Recently, I wrote up a detailed history of a few historical and more recent investment scams while sharing the Top 5 Ways to Spot (and Avoid) Investment Scams.
The timing was not coincidental. I suddenly became very interested in the topic when yet another scam was uncovered. This one defrauded physicians predominantly, if not exclusively, and much of the recruitment of investors took place via a physicians-only Facebook group. I run a physicians-only Facebook group. Yikes!
I read all of the information I could get my hands on regarding this particular scam and wrote the “public service announcement” to help readers discern between what is likely a legitimate investment opportunity and what might not be.
Today, we’ll apply the lessons learned from prior scams to the one perpetrated by a couple of Wall Street veterans and one bold and perhaps unsuspecting surgeon.
Physicians Targeted, Reportedly Scammed out of Tens of Millions of Dollars
Let’s take a closer look at the investment scam that victimized dozens of physicians, 150 investors in total, to the tune of $33 Million.
All of the information below is gleaned from the SEC Complaint against Michael Ackerman, one of three co-founders of Q3 Trading Club and Q3 I LP, and the affidavit from Homeland Security Investigations Special Agent John Rodriguez.
Note that there are two unnamed Founding Partners, and that Founding Partner 1 was a surgeon who initially used a personal bank account as a landing spot for investments in this scheme.
What was the premise?
Ackerman (or co-founders) “told potential investors he developed and used a proprietary trading algorithm (the “Algorithm”) that allowed him to take advantage of the volatility of cryptocurrencies when trading investor funds and earn profits while minimizing risks.”
That’s got all the buzzwords. Proprietary. Algorithm. “Forex” isn’t there, but we’ve got “cryptocurrencies” which is just as good, if not better! Here’s an example of a brazen Ponzi scheme that focused on cryptocurrency more than 20 times the size of the one we’re discussing today.
Ackerman and pals reported consistent profits of 15% a month.
15% a month.
The Rule of 72 tells us that at a return of 15% a month, investor’s money would double in less than 5 months. In 5 years, that would be more than 12 doublings.
Why did I use $220,000? That’s $33 Million divided by 150, or the approximate average amount collected from each investor. Now, the plan was for the three founders to keep half of the proceeds and let the investor keep the other half.
So they’d each get a half-a-billion dollars if the good times were to roll for five years. Note that if the founders were splitting their shares equally among the three of them, they’d each get half from 70-some investors, or maybe $35 billion apiece. In the first five years. That’d buy a nice fishing boat or two.
If our savvy investors with the proprietary cryptocurrency volatility trading algorithm kept up 15% monthly returns for 10 years, the total pot of $33 Million collected would have grown to $634,241,685,063,547.25. Yes, 634 trillion dollars. Trillion!
634 trillion dollars. Enough to pay off our national debt nearly 30 times over.
Pigs get fat; hogs get slaughtered. Gordon Gekko said “Greed is good,” but this is simply egregious.
Now, it’s not like the investors would have gotten all of that 634 trillion. If divided among the 150 or so of them, they’d only have about 4 trillion each, but remember that half of the profits were designed to stay with the company, so now the investors are down to a mere 2 trillion dollars apiece.
And then there were the licensing fees for the incredible algorithm. The surgeon and the other unnamed co-founder took at least $4 million of the $33 Million collected in purported licensing fees. You know, it was proprietary and all, so obviously quite valuable.
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It Was One Big Investment Scam
According to the SEC, Ackerman, his cofounders, and the algorithm never actually made much money, if any.
From the official Complaint,
“The reports Ackerman sent Founding Partner 1 and Founding Partner 2 were false. In truth, from November 2017 until December 2019 the monthly account balance averaged only about $1.7 million. During that time, the monthly account balance was never higher than about $5.815 million.
Nonetheless, by December 2019, Ackerman was reporting an account balance to Founding Partner 1 and Founding Partner 2 of about $310 million. In truth, however, the account only held about $428,162 in mid-December 2019.”
Where did the money go? In addition to the $4 million or more siphoned off to the unnamed cofounders,
“Ackerman misappropriated about $7.5 million of investor funds for his personal use. Ackerman used these investor funds to, among other things, purchase and renovate a new home, pay more than $600,000 for personal security services, purchase more than $100,000 worth of jewelry at Tiffany & Co., and purchase three cars.”
Could anyone have seen this coming? Let’s analyze this investment opportunity through the lens of The Top 5 Ways to Spot an Investment Scam.
#1 Returns are Promised to be Outstanding
634 trillion dollars. Need I say more?
No, but I will. A 15% gain doesn’t sound that exciting. Tesla had a nearly 100% gain in January of 2020. Consistent, repeated 15% monthly gains, however, will soon give you enough money to send you to the moon and back.
Maybe Mars, even, but I’ve seen that Matt Damon movie. No thank you.
#2 Investment is Touted as Low-Risk or No-Risk
Investors were told that safeguards were in place so that Ackerman could not access investors’ money without the knowledge and consent of the unnamed cofounders. This was apparently false.
Getting it in writing doesn’t necessarily make it true.
Also, recall that the algorithm was designed to “take advantage of the volatility of cryptocurrencies when trading investor funds and earn profits while minimizing risks.”
From the HSI affidavit, the surgeon told potential investors the following:
“I founded this company with two other financial analysts both of who worked on the floor of NYSE, one of which is an ex-hedge fund manager. We use very complex algorithms that trade in and out of coins thousands of times a day. On average we make about 0.5% daily on invested income. This comes out to roughly 15% total profit monthly. Profits are continuously reinvested, thus compounding continuously.
