Great frauds in history: Arthur Nadel’s day-trading scam
When failed lawyer Arthur Nadel's hedge fund collapsed, it claimed to have $350m in assets. But it had just $500,000 in the bank.
Arthur Nadel was born in New York on New Year’s Day in 1933. He went on to graduate from New York University (NYU), followed by NYU Law School. His law career came to an ignominious end when he was disbarred in 1982 for misappropriating money held in an escrow account (though the money was eventually repaid). Nadel then moved to Sarasota, Florida, trying out various business ventures, interspersed with stints as a piano player. In the 1990s he and his fifth wife, Peg, founded a successful day-trading club. On the back of this success he launched a hedge fund, Scoop Management Company, which managed money for three funds run by Neil and Chris Moody.
What was the scam?
Nadel claimed that he would make money for investors by day-trading the Nasdaq (a technology-heavy index of stocks) using a computer program. He was a poor trader, however, making only small returns during the technology boom, and large losses when the bubble burst. To cover up his failure, he reported consistently large returns, which enabled him to keep attracting enough money to repay those few investors who wanted their money back. During this period, Nadel and the Moodys earned around $42m each in fees based on the reported performance of the fund and the amount of assets under management.
What happened next?
The global financial crisis in 2008 made investors nervous, resulting in increasing numbers demanding their money back, and a sharp decline in the number of new investors. Nadel suddenly disappeared in January 2009, days before the fund was due to repay $50m, leaving a letter for his wife confessing everything. A few weeks later he handed himself in to the authorities, and was eventually sentenced to 14 years in prison. He died in jail in 2012. Neil Moody and his son, Chris, denied knowing anything about the fraud, but they accepted a brief ban from the securities industry as part of a settlement.
Lessons for investors
At the time of Scoop’s collapse it claimed to have $350m in assets, but had only $500,000 in the bank. Actual investor losses totalled $168m, around half of which has been repaid through lawsuits and clawbacks from those investors who made money. Many investors put money into the scheme based on a fulsome recommendation from an independent investment newsletter, run by a neighbour of Nadel, which claimed to have done “due diligence”, but later turned out to have received nearly $10m worth of payments from Scoop. Investment newsletters can provide useful tips, but it’s always a good idea to do your own research.