Three men who ran a Scotts Valley investment company have been indicted by a federal grand jury in San Jose on fraud and conspiracy charges related to a scheme that allegedly bilked investors of millions of dollars.
John Geringer, 48, and Christopher Luck, 56, both of Scotts Valley, and Keith Rode, 45, of Franklin, Wisc. were indicted on Wednesday on counts of mail fraud, wire fraud, securities fraud, money laundering and conspiracy to commit mail and wire fraud.
All three are also named in a related civil fraud suit filed by the U.S. Securities and Exchange Commission in federal court in San Jose.
According to the indictment, the three men ran a company called Geringer, Luck & Rode LLC, which managed an investment fund named GLR Growth Fund. Geringer, a licensed securities trader, was the managing partner and Rodes, an accountant, and Luck were partners.
The indictment alleges the company took in $60 million from nearly 90 investors by making false promises, such as a claim that the fund had returns of between 17 and 25 percent per year between 2001 and 2011.
U.S. Attorney Melinda Haag said the three men diverted half that amount to themselves and to two private start-ups in which they held an interest.
Some investors received some of their money back in a so-called Ponzi scheme in which earlier investors are paid with money solicited from later investors, according to the indictment.
Most of the investors came from the Santa Cruz area, according to the SEC's lawsuit.
The three men are due to make an initial appearance on the criminal charges before U.S. Magistrate Howard Lloyd in federal court in San Jose on Jan. 17.
The indictment alleges that in addition to falsely promising returns of 17 to 25 percent, the partners fraudulently told investors their money would be invested primarily in publicly traded securities, and created false financial statements.
The investors provided their money for a one-year period, after which they could either withdraw their funds or roll over the investment for another year. They paid the company a four percent management fee, according to the indictment.
The SEC lawsuit said the investment fund had negative returns between 2005 and 2009 and by mid-2009 had stopped trading at all.
The SEC lawsuit was originally filed against Geringer in May. The agency filed an amended complaint adding Luck and Rode as defendants today.
The amended suit alleges that Geringer deceived Luck and Rode between 2006 and 2009, but in April 2009 confessed to them he had been lying about the balances in the fund's trading accounts.
The lawsuit contends that the two partners did not inform investors, but that instead, Luck continued to solicit new investors and Rode continued to prepare misleading account statements.
"Luck and Rode knew Geringer had squandered millions of dollars in investor funds and were uniquely positioned to stop the fraud in its tracks," said Marc Fagel, director of the SEC's San Francisco regional office.
"Rather than expose Geringer, they instead chose to join forces and pretend it was business as usual, further concealing the fraud from investors," Fagel alleged.
At an April 25 hearing, SEC attorneys will ask U.S. District Judge Lucy Koh to approve the amended lawsuit. The civil case against Geringer, who has been acting as his own lawyer, is tentatively scheduled to go to trial in Koh's court on Jan. 13, 2014.
The fraud charges each carry a potential penalty of up to 20 years in prison if the men are convicted.
The SEC's civil lawsuit seeks financial penalties, relinquishment of alleged ill-gotten gains and permanent injunctions against the three men.
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