(Adds Florida case, lawyer statement and note on office door)
CENTRAL ISLIP, N.Y., Jan. 27 (Reuters) - The head of a private New York financing firm who was arrested on Monday night has been charged with operating “a classic Ponzi scheme” into which $370 million was invested, U.S. officials said.
Prosecutors charged Nicholas Cosmo, 37, on Tuesday with mail fraud in U.S. District Court in Central Islip on New York’s Long Island. If convicted, Cosmo faces up to 20 years in prison and hundreds of thousands of dollars in fines.
“This defendant, who operated a classic Ponzi scheme to enrich himself and his colleagues at the expense of investors, is now in custody and the government’s investigation is continuing,” U.S. Attorney Benton Campbell in the Eastern District of New York said.
A ponzi scheme is one in which early investors are paid with the money of new clients.
The large amount of money, however, still pales compared with the purported $50 billion fraud masterminded by investment manager Bernard Madoff. Law enforcement officials said they expect to uncover more schemes as the U.S. financial industry declines.
Also on Tuesday, Florida hedge fund manager Arthur Nadel, who went missing two weeks ago, turned himself in and was ordered held on securities and wire fraud charges until a bail hearing on Friday [nN27353362].
Cosmo’s Agape World Inc and Agape Merchant Advance LLC said they made commercial bridge loans and promised interest rate returns as high as 48 percent to 80 percent a year, prosecutors said in a statement.
After spending the night in custody, Cosmo was unshaven when he appeared in court in a black winter coat on Tuesday. He was ordered held until Thursday, when his lawyers will respond to the criminal complaint and arguments will be heard on whether or not Cosmo is granted bail.
Prosecutors argued that he was a flight risk and “an economic danger to the community.” His attorney Steven Feldman said his client was not a flight risk because he had ties to the community and three children.
Feldman declined to comment to reporters after the hearing, which was attended by investors and Cosmo’s family. In a statement on Monday night, Feldman said Cosmo “intends to work with them (authorities) to allay investors concerns.”
A notice on the Agape office door in Hauppaugge, N.Y. said, “In recent months, due to the financial banking crisis, we have been hit with numerous defaults and extensions which has led to decreased liquidity of our loans.”
Assistant U.S. Attorney Grace Cucchissi told U.S. Magistrate Judge E. Thomas Boyle that $1.5 million had been seized so far in searches of the firms’ offices, but investigators were unsure whether Cosmo had money elsewhere.
At one point during the hearing the judge said, “If anyone can address the missing funds, it would be very, very helpful.”
One investor, who declined to be identified, told reporters that he found Cosmo to be “staggeringly smooth” and was persuaded to continue investing with him even after he discovered that Cosmo had done time for fraud.
Cosmo was convicted of felony fraud and swindle in 1999 and sentenced to 21 months in prison. He was released in August 2000, according to the U.S. Bureau of Prisons.
Cosmo was working for a brokerage at the time of his conviction. He lost his National Association of Securities Dealers license.
According to the Agape Web site www.agapeworldinc.net/ it has made commercial bridge loans, construction loans, acquisition loans and financing for properties nationwide with capital obtained from private sources since 1999.
“While a small number of interest-generating loans were made to commercial borrowers, bank and trading records reveal that most of the money invested in Agape and AMA was used to pay prior investors,” the statement by prosecutors said.
It said more than $55 million was used to pay brokers who recruited investors and to fund commodities trading.
From Jan. 2006 until Nov. 2008 more than $370 million was deposited to Agape and AMA accounts by about 1,500 investors, authorities said. They said less than $10 million of the $370 million was lent to commercial borrowers.
(Additional reporting by Grant McCool and Nicole Volpe; Editing by Bernard Orr)
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