The feds bust a fugitive from Deephaven

  • Article by: DAN BROWNING , Star Tribune
  • Updated: March 29, 2012 - 11:51 PM

He failed to appear at a court hearing to face charges related to a $40 million Ponzi scheme.

Michael J. Murphy's troubles have gone from bad to worse.

Fined twice by the state for selling improper insurance and unregistered securities and slapped by the IRS for back taxes, the 51-year-old Deephaven man now stands indicted in a nationwide Ponzi scheme that authorities say bilked more than $40 million, mostly from retirees.

Murphy failed to appear for his initial court appearance in North Carolina last week and sought psychiatric treatment at a Fargo hospital. A federal judge in Charlotte, N.C., ordered him arrested and he's expected to be transported there soon to face the charges.

Murphy, who invested $100,000 of his own money in the scheme, denies the charges, said his attorney, Anthony Scheer.

"For many months he was actually a cooperating witness in another fraud investigation, and the government has subsequently concluded that he has participated in a fraud," Scheer said. "He's told the government he's going to plead not guilty because he is not guilty."

Murphy was indicted last month along with three other men in North Carolina on securities fraud, wire fraud and money-laundering charges. The indictment says Murphy conspired with a number of other purported hedge fund operators around the country who raised money for Black Diamond Capital Solutions, claiming to use analytical research tools and thorough research to find worthwhile investments, when none of that was true.

So far a half-dozen other individuals from North Carolina, South Carolina, Texas and California have pleaded guilty to participating in the scheme. The man accused of launching the Ponzi scheme, Keith Franklin Simmons, of North Carolina, was convicted in December after a trial and awaits sentencing. CommunityOne Bank has agreed to pay $400,000 to victims for failing to file any "suspicious activity reports" despite the hundreds of suspicious transactions.

Murphy played the role of a "hedge fund" manager and raised some $3 million through entities bearing variations of the name "St. Croix Partners," the indictment says. Co-defendants Jonathan Davey of Newark, Ohio, Chad Sloat of Kansas City, Mo., and Jeffrey Toft of Oviedo, Fla., collected more than $11 million, $4 million, and $2.5 million, respectively.

Warren Buffett, 'Fractal Chaos'

The indictment says the defendants lured investors with lies and false promises. They said Black Diamond followed Omaha investment guru Warren Buffett's philosophy and they claimed to have special access to banks involved in foreign currency transactions, known as "forex" trades. They claimed they relied on computerized trading "based on Elliot Wave theory and Fractal Chaos Mathematics."

Actually, though, the defendants and their co-conspirators "simply handed over victim money ... for the derivative Ponzi account, and had no understanding of what was supposedly meant, if anything, by 'Elliot Wave theory' or 'Fractal Chaos Mathematics' in relation to foreign currency trading," the indictment says.

Davey allegedly siphoned off money to build a 9,000-square-foot estate on 48 acres in Licking County, Ohio, complete with a carriage house, an elevator, a secret passageway, and a driveway that "self-melted" snow.

Concerns were raised

In July 2009, after the Black Diamond collapsed, Toft e-mailed Simmons and others noting that one of his clients had no money, no food, and was about to have her electricity cut off. The woman had a medical condition requiring the use of electricity, Toft wrote, adding that "if her electricity goes out she could DIE."

Even so, Toft and the other defendants propped up the scheme by continuing to raise money from new investors, the indictment says. In November 2009, Murphy and Lacy wrote to Simmons about a client who was threatening to go to the authorities, and noted that "Ponzi schemes related to forex in Minnesota are currently all over the news."

That line apparently referred to the $194 million scheme run by Trevor Cook of Apple Valley, who's now serving a 25-year sentence in federal prison after defrauding more than 700 investors nationwide.

Despite those concerns, Murphy continued to lie to prospective investors for the Ponzi scheme, the indictment says. In 2006, the Minnesota Department of Commerce slapped Murphy with a $7,500 fine for selling unapproved annuities contracts. Three years later, the agency revoked his license and fined him $10,000 for selling "unsuitable policies" and unregistered securities without a license.

Nine months after that, the IRS slapped him with a $380,871 tax lien.

Dan Browning • 612-673-4493

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    Thursday March 29, 2012

    2006: Minnesota Department of Commerce fines Murphy $7,500 for selling unapproved annuities contracts.

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