SEC Charges Connecticut Investment Adviser John A. Masanotti With Stealing Clients’ Money
On November 9, 2023, the Plaintiff, the United States Securities and Exchange Commission ("SEC" or "Commission"), lodge the subsequent allegations against defendants John A. Masanotti, Jr. ("Masanotti") and Middlesex Mortgage Group, LLC ("Middlesex"), along with relief defendant Mary A. Ferrara ("Ferrara"), and seeks a jury trial.
The SEC charged the Defendants with fraud for lying to investors while taking at least $5.9 million from investors from 2016 to the present. The defendants also allegedly used investor money to make Ponzi-like payments back to investors and stole some of their money for Masanotti’s own personal purposes.
Summary Of The Case
Masanotti and Middlesex, in a continuous scheme, have obtained a minimum of $5.9 million from investors through false statements and withholding of information, and have diverted millions for Masanotti's personal gain.
Starting from at least January 2016 until now, Masanotti has misled numerous investors, predominantly seniors, into providing him with substantial sums of money, pledging to invest these funds in a purported collective investment scheme managed by Middlesex, known as the Middlesex Fund or the MMG Fund (referred to as the "Fund").
Many of these Fund investors have sold securities from their retirement accounts to participate in the Fund.
In his presentations to investors, Masanotti detailed the Fund's purported activities, including trading in foreign currencies and securities, as well as investing in stocks through initial public offerings ("IPOs").
Masanotti boasted about his trading prowess to investors, claiming to utilize a profitable proprietary algorithmic trading method for currency futures. He even informed at least one investor of annual returns ranging from 10% to 20%.
However, investigations reveal that Masanotti made no investments in stocks or bonds on behalf of investors from 2016 to 2023, with his foreign currency trading efforts ceasing in 2016. Instead, investor funds were diverted to sustain a Ponzi-like scheme, funneling money into investors' hands and funding Masanotti's lavish personal expenditures.
To conceal the fraudulent nature of his investment scheme, Masanotti furnished investors with fabricated monthly account statements from Middlesex, displaying purported shares held in the Fund and fabricated investment returns. These statements were entirely fictitious.
Meanwhile, the bulk of the funds were utilized by Masanotti to finance his personal lifestyle, covering expenses such as mortgage payments for his wife's properties in Darien, Connecticut (referred to as the "Darien Property") and Bonita Springs, Florida (known as the "Florida Property"), settling credit card debts, and purchasing luxury vehicles and a country club membership.
In recent weeks, Masanotti has evaded and delayed investors seeking to withdraw their funds, citing a purported delay in receiving funds related to an IPO transaction until March 2024 and asserting that the missing funds are partly secured by insurance.
Moreover, in September 2023, Masanotti informed SEC staff that he had incurred significant losses trading cryptocurrencies. However, investigations show no evidence of Masanotti investing in any crypto assets on behalf of investors between 2016 and 2023.
Presently, the Defendants' and Relief Defendant's bank and brokerage accounts hold nearly no funds, despite Masanotti's wife, Relief Defendant Mary Ferrara, selling the Darien Property for $1.85 million on October 10, 2023. Notably, none of the proceeds from the sale appear to have been used to reimburse investors.
Violations
Through the actions outlined herein, the Defendants have contravened Sections 17(a)(1), (a)(2), and (a)(3) of the Securities Act of 1933 (“Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), and the corresponding Rules 10b-5(a), (b), and (c).
Additionally, they have violated Sections 206(1), (2), and (4) of the Investment Advisers Act of 1940 (“Advisers Act”), along with Rule 206(4)-8.
Nature Of The Proceeding And Relief Sought
This action is brought forth by the Commission under the authority granted by Section 20(b) of the Securities Act, Section 21(d) of the Exchange Act, and Section 209(d) of the Advisers Act.
The Commission seeks immediate preliminary measures, including
a temporary restraining order against Defendants to halt any further breaches of federal securities laws
an injunction preventing Defendants from soliciting, accepting, or depositing additional funds from investors
an asset freeze to safeguard assets essential for satisfying future judgments against Defendants, and
additional equitable measures, such as preventing the destruction of documents and facilitating expedited discovery.
