A Ponzi Scheme and the Investment Advisers Act of 1940

Subject: Business
Type: Descriptive Essay
Pages: 8
Word count: 2139
Topics: Investment, Finance, Government, Law Enforcement

Based on the provisions of the SEC, any Ponzi scheme should be punishable by law for violating the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940. Anyone who allegedly solicits money from innocent and uninformed investors for the purpose of personal financial gain is punishable by law. In this particular case, a man named Michael Scronic, is charged with multiple violations of the securities laws.

Detailed Description of the Current Event

Based on a report dated Oct. 5, 2017 and published in the Securities and Exchange Commission website, the SEC charged a New York-based investment adviser with violations of three laws regarding his alleged act of fraud about lying to his investors about how much their investments have grown and giving them all kinds of excuses in not being able to release their funds. This is a Ponzi-like scheme that violated the Securities Exchange Act of 1933, the Exchange Act of 1934, and the Investment Advisers Act of 1940 (SEC.gov, Investment Adviser Charged, 2017).

According to the SEC, the suspect named Michael Scronic began soliciting money from at least 42 people, who were mainly friends and acquaintances, beginning 2010. Many of these people were enticed by Scronic’s proposal to invest their money in a risky options trading strategy of which he promised he has full knowledge. He introduced himself to them as one with an “impressive track of proven returns” (SEC.gov, Investment Adviser Charged, 2017). In fact, this is already one act of lie or withholding of information from the public. Another thing is that he lured investors by lying to them about the ease of liquidity of investments. In fact, he is quoted as saying, “what’s cool about my fund is that i’m 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” (SEC.gov, Investment Adviser Charged, 2017). Aside from this blatant lie, Scronic has also actually lied to his investors about the procedure of his investments. The fact is that he was actually committing massive trading loses. It means that he has committed at least $15 million in trading losses since April 2010 yet by June 30, 2017, Scronic reported to his investors a total of $21,837,475 in assets while his actual balance at this time was only $27,500 (SEC.gov, Investment Adviser Charged, 2017).

The complaint against Scronic was filed by some investors at SEC since when they attempted to redeem some of their investments, Scronic provided them with “a steady stream of implausible excuses for why he could not pay them back” (SEC.gov, Investment Adviser Charged, 2017). Moreover, these complaining investors have also found out that Scronic has been obtaining funds from new investors in order to fulfill the redemption requests from old investors. 

In fact, the scheme used by Scronic is another example of a Ponzi scheme, where a so-called investment professional acts asa a fiduciary. However, this professional’s biggest fault is “failing to deal honestly with his investors for his own financial benefit” (SEC.gov, Investment Adviser Charged, 2017). The rule, according to Lara S. Mehraban, who is Associate Regional Director of the New York Regional SEC Office, “Investors should be wary anytime they are promised high or consistently positive returns in a complex, hard to understand investment strategy” (SEC.gov, Investment Adviser Charged, 2017). However, the problem with the Scronic case is that there must have been mutual consent on the secrecy of their investments.

Another count of lying against Scronic as alleged by SEC is that he identified himself as an “investment adviser to a fictitious hedge fund in which he purported to sell interests or shares” (SEC.gov, Investment Adviser Charged, 2017). This is an outright lie. At the same time, the SEC continually reiterates to investors that they should check the backgrounds of people who claim to be investment advisers. In order to do this, they should use the SEC’s Investor.gov website in order to quickly identify whether these people who claim themselves to be investment advisers are actually registered professionals.

As for Scronic, he has been charged with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940. Moreover, the SEC also seeks “permanent injunction, disgorgement and penalties” against Scronic (SEC.gov, Investment Adviser Charged, 2017). Thus, Scronic is asked by law to stop his investment scheme, to return the money he owes his investors and to comply with the law on whatever punishment awaits him.

Detailed Description of the Relevant Law

One of the laws that Scronic violated was Section 17(a) of the Securities Act of 1933. This section is labeled “Fraudulent Interstate Transactions” and commands that “it shall be unlawful for any person in the offer or sale of any securities” through any means (SEC.gov, Securities Act, 2017). This means that the selling of securities itself is sensitive since securities are basically not guaranteed to win, and thus should be handled by an investment professional. 

Another law that Scronic violated was Section 10(b) of the Exchange Act of 1934 (SEC.gov, Securities Exchange Act, 2017). The Securities Exchange Act of 1934 provides that any securities transaction should be registered with the SEC for “ensuring greater financial transparency and accuracy and less fraud or manipulation” (Investopedia, Securities, 2017). The SEC has been given the power to “oversee securities such as stocks, bonds, and over-the-counter securities, markets and the conduct of financial professionals” that include investment advisers, dealers, brokers and similar others (Investopedia, Securities, 2017). The purpose of which is for the financial reports of these financial professionals to be monitored and disclosed to the public. Moreover, this is to “ensure an environment of fairness and investor confidence” (Investopedia, Securities, 2017). However, as one has seen from the case of Scronic, he has clearly violated the Securities Act of 1933 by posing as an investment adviser, which actually he is not. Moreover, he violates the Securities Exchange Act of 1934 by not registering his activities with the SEC.

