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Recent college grad is charged with running a Ponzi scheme out of his frat house

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The U.S. Securities and Exchange Commission charged a recent University of Georgia graduate with running a fraud scheme from his fraternity house.

Syed Arham Arbab, 22, allegedly used a Ponzi scheme to bilk at least eight college students, recent graduates and their family members out of $269,000 by offering investments in a purported hedge fund, according to the complaint filed on Friday, May 31. A Ponzi scheme, most famously used by Bernie Madoff, is a type of investment fraud that uses funds collected from new clients to pay existing investors.

The regulator claims Arbab started the scheme in May 2018 and listed the address of his fund as 558 W. Broad Street, Athens, GA 30601, which is the home of the Phi Kappa Tau fraternity house at the University of Georgia in Athens.

"We allege that Mr. Arbab used his college affiliations to operate a Ponzi scheme that drained valuable resources from current and former students," Richard R. Best, regional director of the SEC's Atlanta Office, said in a statement.

To gain investors for his "Artis Proficio Capital" investment fund, the SEC says Arbab claimed he generated returns of up to 56% and guaranteed investments up to $15,000. But no such fund existed says the SEC's complaint. Instead, Arbab deposited investor funds into his personal bank and brokerage accounts, and the regulator says he used the funds for expenses such as Uber rides, purchases at bars and a strip club, as well as a gambling trip to Las Vegas.

He also used some of the investor funds to pay back earlier investors who had requested their money back, the complaint says. At Arbab's direction, some new investors even "unwittingly" sent their deposits to existing investors via apps such as Venmo, Zelle and Cash App, reports the SEC. To cover his tracks, Arbab allegedly claimed the existing investors were involved in managing the fund.

While Arbab claimed he was a graduate student at the University of Georgia, pursuing his MBA, the SEC's complaint says he only recently graduated with his bachelor's in cellular biology and genetics in May 2019.

Arbab and the fraternity did not immediately respond to CNBC Make It's requests for comment on Tuesday.

"This is a reminder that investors of all ages and experience levels — whether long-time investors or recent graduates investing funds from their first few paychecks — should carefully research investment opportunities and the people offering them," Best added.

Red flags to watch for when investing

Regulators say there are some common characteristics of a typical Ponzi scheme that investors should watch for. Before you invest in any opportunity, you need to take the time to thoroughly research the fund, the investment professional and the firm. "Fraudsters are counting on you not to investigate before you invest," the SEC says. "Fend them off by doing your own digging."

Here are some rules to keep in mind to protect your investments:

  1. If it's too good to be true, then it probably is. Every investment carries a level of risk, and the higher the reward, the higher the risk. You should be suspicious of any that claims to have high returns with little to no risk, according to the SEC.
  2. There are no guarantees. When it comes to investments, all have some level of volatility, so you should be skeptical of any funds that claim to generate positive returns on a consistent basis, without regards to how the overall market is performing.
  3. Don't work with unregistered sellers and investments. Federal and state securities laws require individuals to be licensed in order to sell securities. If they are not, walk away. If they are registered, you can check their record and job history. "Credibility can be faked. Check out actual qualifications," the SEC says. Most Ponzi schemes usually involved unregistered investments and unlicensed individuals or firms, according to the SEC.
  4. If you don't understand something, avoid it. Many Ponzi schemes involved "secretive, complex strategies," the SEC says. If you don't understand an investment, or worse, you don't receive complete and accurate information about a potential opportunity, it may be worth opting out. "Legitimate professionals should be able to explain clearly what they are doing," says the Financial Industry Regulatory Authority, a self-regulator for investment companies.

FINRA also offers a Scam Tracker tool that can help investors spot common red flags associated with investment fraud. If you do think you've been a victim or are concerned with an investment, you can contact the SEC, FINRA or your state securities regulator.

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