Furthermore, the Commission seeks a final judgment that:
permanently restrains Defendants from violating federal securities laws through the transactions, practices, and conduct described in this Complaint;
mandates Defendants to surrender any unlawfully obtained profits along with prejudgment interest, in accordance with Section 21(d)(7) of the Exchange Act;
compels the Relief Defendant, jointly and severally with Masanotti and Middlesex, to disgorge any unjust enrichment or unlawfully acquired gains, with prejudgment interest;
orders Defendants to pay civil penalties as outlined in Section 20(d) of the Securities Act, Section 21(d)(3) of the Exchange Act, and Section 209(e) of the Advisers Act; and
grants any other relief deemed just and appropriate by the Court.
Defendants
John A. Masanotti, Jr., aged 68, resided in Darien, Connecticut from January 2016 to October 2023. He serves as the proprietor and managing member of Middlesex Mortgage Group, LLC, also recognized as Middlesex Group, LLC.
Masanotti lacks any securities licenses. Representing himself as the overseer of a collective investment vehicle for investors – referred to as the Fund – Masanotti functioned as an unregistered investment adviser and owed a fiduciary duty to the Fund.
In his capacity as an investment adviser, Masanotti was obligated to act in the Fund's best interests, ensuring full disclosure of all pertinent information and exercising due diligence to prevent any misleading practices.
Middlesex Mortgage Group, LLC is a limited liability company established in the state of Connecticut, and headquartered in Darien. It is under the ownership of John A. Masanotti, Jr., who serves as its managing member.
Relief Defendant
Mary A. Ferrara, aged 68, lived in Darien, Connecticut from January 2016 to October 2023. She is the spouse of Masanotti and a member of Middlesex Mortgage Group, LLC.
Ferrara solely owned the Darien Property, their primary residence. On October 10, 2023, Ferrara sold the Darien Property for $1,850,000. Additionally, she is the sole proprietor of the Florida Property, a secondary residence where she and Masanotti have also lived.
Defendant’s Violations Of Federal Securities Laws
A. Misrepresentation in Fund Solicitation by Masanotti
Commencing at least in January 2016, Masanotti initiated the solicitation of investments in the Middlesex Fund. Masanotti enticed investors by portraying the Fund as a collective investment vehicle engaged in trading foreign currency and investing in various securities, including stocks and bonds. Many investors did not formalize their investments through agreements, receipts, or any other documentation.
During a voluntary interview with Commission staff, Masanotti asserted that the Fund was established for foreign currency trading via a specific trading platform (referred to as the “Forex Firm”), and that he ceased using this account in late 2022. However, Commission records reveal no foreign currency transactions conducted by Masanotti through his Forex Firm account after 2016.
Masanotti's investor base comprised primarily friends and family, with many investing substantial sums, often in the hundreds of thousands of dollars, in the Fund over recent years. A significant portion of Fund investors were individuals in their 60s, either at or near retirement age. Collectively, Masanotti solicited investments totaling at least $5.9 million from January 2016 to the present.
While Masanotti tailored his pitch to each client, he consistently portrayed himself as experienced, emphasizing his sole decision-making authority in managing their investments, and assuring investors of profitability – claims that were not substantiated.
To sustain his scheme, Masanotti furnished clients with monthly account statements from Middlesex, detailing the purported shares each held in the Fund and their purported investment returns. Despite their appearance of authenticity, these statements were entirely fabricated. The Fund's holdings were represented on these false account statements as “MMG Fund (Class A Shares)”.
B. Masanotti Deceives Investors to Sustain His Fraudulent Scheme
Apart from fabricating information to secure initial investments from friends and family, Masanotti persisted in deceiving investors to perpetuate his fraudulent investment venture
For instance, a close associate ("Investor 1") and her spouse entrusted approximately $725,000 to the Fund in the summer of 2022. Masanotti assured Investor 1 of annual returns ranging between 10% and 20%, attributing this success to a highly profitable proprietary trading program for foreign currency exchange.
After making the initial investment, Investor 1 received repeated offers from Masanotti to participate in IPOs. According to Investor 1, Masanotti claimed to have purchased IPO shares in a cloud technology company for her Fund account in August 2022, boasting a profit of approximately 20% by December 2022.
However, Masanotti's assertions regarding Investor 1's investment in the Cloud Technology Company were unfounded. Public records indicate that although the stock initially experienced a surge in value upon its debut in August 2022, its price steadily declined over the subsequent three months, trading significantly below the IPO's opening price by December 2022. Hence, the profits claimed by Masanotti from this IPO during that period were unattainable.
