Advance Fee Scheme Promoter Gets 14 Years in Prison for Fraud

A promoter of a so-called “advance fee scheme” has been sentenced to 14 years in prison for his part in an investment fraud scam that cheated investors out of approximately $5.7 million.

According to an unsealed indictment, James Leonard Smith of Virginia was part of an advance fee scheme through purported investment company Chimera Group, which was based in the UK. Advance fee schemes typically involve promoters who promise to pay a sum of money at a later date in exchange for an upfront advance payment. The object is to entice individuals and businesses that are unable to raise money through conventional financing into giving money by promising large payouts that will solve their financial problems.

Promoters of this kind of scheme often use fabricated bank documents, such as a fraudulent standby letter of credit, which is offered to victims to obtain large sums of money. The scammers usually promise clients will receive hundreds of thousands or millions of dollars in exchange for the deposit of a fraction of that amount. Schemers might also use a fraudulent blocked funds letter, which indicates that an amount of money equal to the amount of money sought from the victim has been set aside, or “blocked,” in a bank account to give the false assurance that their principal payment is being protected.

Both the standby letter of credit and the blocked funds letter are often printed on letterhead that appears to come from a large, reputable international financial institution; however, the letters are fabricated and are not actually issued by the financial institution. According to the indictment, Smith helped fabricate these documents in this scheme.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

The indictment, which was filed in the Eastern District of Virginia, also said Smith and his co-conspirators advised businesses to temporarily loan money to Chimera, or its parent company Ion, at a high interest rate to prove their own creditworthiness and that they would not be completely reliant on Chimera or Ion for capital. And to create the illusion that the loans would lead to more substantial capital investments in the companies, they also allegedly provided the businesses with agreements under which Chimera or Ion would receive an ownership stake in the firms in exchange for providing capital.

Court documents show escrow attorneys were also in on the scam to give victims the impression that their money would remain secure. California-based escrow attorney Stuart Jay Anderson was sentenced to four years in prison last year for his involvement in the scheme. Co-defendant James Michael Johnson, 70, also of Virginia, was sentenced to more than eight years in prison in March.

Investment Firm CEO Gets 5 Years in Prison for Securities Fraud

PE Firm Founder Pleads Guilty to $58 Million Manhattan Real Estate Fraud

Tags: advance fee scheme, Brian Michael Bridge, Chimera Group, Fraud, Ion International Holdings, James Leonard Smith, James Michael Johnson

Mmmmmm, not so good. The median investment return for endowments and foundations fell nearly 3 percentage points below the hurdle rate, the minimum level these institutions need, for the five-year period ending mid-2020. That’s according to a survey of these institutions by the National Association of College and University Business Officers (NACUBO) and Nuveen.

The gap between what these institutions had to reap and what they actually did—7.9% versus 5%—is disconcerting at a time when investment headwinds appear to be growing, what with increasing inflation expectations, likely rising interest rates, and new pandemic-related spending pressures. What’s more, for the institutions’ top decile (the top-performing tenth of the group), the median five-year annualized return was only 6.6.%. Stanford University and Princeton University, for instance, each returned 5.6% in 2020.

The report broke down the institutions’ needs this way: They require on average, 4.7% to cover spending, 2.3% to meet long-term inflation expectations, and 0.9% for fees and expenses. “This is meaningfully higher,” the report stated, “than the 7.5% that is commonly cited as the typical hurdle rate for endowments.”

What can the endowments and foundations do about this sorry state of affairs? The report had four ideas: 1) take more risk; 2) be more efficient in deploying risk by focusing on risk-factor exposure rather than asset allocation; 3) remove constraints such as limits on liquidity and leverage; 4) be more dynamic in asset allocation. A fifth idea it listed, lowering return expectations, won’t fly in many places because the institutions need more money, the study noted.

For more stories like this, sign up for the CIO Alert newsletter. 

The study suggested allocating to emerging markets (EM) equity, mainly in Asia due to the region’s growing tech industry. Plus, EM debt in South America, which is commodity-centric and cyclical, might make sense, it observed. One can find high yields there, although some of the governments (such as Argentina’s), are perennially in trouble. Developed markets—excluding the US, whose stock market already has had a great run—are due to catch up, owing to their high rates of vaccinations, the study contended. This means Europe and Japan.

Active management is a big help, the report added, as long as institutions choose managers that offer value and diversification. The trap is that too seldom do asset allocators take into account how the various outside managers complement or counteract each other.

Further, the report documents that many asset classes no longer deliver what they have historically—which leaves allocators with outmoded data to model their portfolios. US bonds, for instance, over the past quarter century had just a 4% probability of running a negative return. But the long decline in interest rates, which juiced prices, has petered out. Looking at data from the past five years as a guide for future planning, the probability of a negative return for bonds in the future has exploded to 61%, the study figured.

The report said that a risk factors-first approach “helps you see that not every asset class’s drift from the desired exposure has an equal impact on the total portfolio’s tracking error risk.” For example: Say a portfolio’s short-duration bond allocation drifts down 5% and its cash allocation moves up 5%; the movements would have very little influence on its risk exposure. On the other hand, should the same bond allocation descend 5% and the energy allocation rise 5%, the impact on risk would be far greater, in light of energy’s longstanding volatility.

This survey, performed in 2020, is based on the responses of 705 institutions, which have a collective $637.7 billion in assets, including 191 that each have at least $500 million.