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Hedge Fund Boss Preying on African-Americans Arrested

Wednesday, 5 Jun 2013 | 1:53 PM ET
Fredrick Scott posted photos on his website of himself with the former Knicks star Patrick Ewing.
Source: Frederickdscott.com
Fredrick Scott posted photos on his website of himself with the former Knicks star Patrick Ewing.

"Two things are infinite: the universe and human stupidity; and I'm not sure about the universe."

Those were the words that Fredrick Douglas Scott attached to most of the emails sent to the clients of his boutique investment banking and financial advisory firm, ACI Capital. What the clients didn't realize was that the joke was on them, according to federal prosecutors.

In addition to being one of Ebony magazine's "Top 30 under 30" and claiming to be the youngest African-American to found a hedge fund, Fredrick Douglas Scott was a fraudster, according to the criminal complaint filed Monday in U.S. District Court for the Eastern District of New York. The complaint was unsealed Tuesday after Scott was arrested.

In its most recent regulatory filing, ACI claimed to manage $3.7 billion in assets. The FBI said Scott used ACI to execute two related fraudulent schemes in which money wired to the firm by clients was stolen for Scott's personal use.

It's not quite clear how much money Scott may have stolen. The criminal complaint alleges he stole $750,000. But if Scott had anywhere near the $3.7 billion under management he claimed, the actual fraud could be much larger.

Of course, he may have just made up that number to impress his alleged victims. (The complaint says he once told a potential investor/alleged victim that he had $6 billion under management.)

By all appearances, Scott was allegedly running what's known as an "affinity fraud," where people are conned out of their money by someone who appears to be one of their people. Bernie Madoff is the most famous example of this, with many of his victims coming from Florida's elderly Jewish community.

For Scott, his alleged victims appear to be affluent African-Americans, according to a person familiar with the matter.

In one of his alleged schemes, Scott told one investor that he was buying an African-American-operated savings bank. The investor agreed to co-invest with Scott by buying a convertible note for $250,000.

The investor, however, needed approval from trust advisors who controlled his funds. The advisors objected and demanded the money—which had already been transferred to Scott—be returned. The criminal complaint said that the account that held the money is overdrawn by $91.24.

Scott closed down ACI in April, immediately launching a new firm called Fredrick D. Scott LLC. You can get a feel for the affinity style of his endeavors from the press release:

Fredrick D. Scott announced today that he has launched Fredrick D. Scott, LLC (FDS). FDS is a venture capital and private equity firm that will principally invest in and acquire minority-focused financial and banking institutions.

Scott was formerly the head of ACI Capital Group, LLC (ACI). Founded in August 2009 and registered as an Investment Advisor with the United States Securities and Exchange Commission, ACI was a privately held investment banking and advisory firm that managed $3.7 billion in assets.

"My goal is to redefine and advocate for economic sustainability and wealth creation in our community," said Scott. "The minority banking industry, more specifically the African-American owned banking segment, is fragmented and under tremendous pressure from larger and more robustly capitalized mainstream competitors who have embraced the growing diversity of the marketplace. I believe that, in addition to capital, I can contribute fresh energy and new strategies that would improve the competitive posture of African-American owned banking and financial services businesses, as well as advance the mission of multi-generational economic strength and wealth creation in our community."

The number of African-American owned banks across the United States has dwindled. In 1994, 54 such banks were identified by the Federal Deposit Insurance Corporation (FDIC). At the end of 2012, there were just 28, leaving huge swaths of the African-American community without advocates and access to these traditionally "mission-based" institutions. Most, had close ties to the local churches, families and businesses, had historically served as a boon to black businesses, and offered African-Americans resources they had been previously denied.

Named one of Ebony magazine's "Top 30 Under 30" in May 2010 at the age of 26, Scott was, at the time, the youngest African-American hedge fund founder in history. For more about Scott, go to www.fredrickdscott.com and follow him on Twitter @fredrickdscott.

That twitter account has been deleted, by the way. And his website seems to be down as well. His linkedin page, however, is still up. He claims, among other things, to be fluent in German, Italian and Korean.

"As alleged, the defendant was more creative in touting his own abilities as an investment strategist than he was at actually investing clients' money. In actuality, he was a con man who induced victims to part with their money by promising high returns, and then squandered their money on himself," FBI Assistant Director-in-Charge George Venizelos said in a statement.

The criminal complaint says that bank records show Scott withdrawing cash from an account that held client money and using client funds to purchase personal items at Louis Vuitton, the Apple Store, Starbucks, Fair Bail Bonds, True Religion Jeans, Tao Restaurant, the Hampton Inn SoHo and Dizzy's Coca-Cola Club.

Some of these things, you'll notice, are not like the others. Fair Bail Bonds? There's probably more to learn about what Scott was allegedly up to.

_By CNBC's John Carney. Follow me on Twitter @Carney

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