Of everything the Securities and Exchange Commission is asked to do, the most unfair is investor education. No matter how many times some rich guy convinces his rich friends that he'll make them richer with unspecified investments in a shady vehicle whose primary point of contact is his own personal email address, and no matter how many times this whole thing turns out to be a two-bit Ponzi scheme, there will still be more such cases. Adam Smith talked about mankind's propensity to truck and barter. There should probably be a third category for pissing away with other people's money.
Anyway, there are probably a whole lot of angry phone calls going around right now in Westchester. For the last seven years, Michael Scronic has been soliciting funds from friends and family for investment in his hedge fund Scronic Macro. Since 2010, he attracted nearly $22 million from 42 neighbors and acquaintances. In the intervening years, Scronic evidently bent over backwards to lose every penny he attracted to his hedge fund – which, it turns out, was actually just a personal brokerage account. Here's how he did, according to federal prosecutors:
During the period of January 2015 through July 2017, approximately $10.4 million was deposited to Scronic's brokerage account and $2.2 million was withdrawn, in large part in transfers to Scronic's personal bank accounts. As of the end of July 2017, the brokerage account had under $6,000 in assets.
The $8 million that he didn't withdraw for personal use was surrendered to the faceless markets. Of the $21 million he attracted since April, 2010, Scronic's accounts show withdrawals of $2.9 million – pretty modest, all things considered – and investment losses of $15.8 million, per the SEC. How did he do it? From the criminal complaint:
About half of the investment losses were attributable to equity or index options, and the other half were attributable to options on futures contracts.
Scronic got away with it for so long because he was allegedly running a Ponzi. New investors in, old redemptions out, until there was nothing left. It didn't help that Scronic Macro Fund boasted a particularly attractive redemption policy. Per an email to an investor quoted by the SEC:
what's cool about my fund is that i'm [sic] only in publicly traded options and cash so any redemptions are met within 2 business days so if you do need to withdraw for your business needs it will be quick and painless.
When this particular investor did try to redeem the $200,000 he'd handed over out of SMF, Scronic hemmed and hawed, the SEC says. It turned out he only had $27,376 in the bank.
What's really remarkable about this otherwise routine ponzi scheme is just how staggering Scronic's losses were. Though the charging documents don't go into detail about the types of options responsible for SMF's catastrophic failure, they do characterize Scronic's communications with investors:
Scronic attempted to convey macroeconomic and global trends to his investors using complicated vocabulary in an attempt to demonstrate his mastery of the markets and investment acumen.
Since this basically describes the investor communications of every macro fund in existence, there's not much we can infer here. But someone ought to figure out what this guy was doing and market it in reverse, the Scronic Fade Fund. It's hard to imagine losing that much money if you tried! Obviously with futures options there is the potential of losing far more than you would with vanilla assets, but Scronic still racked up an impressive record. Once they get over their losses, his Westchester neighbors ought to be at least a little impressed.