Moreover, while bank records confirm Masanotti's receipt of Investor 1's $725,000 investment, there is no evidence demonstrating its allocation to the Fund, or indeed any investment at all. Instead, the funds seem to have been directly diverted to Masanotti or accounts under his control, subsequently misappropriated for personal use or disbursed to previous investors to sustain Masanotti's scheme.
Believing the authenticity of their monthly account statements from Middlesex, certain investors in the Fund occasionally sought to withdraw funds or make partial withdrawals from what they perceived as profits generated through their association with Middlesex.
For example, another investor ("Investor 2") requested a $60,000 withdrawal from her Fund account in March 2023. Relying on Masanotti's account statements, Investor 2 believed her Fund account held a significantly higher balance than $60,000. However, as of now, Masanotti has failed to fulfill Investor 2's request to access the $60,000 in her Fund account.
Similarly, a different investor ("Investor 3") initially invested $150,000 in the Fund with Masanotti and received periodic small payments, eventually recovering the entire principal. However, due to Masanotti's provision of fictional monthly account statements, Investor 3 believed he held a $300,000 balance in the Fund, reflecting profits earned over the years. Consequently, in early 2023, Investor 3 sought a withdrawal from his Fund account. However, Masanotti's responses were consistently evasive, and Investor 3's request went unfulfilled.
In June 2023, Masanotti ceased sending monthly account statements to many Fund clients, citing delays in an IPO transaction expected to conclude in March 2024, assuring investors of full reimbursement.
During an interview with Commission staff, Masanotti claimed to have incurred significant losses trading cryptocurrency on an unidentified online platform in the spring of 2023. He alleged, without evidence, to have notified Fund investors of these losses. However, there is no indication that Masanotti engaged in any cryptocurrency trading between 2016 and 2023, and no investors have reported receiving such notifications from him.
C. Masanotti Diverted Investor Funds to Sustain His Family's Lifestyle
In addition to the multitude of falsehoods and omissions presented to investors concerning the security of their investments, the nature of investments to be undertaken with their funds, and the purported safety of said investments, Masanotti misused the assets of the Fund. He breached his fiduciary obligation to the Fund, with the aim of enriching himself and upholding his family's standard of living.
From January 2016 to October 2023, bank accounts under Masanotti's control, held in the name of Middlesex or in the name of his family members, received approximately $5.9 million from investors.
Subsequently, Masanotti utilized millions from the Fund's assets for personal gain, alongside his family's, and to satisfy obligations to earlier investors, maintaining the illusion of the Fund's profitability.
For instance, bank records for August 2019 indicate that on August 1, 2019, a Middlesex account received a $30,000 deposit from a couple of investors. Throughout that month, Masanotti initiated transfers totaling $29,500 from the Middlesex account to accounts held in his and his wife's name. These funds were then disbursed to cover various expenses, including luxury car payments exceeding $3,000, nearly $10,000 in mortgage payments, and dues for a country club.
Over the duration of the scheme, Masanotti redirected more than $3 million from the Fund's assets to benefit himself and his family, a clear violation of his fiduciary duty to the Fund.
D. Depletion of Investor Funds and Liquidation of Major Assets by Masanotti and Ferrara
On October 16, 2023, the Commission staff engaged in a phone conversation with Masanotti. During this exchange, Masanotti indicated that the sale of the Darien Property, in which Relief Defendant Mary Ferrara was involved, would be finalized imminently, specifically on October 18, 2023.
When questioned by the Commission staff regarding the confirmation of this closing, Masanotti clarified that Ferrara had signed the necessary documents for the transaction, as the property was solely under Ferrara's name. However, he expressed uncertainty about the completion of paperwork by other involved parties.
Subsequent property records obtained by the Commission staff revealed that the closing on the Darien Property had actually occurred on October 10, 2023, with the property being sold for $1.85 million.
Correspondence reviewed by the Commission staff demonstrated that Masanotti and Ferrara were engaged in a group text message exchange with the listing agent responsible for the Darien Property. On October 10, 2023, the listing agent queried Masanotti and Ferrara about the closure, to which Ferrara, copying Masanotti, responded affirmatively, stating that the attorney's paralegal had confirmed the completion of the transaction and the forthcoming wire transfer of funds.
Bank records corroborated that by the time Masanotti conversed with the Commission staff on October 16, 2023, Ferrara had already received a wire transfer totaling $1,733,734 (after brokerage fees), representing the proceeds from the sale of the Darien Property. A significant portion of these funds was promptly directed toward settling multiple mortgages on the Darien Property.
