Local man charged in Ponzi scheme

An Albemarle County man is facing civil and criminal charges in connection with a multimillion-dollar Ponzi scheme allegedly run out of an office suite in downtown Charlottesville.

John M. Donnelly, 52, was arrested Wednesday and accused of bilking at least 31 investors out of more than $11 million since 1998.

Donnelly convinced investors to pool their money with his three companies — Tower Analysis Inc., Nasco Tang Corp. and Nadia Capital Corp. — after promising lucrative annual returns of up to 22 percent, according to federal court filings by the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.

One of Donnelly’s firms advertised itself as relying on a secret formula Donnelly invented that “can, and has, resulted in substantial earning opportunities for clients since 1998,” according to the SEC complaint.

“Using his background in astrophysics,” the court filing quotes, “Donnelly developed a proprietary model of financial markets using algorithms derived from the quantification of a fractal wave frequency model which he named Blue Logic.”

In reality, however, Donnelly was apparently conducting almost no securities trading. He had not made a single trade since 2002, according to court documents.

“Contrary to [his] claims, Donnelly only rarely executed trades,” says the CFTC civil complaint. “Indeed, according to Donnelly, as a result of some significant trauma he experienced in the past, Donnelly could never quite bring himself to execute trades.”

The SEC complaint goes on to suggest that Donnelly was never qualified to present himself as an investment adviser.

“Donnelly does not appear to have any professional experience in trading securities or managing an investment fund, nor has he ever been associated with a registered investment advisor or broker-dealer,” the SEC filing says.

The government alleges that Donnelly was defrauding investors by paying some of them returns out of principal received from other investors. At the same time, Donnelly skimmed off $1 million to pay himself a salary and cover expenses over the last three years, according to the court filings.

A call to Donnelly’s home in western Albemarle was not immediately returned Wednesday.

The alleged scam mirrors that — albeit on a much smaller scale — of Bernard Madoff, who is expected to plead guilty today to charges that he orchestrated a multi-billion dollar Ponzi scheme that may be the largest financial fraud in the country’s history.

In the wake of Madoff’s arrest, the SEC has accused at least a dozen other investment advisers of similar allegations. In California on Wednesday, the SEC charged two principals of the Folsom-based Equity Investment Management and Trading Inc. with fraudulently scamming investors out of $40 million. Many of these cases have been dubbed “mini Madoffs.”

Yuri B. Zelinsky, assistant director of the SEC’s division of enforcement, said many aggrieved investors are coming forward in the aftermath of the Madoff scandal, realizing that they may have been investing in a fraudulent fund too good to be true.

“Many people — as we saw with Madoff — have a gift for self-deception when money is being made,” Zelinsky said. “Now they may be revisiting those deceptions.”

Ronald T. Wilcox, a professor at the University of Virginia’s Darden Graduate School of Business Administration and a former SEC economist, said the recent rise in Ponzi schemes is tied into the economic downturn. As the stock market crashed, many investors wanted to pull out their money. They found, however, that their money had long ago vanished.

“Ponzi schemes depend on the person running the scheme’s ability to attract new money,” Wilcox said. “As long as there is money inflow, such a scheme can work. As soon as people start wanting out of investments en masse, that is when you start to see these kinds of collapses.”

Wilcox added that the nation’s economic and political climate has encouraged federal regulators to aggressively pursue such cases.

“In this political climate, I’m sure they are having a lot of SEC attorneys work overtime to follow-up on any lead that looks like it might involve financial misconduct,” he said. “They don’t want to be called before a congressional committee and asked, ‘What were you thinking when you didn’t follow-up on ...’”

In Donnelly’s case, government regulators began investigating his Charlottesville operation after one of Donnelly’s investors — identified only as “Investor B” in court documents — came forward and told them that Donnelly had admitted he was conducting a Ponzi scheme.

According to the documents, the unidentified investor told regulators that Donnelly had admitted to him that he did not have the investor’s money, that he had been sending fictitious account statements for the past seven years, that he had never actually executed any trades on the investor’s behalf, and that he had used the investor’s funds to make payments to other investors.

In recent days, the government alleges, Donnelly was actively soliciting investors for a new fund based on misrepresentations about his past financial success.

A judge with the U.S. District Court for the Western District of Virginia issued an emergency order Wednesday freezing all of Donnelly’s personal and company assets.

Federal agents executed search warrants Wednesday at Donnelly’s home and his office in suite F of 600 E. Water St.

Donnelly’s wife is also named in the lawsuits, though she is not accused of any violations. Deborah B. Donnelly is named in the complaints as a “relief defendant,” meaning she did no wrongdoing but is accused of receiving ill-gotten funds. She is executive director of the Curry School of Education Foundation, which raises money for UVa’s education school. A UVa spokeswoman declined to comment on the matter Wednesday.

Donnelly is scheduled to appear in federal court in Charlottesville this morning to face criminal charges. A hearing has been scheduled for March 24 for the civil lawsuit filed against Donnelly by the Commodity Futures Trading Commission. And a hearing in the SEC case is expected to be scheduled within the next 10 days or so.