Thirdly, Scronic violated Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940. These particular sections specify that the violation is the use of “any device, scheme or artifice to defraud any client or prospective client” as well as to “engage in any transaction, practice or…business which operates as a fraud or deceit upon any client or prospective client” (SEC.gov, Investment Advisers Act, 2017). Thus, this means that anyone who defrauds others through any means as long as it appears as a business or investment is punishable by law. Deceit committed against innocent people in any way is nonetheless punishable by law. 

The third law that Scronic violated — the Investment Advisers Act of 1940 — requires that individuals with the position or title of investment advisor, or investment adviser, with more than $25 million under their management and care, are required by law to register with the SEC. However, those with lower income are required to register with their own state. Moreover, those who have registered themselves with SEC and who have provided the SEC with the guidelines concerning their fees are therefore held liable by law to comply with such guidelines (Investopedia, Investment Advisers, 2017).

Moreover, the Investment Advisers Act of 1940 provides that all investment advisers are required to register with SEC, particularly those handling at least $25 million. However, the investment adviser must be clearly defined. The act provides a clear definition of an investment adviser — “any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities” (Knes, 2017). Moreover, the act specifies that such a giving of advice may not actually go together with any principal business activity. Also, an investment adviser is basically identified by three criteria — the type of advice he offers, the method of compensation, and if a major part of his income comes from giving financial advice (Knes, 2017). If these are all true in his case, then he must be an investment adviser and is therefore answerable to the law provided by the SEC. Lastly, an investment adviser must be one who offers advice or recommendations regarding securities such as notes, bonds, stocks, mutual funds, money market funds or certificates of deposit. However, the term “securities” does not include insurance, commodity and real estate (Knes, 2017). Nonetheless, the ultimate point of the law is that anyone who violates the said acts are believed to be connected with fraud or deceiving an innocent person. Any form of deceit is punishable by law.

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Analysis of the Current Event

The case of Scronic is important to the investment industry since it is a Ponzi scheme, or “an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors” and which collapse when there are no more new investments (SEC.gov, Ponzi Schemes, 2017). This is important to the investment industry because there are numerous types of Ponzi schemes out there in the market today from online websites that pose as legitimate companies to individual investment advisers like Scronic who claim to be able to trade one’s money at almost no risk and for unusually large returns. 

Companies that will care about the news story may include all legitimate financial companies as well as all legitimate advisers because their names and image are once more marred by a scam investment adviser. The legitimate companies will therefore be motivated by this news story to tighten their security and become more transparent to their investors regarding their businesses. At the same time, the illegitimate companies and advisers that have not yet been discovered may either revise their scheme based on what they have learned from the case of Scronic. Otherwise, they will become more apprehensive of the situation that they are in, upon realizing that the SEC is indeed serious in its crackdown against these Ponzi criminals.

The impact of the Scronic case serves as a warning against any other Ponzi criminal on the loose and disguising himself as an investment adviser. This is also a warning against those who are deliberately trying to mar the good image of the investment industry. This will definitely make some bad people rethink their moves since they have witnessed that the SEC is adamant at resolving crimes like these and of exposing the identity of the criminal to the public immediately. 

In such a case, the winner will definitely be the SEC or the people who complained against Scronic and those who filed a case against him. This is because clearly Scronic has violated the provisions of three laws: the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940. The clear and blatant violations of these acts are coupled with evidence of untruthfulness and dishonesty on the part of Scronic regarding his status as an investment adviser and regarding the status of the funds. The only claim of his defense lawyer would be the ignorance and voluntary investments of Scronic’s investors but an act of deceit on the part of the investment adviser is clearly above the inability of the investor to make informed decisions concerning his investment.


The case of Michael Scronic is just one of the numerous Ponzi schemes that continually violate the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940. Investment advisers like Scronic tell lies about their professional background, about the status of their investment strategies, and would frequently postpone fulfilling redemption requests of funds. Moreover, these people have chosen not to register themselves with the SEC for the purpose of not exposing their deception to the public. Basically, anyone who deceives the innocent by pretending to be an investment adviser is someone who deliberately steals the latter’s money and is therefore punishable by law.

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  1. Investopedia. (2017). Investment Advisor Act of 1940. 
  2. Investopedia. (2017). Securities Exchange Act of 1934.
  3. Investopedia. (2017). What was the ‘Securities Act of 1933?”
  4. Knes, M. (2017). Investment Advisers Act of 1940.
  5. SEC.gov. (2017). Investment Advisers Act of 1940. 
  6. SEC.gov. (2017). Securities Exchange Act of 1934. 
  7. SEC.gov. (5 Oct. 2017). Investment Adviser Charged in Multi-Million Dollar Options Trading Scheme. 
  8. SEC.gov. (2017). Ponzi Schemes. 
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