Stock Selection by Astrology? Not According to the SEC
There are quite a few theories for forecasting the direction of the market. The Hemline Theory is one. According to its devotees, when women’s hemlines are up, so goes the market and when they are lower, the market heads down. There’s also the “Super Bowl Indicator,” which posits that a Super Bowl win by a team from the old American Football League (now the AFC) foretells a decline in the market. And, so it goes…
A number of years ago, I received a call from a woman who wanted to know when a particular client went public. I gave her the month. She asked for the date. I gave her the date that trading commenced. She then inquired as to the time of the first trade. This took a bit of digging and when I called her back with the information, I asked as to why she needed such detail. She told me that her firm prepares an astrological chart for each prospective investment opportunity and bases its decisions accordingly. Okay…
I was reminded of the aforementioned story as it came to light that the SEC recently charged that a former broker in Orlando, Fla., defrauded investors in an astrology-based Ponzi scheme.
The SEC alleges that Gurudeo “Buddy” Persaud lured family, friends, and others into investing in his firm, White Elephant Trading Company LLC, by falsely guaranteeing their money would be safe and yield lofty returns ranging from 6 to 18 percent. Persaud told investors he would invest in the debt, stock, futures, and real estate markets, but did not reveal that his trading strategy was based on his belief that markets are affected by gravitational forces.
According to the SEC’s complaint (http://sec.gov/litigation/complaints/2012/comp-pr2012-118.pdf) filed in U.S. District Court for the Middle District of Florida, Persaud used investors’ money to make payments to other investors, the hallmark of a Ponzi scheme. Persaud also lost $400,000 of investor funds through his trading and diverted at least $415,000 to pay for his personal expenses, the SEC alleged. The same month Persaud began receiving investor money, he started using some of that money for his personal expenses. The SEC said that Persaud created phony account statements to hide his trading losses and give investors a false sense of security.
“Persaud preyed on people who trusted him by promising high and steady returns while hiding his unconventional trading strategy,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “When Persaud blatantly lied to investors and hid their losses through a Ponzi scheme, he should have known that an SEC enforcement action was in the stars.”
Persaud was a registered representative at a Florida-based broker-dealer but separately operated the now-inactive White Elephant, starting in mid-2007. In all, Persaud raised more than $1 million from at least 14 investors between July 2007 and January 2010.
The SEC alleges that in making trading decisions, Persaud chiefly relied on an Internet service that provided directional market forecasts based on lunar cycles and gravitational pull. Persaud’s strategy was premised on the idea that gravitational forces affect mass human behavior, and in turn, the stock market. For example, Persaud believed that when the moon exerts greater gravitational pull on the Earth, people feel dejected and are more inclined to sell securities.
The SEC’s complaint seeks disgorgement of ill-gotten gains, financial penalties, and injunctive relief against Persaud to enjoin him from future violations of the federal securities laws.