Hedge Fund Manager Charged In Manhattan Federal Court With Scheme To Defraud Investors

Preet Bharara, the United States Attorney for the Southern District of New York, announced the arrest and unsealing of a complaint charging NICHOLAS MITSAKOS with securities and wire fraud in connection with a scheme to induce investments in a hedge fund by misrepresenting the fund’s performance and assets under management.  From at least May 2014 through August 2016, MITSAKOS fraudulently solicited investments in a hedge fund that he had founded, Matrix Capital (“Matrix”), by distributing marketing materials claiming that Matrix had millions of dollars under management and had achieved outsized returns since 2012.  In or about September 2015, one entity (“Victim-1”) invested approximately $2 million with MITSAKOS based on these representations.  The claims that MITSAKOS made to help secure this investment, however, were false.  Matrix had no assets under management and its returns were based on a hypothetical stock portfolio that had been retroactively altered on multiple occasions in order to enhance the fund’s supposed performance.  And rather than invest Victim-1’s money as promised, MITSAKOS misappropriated parts of this money to pay personal expenses and expenses associated with his administration of the fund.  MITSAKOS surrendered to law enforcement today in Los Angeles and will be presented in the United States District Court for the Central District of California.

In a separate action, the SEC filed civil charges against MITSAKOS.  

U.S. Attorney Preet Bharara said:  “Nicholas Mitsakos, founder of Matrix Capital, allegedly promised huge returns and told would-be investors that he had ‘a little more than $60 million’ in his hedge fund.  But as alleged, Mitsakos essentially ran an imaginary portfolio, which just tracked the performance of certain stocks without actually having a financial position in them.  Instead, Mitsakos allegedly spent much of his investors’ money on car payments, credit cards, and rent.”

According to the allegations in the Complaint unsealed in Manhattan federal court:^[1]

In or about October 2013, MITSAKOS created an entity called Matrix Capital.  Matrix purported to be a “long-short” hedge fund that invested in undervalued securities and sold overvalued securities short.  In order to raise capital for Matrix, MITSAKOS and another co-conspirator (“CC-1”) sent marketing materials and newsletters to numerous investors.  Certain of these materials claimed that Matrix had returns “exceed[ing] all major indices,” including returns of approximately 25.4% in 2012, 66.3% in 2013, 20.9% in 2014, and 49.5% between January and October of 2015.  MITSAKOS also told investors that these returns were based on actual trades, and that he had millions of dollars under management.  In one communication with a potential investor, for example, MITSAKOS represented that he had “a little more than 60 million” of assets under management at the time. 

These representations were all false.  Matrix had not achieved the returns MITSAKOS and CC-1 had represented to investors, and had no real assets before receiving an investment from Victim-1 in or about September 2015.  Instead, MITSAKOS and CC-1 maintained a hypothetical portfolio that tracked the performance of certain stocks.  MITSAKOS and CC-1 retroactively manipulated this portfolio from time to time to improve its performance.  In or about May 2014, for example, MITSAKOS sent CC-1 an email stating, “Let’s talk about our monthly performance in 2014…. [T]here are some big monthly losses that I don’t think we would’ve had if we were managing the portfolio.  I know this is a bit of revisionist history....”  Later that day, CC-1 suggested “trim[ming]” two positions that had performed poorly in order to “see what that does to the performance [of the fund].”  The revised hypothetical performance figures from these changes were then disseminated to potential investors as returns on actual investments. 

Based in part on misrepresentations about Matrix’s performance and assets under management, among other things, Victim-1 invested approximately $2 million with MITSAKOS.  MITSAKOS, however, only used a portion of this amount – about $1.2 million – to actually buy and sell stocks.  Of the remaining amount, MITSAKOS spent hundreds of thousands of dollars on business expenses and personal expenses like car payments, credit cards, and rent before Victim-1 learned what had come of its investment.  MITSAKOS’s trading of the $1.2 million that he did invest, moreover, resulted in significant losses.

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MITSAKOS is charged with one count of conspiring to commit securities and wire fraud, one count of securities fraud, and one count of wire fraud. The conspiracy charge carries a maximum term of five years in prison.  The securities and wire fraud charges each carry a maximum term of 20 years in prison.  The charges also carry a maximum fine of $5 million, or twice the gross gain or loss from the offense.  The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendant will be determined by the judge.           

Mr. Bharara praised the exceptional work of the Office’s criminal investigators, and thanked the Securities and Exchange Commission for its assistance. 

The charges were brought in connection with the President’s Financial Fraud Enforcement Task Force.  The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.  With more than 20 federal agencies, 94 U.S. attorneys’ offices, and state and local partners, it is the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud.  Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions and other organizations.  Since fiscal year 2009, the Justice Department has filed over 18,000 financial fraud cases against more than 25,000 defendants.  For more information on the task force, please visit www.StopFraud.gov.

This case is being handled by the Office’s Securities and Commodities Fraud Task Force.  Assistant United States Attorney Robert Allen is in charge of the prosecution.  

The allegations contained in the Complaint are merely accusations, and the defendant is presumed innocent unless and until proven guilty.

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