The SEC has filed an emergency enforcement action, obtained a temporary restraining order and has frozen the assets of three managers over an alleged fraudulent international trading program. The regulator said that the scheme put more than $125 million of investor funds at risk.
According to the SEC’s complaint, Michael Young, Michael Stewart, and Bryant Sewall, and their companies Mediatrix Capital, Blue Isle Markets Inc., and Blue Isle Markets Ltd., offered investments through managed account foreign exchange funds (MAFEF). Investor funds were pooled into these vehicles and traded according to an algorithmic trading strategy in foreign currency markets.
Mediatrix Capital, Young, Stewart, and Sewall solicited investors to invest in the MAFEF, which received its first investor in March of 2016.
Young, Stewart, and Sewall allegedly told investors that their trading strategy earned a profit every single year for five and half years, during which time they said it returned more than 1,600%. They also claimed that their trading strategy had allowed Mediatrix Capital to accumulate assets under management of $225 million by the end of 2018.
Instead, the fund consistently lost money, according to the SEC. Losses in 2018 alone topped $18 million. While the funds’ actual AUM hovered around $35.3 million.
“We allege that this scheme has resulted in tens of millions of dollars in investor losses, in part, to fund defendants’ luxurious lifestyle,” Kurt Gottschall, director of the SEC’s Denver regional office, said in a statement.
The complaint said that the three received approximately $125 million from MAFEF and fund investors into Blue Isle and the fund’s bank accounts. However, only $75 million of the $125 million was forwarded to the Blue Isle Brokerage Accounts.
“Defendants misappropriated over $35 million of investor monies for their own personal use, such as purchasing luxury properties and vehicles,” the complaint says. “Defendants further misappropriated an additional $5 million of investor monies to perpetuate the fraud by, among other things, paying certain fees to sales representatives that were only due in the event of profitable trading, which did not occur.”
The SEC also alleged that the three made Ponzi-like payments by using investor money to meet redemption requests by other investors in order to hide the fact that their trading had resulted in large losses.
The SEC also named 20 relief defendants, which it said was a result of Young, Stewart, and Sewall transferring millions of dollars of investors’ money to spouses, relatives, friends, and shell companies they owned or controlled.
The SEC is seeking permanent injunctions against each of the defendants, enjoining them from future violations of the securities laws, as well as disgorgement of all defendants’ and relief defendants’ ill-gotten gains.