Bank records further revealed that between 2016 and 2023, Masanotti had disbursed over $600,000 towards mortgage payments for properties in Ferrara's name, including the Darien Property and the Florida Property.
Ultimately, Masanotti indulged in a luxurious lifestyle at the expense of the Fund, simultaneously deceiving investors about their purported account balances and investment returns through Middlesex.
Claims
The Defendants:
Either directly or indirectly, in the process of offering or selling securities, acquired money or assets by making false statements of material fact or omitting essential facts necessary to prevent the statements from being misleading.
Have made or are making untrue statements of material fact or have omitted to state material facts necessary to make the statements not misleading.
Engaged or currently engaged in any transaction, practice, or business conduct that functions as a fraud or deceit upon a client or potential client.
While serving as investment advisers to a pooled investment vehicle, they either directly or indirectly, engaged in acts, practices, or business courses that were fraudulent, deceptive, or manipulative. Defendants also disseminated false statements of material facts and/or neglected to disclose material facts essential to prevent the statements from being misleading to investors or potential investors in the pooled investment vehicle.
Further, the complaint alleges that the Relief Defendant received proceeds acquired through deceitful means from investors for investment purposes with Masanotti and Middlesex. Also, the Relief Defendant lacks legitimate entitlement to these assets. It would be inequitable and against principles of fairness for the Relief Defendant to retain such assets.
Consequently, the Relief Defendant shares liability with Masanotti and Middlesex for unjust enrichment and should be compelled to reimburse her portion of the unjustly acquired profits, the exact amount of which will be determined by the Court. Furthermore, the Court should establish a constructive trust over the unlawfully acquired assets currently held by the Relief Defendant.
Relief Sought By The SEC
In the complaint filed by the SEC, the SEC requests that the court should:
Issue a temporary restraining order and preliminary injunction to: (a) prevent Defendants from further breaching the Securities Act, the Exchange Act, and the Advisers Act; (b) freeze Defendants' and Relief Defendant's assets; (c) forbid Defendants from soliciting, accepting, or depositing any funds acquired from current or potential investors; (d) mandate Defendants to preserve pertinent documents and prohibit their alteration or destruction; and (e) authorize expedited discovery to commence promptly.
Issue a Final Judgment permanently restraining and enjoining Defendants, as well as their agents, employees, attorneys, and any other individuals acting in concert with them, from directly or indirectly engaging in the described conduct or similar acts with the same purpose and effect, in violation of:
Section 17(a) of the Securities Act
Section 10(b) of the Exchange Act and
Sections 206(1), (2), and (4) of the Advisers Act and Rule 206(4)-8 thereunder.
Issue a Final Judgment ordering Defendants to disgorge any unlawfully obtained profits or unjust enrichment, with prejudgment interest, to fulfill the remedial objectives of the federal securities laws.
Issue a Final Judgment against the Relief Defendant, directing her to disgorge all unfairly acquired gains and/or unjust enrichment, jointly and severally with Masanotti and Middlesex, with prejudgment interest, to fulfill the remedial objectives of the federal securities laws.
Issue a Final Judgment requiring Defendants to pay civil penalties following Section 20(d) of the Securities Act, Section 21(d) of the Exchange Act, and Section 209(e) of the Advisers Act.
Maintain jurisdiction over this action to execute and enforce the terms of all orders and decrees that may be issued; and
Grant any other relief deemed just and proper by this Court.
Key Takeaways For Investors
1. Conduct Due Diligence
Investors should thoroughly research investment opportunities and the individuals or entities offering them. This includes verifying credentials, conducting background checks, and scrutinizing investment strategies and promises of returns.
2. Beware of Red Flags
Investors should be wary of any investment opportunity that promises unusually high returns with little to no risk. Additionally, discrepancies in account statements or delays in fund withdrawals should raise concerns.
3. Understand Investment Vehicles
Investors must have a clear understanding of the investment vehicles they are putting their money into. They should be aware of the types of securities being traded, the investment strategy employed, and any associated risks.
4. Seek Professional Advice
When in doubt, investors should seek guidance from qualified financial advisors or legal professionals who can provide unbiased advice and help assess the legitimacy of investment opportunities.
5. Report Suspected Fraud
If investors suspect fraudulent activity or believe they have been victimized by investment fraud, they should promptly report it to the appropriate authorities, such as the Securities and Exchange Commission (SEC), to help prevent further harm and hold perpetrators accountable.