These returns have been consistent since August 2017. Algorithms are managed 24/7 by our chief trading officer, Michael Ackerman. Currently we have over $236M Assets Under Management. Distribution is simple: 50% return on your profit at end of each fiscal year. The General Partners- myself and the other two founders take 50% of all profit. There are a few costs of operations (minor salaries, an office , licensing fees and other costs). At the end of year you get all of your initial investment back plus 50 % of what your investment made. It’s been a winning strategy that has been tested through every peak and trough of this market over the last two years without failing.”
Did you hear that? Two years of steady returns through every peak and trough.
#3 The Investment Found You
According to the document, many of the investors were recruited by the surgeon cofounder via a specific physician-only Facebook group. The group named in the SEC Complaint is not a personal finance or investing group.
If he managed to find investors who weren’t looking for one, that is the definition of the investment finding you.
I happen to know the surgeon was also lurking in my Physicians on FIRE group. It is a group focused on personal finance and investing with nearly 20,000 physician members. I sincerely hope none of our members were duped by this Q3 outfit, but I cannot control what goes in via private messaging among members. Any public mention of any “strategy” like the one from Q3 as outlined by the SEC would have been promptly deleted by me or one of our moderators. I believe the same to be true of the group named by the SEC.
#4 Insufficient Documentation
“Each month from no later than March 2018 until at least December 2019 Ackerman reported to Founding Partner 1 and Founding Partner 2 that monthly trading profits were at least 15%. Ackerman sometimes modified screenshots of the Q3 Trading Account statement balances as reflected on the online trading platform to provide support for these representations.
The reports Ackerman sent Founding Partner 1 and Founding Partner 2 were false.
Screenshots are not account statements. Accounting should be independently verified by an accredited accounting firm, and an established brokerage firm should be acting as a custodian to clear and settle trades. Such forgery would not have been possible if this had been set up.
Apparently, there were at least some of the expected investing documents. Per the SEC Complaint: “Ackerman and his partners marketed the Q3 I investment through the distribution to potential investors of a private placement memorandum (the “PPM”), a limited partnership agreement, and a subscription agreement.”
Seeing something in writing, or on your computer screen or phone, does not make it true. In this alleged scam, documents existed, but they contained information that was falsified or untrue.
#5 The Investment is Too Complex to Comprehend
Cryptocurrency, and the blockchain technology upon which it relies, is not a simple topic. This supposed algorithm not only utilized in cryptocurrency, but purportedly took advantage of volatility in cryptocurrency trading.
Also, the precious algorithm used “proprietary high velocity trading software in a methodically risk mitigating fashion.” They claimed that their “strategem” focused on a “correlated capital forfeiture ratio.” That all sounds so sophisticated, doesn’t it?
The SEC does state that the surgeon was willing to explain the algorithm to willing potential investors, and that they had previously “successfully traded various cryptocurrencies through various crypto exchanges using proprietary algorithmically driven software for other pooled investment groups.”
Obviously, I never heard the actual pitch, but if I had, I doubt I’d be able to both fully comprehend it and explain it to a 5th grader. Just reading all those buzzwords makes me long for the simplicity of a three fund portfolio.
Once again, the investment doesn’t pass the sniff test here.
Allegedly, at most, $10 million of the $33 million dollars was actually invested in cryptocurrencies, and little, if any profits were realized. The rest of the money was either diverted to the cofounders for personal use or presumably lost.
Who Are the Victims?
Apparently, most of the victims are physicians who were contacted directly or indirectly by a surgeon promising amazing returns from a company he co-founded. These victims are busy professionals with little or no formal financial education who trusted a colleague.
The SEC refers to those who prey on people in their professional networks or social circles as guilty of affinity fraud. He’s one of us; he’d never screw us over, would he?
It’s not clear that this particular surgeon is guilty of intentionally defrauding his online buddies. In my opinion, he is most certainly guilty of a profound naivete and great hubris. To not only launch this company, but also believe everything he was told about the wondrous algorithm, and to collect millions from friends and family without recognizing it could be a fraud is, frankly, atrocious.
On the other hand, he did reportedly invest and lose a significant amount of money himself, and it appears that he and the other co-founder were the first to realize that the house of cards had fallen. That’s when they got ahold of the SEC, and I assume it is why they are unnamed co-founders and presumably valuable cooperating witnesses.
From the affidavit, a message from the surgeon and co-founder to their supposed co-investors after visiting Michael Ackerman in December of 2019:
“We gained access to his computer and discovered what appeared to be a very large discrepancy between the assets Michael had been reporting to us and the balance in the trading account we expected to house the assets . Michael assured us that the assets were moved to a more secure account but he refused to provide us access to that account. Last Friday morning he sent a screenshot showing the correct amount of assets in a trading account. We have been unable to verify the accuracy of this screenshot . We are taking steps to investigate the discrepancy and have alerted the SEC office in Miami, Florida. In addition, we have directed Michael to cease all trading. We will provide a further update when we have more definitive information to report.”
Those who believed him and took a chance are the real victims here. If money was stolen from you, I am sorry. As someone who decided to leave medicine when I could easily afford to do so, I can relate to the desire for financial freedom. Double your money a handful of times, and you could start living a whole new life.
Unfortunately, what was proposed sounded too good to be true. And it was.
For further reading on this evolving scandal, see The Southern Investigate Reporting Foundation’s article, Q3 I LP: The Cryptic Doctors of Persuasion for additional details not found in the SEC complaint or affidavit.
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Be careful out there, my friends. Understand how to spot a scam.
Have you been a victim of fraud or have you lost significant money by investing with friends or family? Know someone who has? Tell us your stories in the comment box below!