Three former hedge fund managers were sentenced to federal prison for their role in a $40 million Ponzi scheme that was previously characterized by a U.S. District Judge as the "the worst financial crime in this district in memory." Jeffrey M. Toft, 51, of Sioux Fall, S.D., Chad A. Sloat, 36, of Kansas City, Mo., and Michael J. Murphy, 54, of Deep Haven, Minn., became the latest to be sentenced after authorities filed criminal charges relating to the "Black Diamond" Ponzi scheme that swindled victims out of tens of millions of dollars. Toth, Sloat, and Murphy received sentences of 66 months, 70 months, and 48 months, respectively, and each was also ordered to pay millions of dollars in restitution to victims. Toft had previously pleaded guilty to one count each of securities fraud conspiracy, wire fraud conspiracy, and money laundering conspiracy, while Sloat and Murphy each pleaded guilty to one count of securities fraud conspiracy.
Black Diamond was a foreign currency ("forex") trading operation masterminded by Keith Simmons. Beginning in 2007, and using a network of co-conspirators and feeder funds, Simmons solicited investors under the guise that their funds would be used in the purportedly highly successful Black Diamond trading platform. Potential investors were promised 4% monthly returns and were assured that their investment was safe due to Simmons' promise that no more than 20% of invested funds would be at risk at any time. Even quoting Bible verses and stressing his devout Christianity, Simmons succeeded in convincing approximately 240 investors to contribute at least $35 million to the scheme.
Toft, Sloat, and Murphy operated hedge funds that solicited investors by representing that their funds would be invested in the Black Diamond venture, of which the trio had conducted extensive due diligence and were utilizing extensive safeguards. However, these representations were not true, and soon the Black Diamond scheme began collapsing - as all Ponzi schemes eventually do. But instead of disclosing this to their investors, the trio were accused of enlisting the assistance of a fourth individual, Jonathan Davey, to create their own Ponzi scheme and continue to divert investor funds for their own personal use.
The mastermind, Simmons, was sentenced to a 50-year term back in May 2012 - one of the largest white collar prison terms in history. Davey was convicted by a federal jury in February 2013 after 45 minutes of deliberations, and is still awaiting sentencing.
The case was also significant in that the bank used by Simmons to perpetuate the scheme, CommunityONE Bank, N.A., was criminally charged over its lack of an effective anti-money laundering program. The bank entered into a deferred prosecution agreement ("DPA") with the government, under which the bank, after paying $400,000 in restitution to the victims of Simmons' scheme, was able to have the criminal charges dismissed after two years.