Ponzi Schemer is a Fraud and a Criminal—But He’s Not a Broker

SEC HQs 2According to an SEC administrative law judge, Gary L. McDuff is a serial money launderer, a twice-convicted fraudster, a cheat and a thief who swindled his own mother out of at least $16,000—but at least he’s not a broker. While McDuff, currently incarcerated, still faces years in prison and a $6.5 million restitution order, he is no longer subject to a securities industry bar. After a hearing held inside the Federal Correctional Institution in Beaumont, Texas, Administrative Law Judge Cameron Elliott dismissed the Commission’s request for a collateral industry bar because the Enforcement Division failed to prove, amid all his other criminal conduct, that McDuff acted unlawfully as a broker.

McDuff’s rather brazen misconduct had attracted the attention of law enforcement for years. He was convicted in 1993 of engaging in monetary transactions in criminally derived property. In 2008, the SEC filed a civil complaint against McDuff and two other defendants, alleging that McDuff was the mastermind behind a large Ponzi scheme. As alleged, McDuff and his co-conspirators falsely stated that the investment fund they were promoting, the Lancorp Fund, was duly registered, would maintain an insurance policy to protect against losses, and would only invest in highly-rated debt securities. They also failed to disclose that McDuff was a convicted felon lacking any required securities licenses. The schemers allegedly received payments totaling approximately $10 million from over 100 investors and diverted the bulk of those investments to Megafund, an illegal investment scheme. Megafund returned at least $1 million in payments to Lancorp, with most of those payments diverted for the schemers’ personal use.

In February 2013, the district court granted the Commission’s motion for a default judgment, including injunctive relief. The court also ordered him to disgorge $136,336 plus $65,004 in prejudgment interest, and to pay a civil penalty of $125,000.

The Justice Department also stepped in and charged McDuff with criminal fraud and money laundering violations. Following a trial at which he represented himself, with court-appointed standby counsel, the jury found him guilty on both counts. In April 2014, the district court sentenced him to 25 years in prison, with an additional three-year supervised release term, and ordered him to pay $6.5 million in restitution. The Fifth Circuit affirmed the convictions and sentences in February 2016.

The government was not quite done however. Just before sentencing in the criminal case, the SEC sought to cap off the matter with a request for a collateral industry bar. Administrative Law Judge Cameron Elliott, citing the federal court proceedings, granted the request. The SEC, in response to an appeal from McDuff, remanded the case to the Administrative Law Judge for further proceedings because ALJ Elliott misconstrued the preclusive effect of the allegations in the civil complaint and the criminal indictment.

In a rather unusual move, ALJ Elliott held an evidentiary hearing in the federal prison where McDuff is incarcerated. ALJ Elliot spent little time in disposing of McDuff’s argument that the prison hearing violated the public hearing requirement of the SEC’s rules of practice. He concluded that “a hearing is not considered non-public merely because it takes place in a facility that places some conditions on public access.” SEC rules did not create an unqualified right to a public hearing, and in this instance, “members of the public could have attended the hearing had they been especially determined and diligent.”

After hearing testimony, ALJ Elliott concluded that, despite the overwhelming evidence of illegal conduct, the Enforcement Division failed to prove that McDuff acted as a broker. The SEC failed to show that he engaged in the business of affecting securities transactions for the accounts of others. ALJ Elliott did have harsh words for McDuff, finding that much of his testimony was unbelievable. He concluded, however, that McDuff’s “plundering of the Lancorp Fund’s so-called returns is thus more consistent with garden-variety theft than it is with brokering,” and dismissed the SEC claim.

In the Matter of Gary L. McDuff, Initial Decision Release No. 1090 (Dec. 16, 2016).