First the Smart Money, then the Dumb Money, then the Dirty Money

As surely as night follows day, there is an order to every investment boom cycle.  As most people know, the Innovators are first, then the Imitators, then the idiots.

But there is a last step here that is an excellent tell, a sure sign that it’s time to move on from a given mania.  I call it the Dirty Money, which usually comes in right behind the dumb money like a wolf sidling up to a distracted herd of sheep.  Predators follow the food after all.

And so it comes as no surprise that we hear about the Dirty Money’s entrance into the world of social media startup investments.  The SEC just nailed one today, which is good to hear.  This is one of those schemes where a fake product (in this case a pretend hedge fund) is built that claims to have access to highflying private shares in Facebook and Twitter and all that jazz.  Except it doesn’t…

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SEC Halts Scam Touting Access to Pre-IPO Shares of Facebook and Groupon

FOR IMMEDIATE RELEASE
2011-245

Washington, D.C., Nov. 17, 2011 — The Securities and Exchange Commission today filed an emergency enforcement action to stop a fraudulent scheme targeting investors seeking coveted stock in Internet and technology companies like Facebook before they go public.



The SEC alleges that Florida resident John A. Mattera and several other individuals carried out the scam using a newly-minted hedge fund named The Praetorian Global Fund. They falsely claimed that the fund and affiliated Praetorian entities owned shares worth tens of millions of dollars in privately-held companies that were expected to soon hold an initial public offering (IPO) including Facebook, Groupon, and others. Taking advantage of investor interest in pre-IPO shares that are virtually impossible for company outsiders to obtain, Mattera and others solicited funds and gave investors a false sense of comfort that their money was protected by telling them that an escrow service was receiving their funds.

In reality, according to the SEC’s complaint filed in federal court in Manhattan, Mattera and his cohorts never owned the promised pre-IPO shares in these companies. The purported escrow service, headed by John R. Arnold of Florida, merely transferred investor funds to personal accounts controlled by Mattera and Arnold. After Arnold took a cut of the money for himself, Mattera stole most of the remaining funds to afford his lavish personal expenses and pay others for their roles in the scheme.

“By conjuring up a seemingly prestigious hedge fund and touting the safety of an escrow agent, these men exploited investors’ desire to get an inside track on a wave of hyped future IPOs,” said George S. Canellos, Director of the SEC’s New York Regional Office. “Even as investors believed their funds were sitting safely in escrow accounts, Mattera plundered those accounts to bankroll a lifestyle of private jets, luxury cars, and fine art.”

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Investors should know better – no one that really has access to shares of Facebook is simply giving them up to investors without a catch.  In this case, the catch was that the shares didn’t even exist in the first place.  Nice work by the SEC, with non-public vehicles like these, it’s not easy to catch them in the early stages before major damage is done.

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