Three Hedge Fund Managers Sentenced in Connection with $40 Million ‘Black Diamond’ Ponzi Scheme
CHARLOTTE, NC—On Wednesday, September 3, 2014, U.S. District Judge Robert J. Conrad, Jr. sentenced three hedge fund managers in connection with a $40 million investment fraud conspiracy, announced Anne M. Tompkins, U.S. Attorney for the Western District of North Carolina. Jeffrey M. Toft, 51, of Sioux Fall, S.D., was sentenced to 66 months in prison followed by two years of supervised release. Chad A. Sloat, 36, of Kansas City, Mo. was sentenced to 70 months in prison, followed by two years of supervised release, and Michael J. Murphy, 54, of Deep Haven, Minn., was sentenced to 48 months in prison, and two years of supervised release.
Judge Conrad also ordered the defendants to pay restitution to victims as follows: Toft in the amount of $2,172,666; Sloat in the amount of $3,747,130 and Murphy in the amount of $2,552,824.30. Sloat was also ordered to pay $93,727 in restitution to the Internal Revenue Service. A fourth codefendant, Jonathan D. Davey, 50, of Newark, N.J. is currently awaiting sentencing.
At sentencing, Judge Conrad noted that the callous greed displayed by the defendants caused devastating financial ruin to hundreds of elderly and vulnerable victims. Judge Conrad also stressed that the lengthy sentences were appropriate given the predatory nature of the scheme.
John A. Strong, Special Agent in Charge of the Federal Bureau of Investigation (FBI), Charlotte Division, and Thomas J. Holloman III, Special Agent in Charge of the Internal Revenue Service—Criminal Investigation Division (IRS-CI), join U.S. Attorney Tompkins in making today’s announcement.
According to filed court documents and court proceedings, the defendants operated “hedge funds” as part of a $40 million Ponzi scheme operating under the name Black Diamond Capital Solutions (Black Diamond). Court documents show that from 2007 to 2010, the defendants induced their investor victims to turn over their money by claiming, among other things, that they had done due diligence on Black Diamond and were operating legitimate hedge funds with significant safeguards, when, in reality, those claims were false. Court records also show that as Black Diamond began collapsing, the defendants and others created a new Ponzi scheme and used a series of separate bank accounts administered by Davey to further the scheme. Specifically, the defendants deposited new victim money into these bank accounts and used the money to make lulling payments to other victims and to fund the defendants’ lifestyles.
Toft pleaded guilty in November 2012 to securities fraud conspiracy, wire fraud conspiracy and money laundering conspiracy. Sloat pleaded guilty in October 2012 to securities fraud conspiracy and Murphy pleaded guilty to the same charge in January 2013. Davey was convicted at trial of securities fraud conspiracy, wire fraud conspiracy, money laundering conspiracy and tax evasion. He will be sentenced by the court at a later date.
Toft remains free on bond and will be transferred to the custody of the Federal Bureau of Prisons upon designation of federal facility. Murphy and Sloat have been in federal custody since their bonds were revoked due to bond violations in March 2012 and August 2013, respectively. All federal sentences are served without the possibility of parole.
The case is prosecuted by Assistant United States Attorneys Kurt W. Meyers and Mark T. Odulio of the Western District of North Carolina. The investigation was handled by the FBI and the IRS.