A Pennsylvania woman is facing charges from civil and criminal regulators on allegations that her hedge fund was operated as a massive Ponzi scheme that raised over $100 million from dozens of investors. Brenda Smith, 59, was arrested Tuesday morning on a criminal complaint from the U.S. Attorney’s Office for the District of New Jersey charging her with four counts of wire fraud and one count of securities fraud. That same day, the Securities and Exchange Commission filed an emergency enforcement action alleging violations of federal securities laws and secured an asset freeze against Smith and her entities. Each of the criminal charges carries a maximum sentence of up to twenty years in prison. Based on preliminary research and a review of Ponzitracker’s database of Ponzi schemes, it is believed that Smith’s alleged scheme is not only the largest Ponzi scheme in Pennsylvania history but possibly the largest scheme run by a woman.
The SEC named Smith and the companies she controlled, Broad Reach Capital, LP (the “Fund”), Broad Reach Partners, LLC (“Partners”), and Bristol Advisors, LLC (“Bristol”), as defendants, alleging that Smith began soliciting investors for the Fund beginning in early 2016 on promises of consistent profits through lucrative trading strategies such as “Dividend Capture, VIX Convergence, Volatility Skew, S&P Premium Capture, Opportunities and Intraday Trading” as well as the Fund’s access to the Philadelphia Stock Exchange trading floor. The Fund touted its incrediblly consistent history of returns to investors, using charts in presentations claiming that the Fund had yielded positive returns for every month since inception in 2015 - even though the Fund itself did not even start until 2016. The Fund claimed to have returned 35% in 2016 and 33% in 2017 as well as a 6.07% return during the first three months of 2018. Based on these and other representations, the Fund raised more than $100 million from dozens of investors including more than $40 million from the three investors whose plights are chronicled in the Complaint.
According to the SEC, Smith’s claims about the profitability and trading success were simply false. Rather than using all investor funds for the promised trading strategies, the Complaint alleges that the balance in the Fund’s brokerage accounts never exceeded $30 million. Similarly, the Commission disputed the Fund’s claims of consistent profitability in alleging a continuous decine in the Fund’s total assets and the existence of a current “massive shortcoming” in which $63 million in investor principal is still outstanding.
The Complaint also details a chain of recent events which likely precipitated the filing of civil and criminal charges which began with an investor attempting to redeem its combined $46.6 million investment in March 2019. After the Fund failed to return the investment by the promised date in mid-May, Smith allegedly concoted various excuses for the redemption delay including providing a “proof of funds” from an unrelated entity owned by Smith and claiming that the entity owned an entire $2.5 billion bond issuance. This was easily disproven by public records. That same investor also received an “asset list” to show the Fund had sufficient assets to satisfy redemption requests, with the list including $20.25 million in “securitized cryptocurrency.” As the SEC recounts,
Attempting to substantiate this claim, Defendants provided Investor 3 with only a two-page, unintelligible document entitled “Wallet,” which shows a few lines of text with dollar figures. Fund bank records do not reflect the purchase of this purported asset.
Smith appears to have a lengthy history in the securities industry that included her ownership and management of a broker-dealer. According to the Financial Indsutry Regulatory Authority’s BrokerCheck tool, Smith had over 10 years of experience in the industry and at one point held Series 7, 24, 27, 53, and 79 licenses over a career that included stints at firms like Drexel Hamilton. Smith has a lengthy disciplinary history with FINRA that ultimately and recently resulted in her consent to be permanently barred from the industry after she refused to respond to regulatory inquiries. Notably, after an unnamed customer filed an arbitration claim against Smith in late 2018, Smith included the following response:
Registered Representative is in complete disagreement with this allegation and will defend herself including counterclaims. FINRA does not have authority over this arbitration as [REDACTED] is not and never was a customer of CV Brokerage. [REDACTED] has served a prison term for securities fraud himself. [REDACTED] alleges that Brenda Smith committed actions noted above. All are denied. [REDACTED] was redeemed involuntarily because of his hostile actions against Brenda Smith. His filing of this arbitration is retaliatory as he has no method to make the same level of returns as he received from Smith's Fund. This Fund is NOT governed by FINRA and Ms. Smith is confident this arbitration will be thrown out in its entirety.
Smith’s scheme may be historic on several levels. Based on Ponzitracker’s quick research and a review of its 11-year database, Smith’s scheme is likely the largest Ponzi scheme not only in Pennsylvania history and could also be the largest Ponzi scheme run by a woman based on investor losses. Florida woman Lydia Cladek was charged in 2012 with operating a $100 million Ponzi scheme but investor losses were likely closer to the $34 million she was ultimately ordered to repay when sentenced to a 30-year prison term. Similarly, Washington woman Doris Nelson was accused of raising $135 million from investors in a Ponzi scheme but investor losses were ultimately believed to be approximately $50 million. The SEC has alleged that Smith’s investors are currently owed at least $63 millon in outstanding principal.
A copy of the SEC’s Complaint is below: