By Jason Bramwell
A North Carolina man who was the owner and operator of an investment fund that defrauded investors of approximately $6 million over a seven-year period agreed to plead guilty to securities fraud in US District Court on June 17.
James Shepherd, fifty-eight, of Vass, North Carolina, was charged with one count of securities fraud. Shepherd faces a maximum of twenty years in prison and a $5 million fine if convicted. The date of his plea hearing has yet to be determined.
As part of his plea deal, Shepherd agreed to pay full restitution to his victims, the amount of which will be determined by the court at sentencing.
The key turning point in the case, according to federal investigators, was Shepherd refusing to let an accountant verify the cash balance of the investment fund's bank account electronically through the web-based audit confirmation service offered by Confirmation.com.
A preferred provider for the American Institute of CPAs and endorsed by the American Bankers Association, the Confirmation.com electronic audit confirmation service provides accounts payable and accounts receivable confirmations as well as thirty types of bank confirmations.
"We've built a secure clearinghouse that eliminates and really reduces the opportunity for financial fraud to happen. It's really focused on investors; it's for investor protection", Brian Fox, CPA, founder and CMO of Confirmation.com, told AccountingWEB.
Fox said the Shepherd case is similar to the nearly one hundred other confirmation fraud cases that have been made public over the past ten years.
"When you have somebody who's been committing fraud, they've been circumventing the paper confirmation process through fax or mail or e-mail", he stated. "The auditors either say, 'No, we're going to use electronic confirmation,' or entities like banks say, 'We're not accepting a confirmation unless it comes through Confirmation.com.' That's when the fraud gets uncovered because the fraudsters can't get around it. If you're an auditor and you have a client who refuses to allow you to use Confirmation.com, it's a pretty strong indication of fraud."
Confirmation.com processes more than $1 trillion in confirmation information annually for a majority of public companies as well as private companies, not-for-profit groups, and government agencies. Fox said the company isn't involved in each individual audit because hundreds of thousands of audits go through the service each year.
"It's the technology itself that allows the auditor or the regulatory body to uncover the fraud, and then we're typically notified", he added.
Misappropriating Investors' Money
According to court documents and court proceedings, Shepherd defrauded more than one hundred investors in Union County, North Carolina, and elsewhere of approximately $6 million beginning in 2006 through spring 2013.
Shepherd perpetrated the fraud by promising his victims returns on their investments in funds Shepherd owned and controlled, including the Shepherd Major Play Option Fund, LP (Major Play Fund) and Shepherd's Model Hedge Fund (Hedge Fund). In addition, Shepherd had some individual investors who invested their money independent of any particular investment vehicle.
In 2006, unbeknownst to his investors, Shepherd began misappropriating investor money from the Major Play Fund, which he used to pay investors of his Hedge Fund, to trade in his personal accounts and to fund the operations of Shepherd's newsletter that offered investment news and advice to thousands of subscribers. Shepherd also used the money to fund his personal lifestyle. Documents indicate that Shepherd built a $2 million home in Vass and used investor money to make mortgage payments on the residence.
To conceal his fraudulent conduct, Shepherd sent to investors certified financial statements for the Major Play Fund accompanied by an independent auditor's report that assured investors an independent audit on the fund had been conducted in compliance with the rules of the US Commodity Futures Trading Commission (CFTC).
The false financial statements also misrepresented to investor victims the financial condition of the fund. For example, in December 31, 2012, Shepherd noted in a fraudulent statement that the fund had a $6,041,850 cash balance, when in reality the fund had less than $100,000 at the time.
According to court documents, Shepherd was able to obtain the independent auditor's report each year by tricking the accountant who provided it. The accountant would send a letter of inquiry to the bank that held the fund's account, requesting the fund's cash balance. On each occasion, the accountant sent the inquiry letter to the bank's post office box address provided by Shepherd and to the attention of "Charles Fisher", who was purportedly working at the bank.
In each instance, records show that the accountant would then receive a letter or fax confirmation from Charles Fisher verifying the Major Play Fund's bank balance as well as a copy of the bank statement confirming the cash balance of the fund.
In reality, Charles Fisher was a fictitious bank employee. Shepherd would forge Fisher's name on a fake bank letter and send forged bank statements with fake balances. Shepherd generated the fraudulent bank statements using Adobe Acrobat, which enabled him to type false numbers over true bank statements. He also controlled the post office box the accountant's letters were mailed to and controlled the fax number that supposedly belonged to Charles Fisher at the bank.
Shepherd's scheme unraveled this past March when the accountant insisted on verifying the Major Play Fund's cash balance on Confirmation.com. Shepherd delayed and then refused to give the accountant authority to use the website to verify the fund's cash balance. According to court records, the accountant notified the National Futures Association on March 26 that his audit opinion could no longer be relied on.
"For seven years, Shepherd used his investment fund as his personal piggy bank and repeatedly lied to his investors who trusted him with their savings", Anne Tompkins, US attorney for the Western District of North Carolina, said in a written statement. "Shepherd used his investors' money to fund his failing investment funds and his personal lifestyle and prolonged the fraudulent scheme through trickery and lies. Prosecuting investment schemes is a priority for this office, and we will continue to go after those who make false promises and steal people's hard-earned money."
The CFTC filed a civil enforcement action against Shepherd on June 17, according to the FBI.
Wanting to Catch the Bad Guys
Fox of Confirmation.com, whose mother and brother were both police officers, said he too has the bug of wanting to help catch criminals.
"We really want to catch the bad guys, but we do it for the investors", he concluded. "We want to make sure the auditors have the best tools available so they don't miss a fraud. We want to make sure the investors, who rely on those financial statements, are protected. That's why we do what we do."