

But Segal allegedly offered investors CDs paying ten times as much. While working for a New York broker from 2011 through 2014, Segal allegedly told customers he was selling CDs paying annual interest rates of 12%. According to a federal grand jury indictment, Segal received $100,000 investments from several victims, which he was supposed to use to purchase these supposedly high-interest CDs. In fact, the grand jury said, he purchased no CDs at all, instead using investor funds “for personal expenses and to pay off other investors.” Altogether, the grand jury said Segal stole more than $1.8 million from investors using this scheme.

But this was apparently just a drop in the bucket. The SEC’s civil complaint detailed a $15.5 million scheme, of which $8.1 million came from the sale of non-existent CDs. During the early part of the alleged scheme, the SEC said Segal actually did purchase some CDs, but he redeemed them early without informing investors. The SEC said in 2009, Segal bought nearly $11.7 million in CDs—paying interest rates of no more than 2.75%—and titled them in the name of his firm, rather than investors. As the SEC explained, titling the CDs in this manner deprived individual investors of FDIC protections and allowed Segal to retain full control over the certificates.

The SEC also cited two investors Segal allegedly defrauded in 2010. The investors wired over $250,000 to an entity controlled by Segal, ostensibly to purchase short-term CDs. But instead of purchasing CDs, the SEC said Segal and his wife used the money to purchase a condominium in an exclusive gated community in Boynton Beach, Florida. Segal then allegedly sold more fictitious CDs to pay back the original investors and cover his tracks.

The SEC’s civil complaint, now pending before a federal court in Philadelphia, seeks unspecified civil penalties and disgorgement against Segal. The criminal indictment is a separate matter. The grand jury indicted Segal on six nine counts of mail fraud and wire fraud in connection with his alleged Ponzi scheme. He likely faces up to six years in prison if convicted on all charges.

Protecting Yourself from Ponzi Scammers

Investors should always be vigilant, even when purchasing “safe” investments like certificates of deposit. Beware anyone offering exorbitant interest rates on CDs, and make sure any certificates you do purchase exist and are properly titled. And if you have been the victim of a fictitious CD or similar scam, you should seek out independent legal advice from a qualified Florida securities fraud attorney. Contact Gregory Tendrich, P.A., today if you have any questions.