Former Investment Broker Receives 42 Months Prison For Role In CD Scam

Many clients who purchased long-term “zero coupon” CDs were elderly

SAN JOSE – LAWFUEL – Legal Newswire – United States Attorney Scott N. Schools announced that Vincent Joseph Ferro, a former principal with the Capital Advisory Group investment firm in Westlake Village, California, was sentenced Monday, October 29, 2007 to 42 months in prison following his conviction for mail fraud. The sentence was handed down by United States District Judge James Ware, who also ordered Mr. Ferro to serve a three-year term of supervised release after completing his prison term. Mr. Ferro was taken into custody immediately after sentencing.

According to the indictment and Ferro’s plea agreement, Ferro, 49, began selling brokered Certificates of Deposit (CDs) using Advent Trust Company, formerly based in Houston, Texas, as the custodian in approximately 1997. The “brokered” CDs were not certificates of deposit in the traditional sense. They were, instead, fractional interests in long-term, “zero coupon” jumbo CDs, held by Advent Trust as the custodian and not in the purchasers’ own names, in which all of the principal and interest was to be paid at maturity. Ferro admitted that he knew that his elderly clients were not interested in holding those CDs to maturity. In order to induce them to invest, Ferro admitted that he made several false and misleading representations regarding the investments:

– No Commissions. The brokered CDs were advertised and sold as if there were no commissions. This representation was false. In fact, substantial up-front commissions were taken from investors’ principal. (The remaining funds were invested at a higher rate of interest than was promised to the buyer; over the life of the CD, this interest rate “spread” would have made up for the commissions.) The statements mailed to the investors by Advent Trust furthered the fraud, as they reflected the full amount of the client’s purchase and did not reveal the amount taken as commissions.

– No Early Withdrawal Penalty. Ferro also admitted that he told his customers that although they were buying longer-term instruments, they could, at any time after one year, redeem their CD with “no fixed early withdrawal penalty,” or words to that effect. This statement was intentionally misleading. The ability to fulfill that promise depended upon Ferro’s ability to re-sell the redeemed CD in the “secondary market,” meaning sell it to another buyer. Ferro acknowledged knowing that his ability to re-sell the

CD and thereby keep his promise to his customers depended on many factors, including the movement of interest rates, that were entirely outside of Mr. Ferro’s control.

– Misleading Interest Rates. Finally, Ferro admitted that he misled his customers by touting the “average annual yield” of the zero-coupon CDs he was selling with the “average percentage yield” (APY) advertised by banks for traditional CDs. The rate Ferro advertised was a “simple” rate, while the banks are required to advertise a compound rate. Ferro knew, and admitted in his plea agreement that he took advantage of, the fact that his clients would not understand the difference between the two rates of interest and would therefore mistakenly believe that the difference between Ferro’s products and those available from local banks for ordinary CDs was greater than it really was.

In his plea agreement and sentencing papers, Mr. Ferro agreed to accept an order requiring him to make full restitution to his victims. The Court deferred a precise calculation of restitution until January 28, 2008, pursuant to Title 18, United States Code, Section 3664(d)(5).

United States Attorney Scott N. Schools stated: “I am gratified by the sentence and hope it will send a strong message to brokers, financial advisors, and other fiduciaries that this office will vigorously pursue those who, in violation of federal criminal law, place their personal self-interest ahead of the interests of customers who place their trust in them.”

David R. Callaway is the Assistant U.S. Attorney who is prosecuting the case. The charges followed a two-year investigation by agents of the United States Secret Service and the Internal Revenue Service – Criminal Investigation.

Further Information:

Case # CR 04-20116

A copy of this press release may be found on the U.S. Attorney’s Office’s website at www.usdoj.gov/usao/can.

Electronic court filings and further procedural and docket information are available at https://ecf.cand.uscourts.gov/cgi-bin/login.pl.

Judges’ calendars with schedules for upcoming court hearings can be viewed on the court’s website at www.cand.uscourts.gov.

All press inquiries to the U.S. Attorney’s Office should be directed to Natalya LaBauve at (415) 436-7055 or by e-mail at [email protected]

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