Madoff lite: Feds claim Charlottesville Ponzi scheme
Federal authorities announced March 11 that 52-year-old Charlottesville-area resident John M. Donnelly has been indicted for fraudulently taking at least $11 million from as many as 31 investors in an alleged Ponzi scheme. If true, the crime bears an eerie–- if smaller–- resemblance to the cases of Albemarle's biggest thief, Terry Dowdell, and to Bernie Madoff, who appears to have pulled off the world's largest fraud.
By selling limited partnership interests in three investment funds–- Tower Analysis Inc., Nasco Tang Corp., and Nadia Capital Corp.–- Donnelly told investors that he would pool their funds in, among other things, stock and bond index derivatives.
"He seemed like a very pleasant guy," said one person who saw Donnelly at work. "I visited his office once," says the person, who spoke on condition of anonymity. "He had a bunch of computers. It seemed like a very sophisticated operation."
Investigators were in Donnelly's office in the old C&O Station on Water Street all morning carrying material out, according to a neighbor who did not want to be identified. The office was locked, although an arrangement of fresh flowers and a series of under-construction photos of the Eiffel Tower were visible from the door.
"We'd see him riding up on his motorcycle to work," says the neighbor.
Donnelly lives in the 1500 block of Church Plains Drive near Crozet. A message left at his home answering machine was not immediately returned. His wife, Deborah Donnelly, is the executive director of the Curry School of Education Foundation.
Reached at her office this afternoon, Ms. Donnelly claimed it was the first she'd heard of the alleged Ponzi scheme run by her husband, but did say her husband had been arrested this afternoon.
"Until I talk to my husband, I can't say anything," she said. "I need to find out more, talk to a lawyer. I want to be responsive here, but I've got a kid coming home from high school, and I have to tell him first."
According to the complaint from the Securities and Exchange Commission, Donnelly was promising his investors stellar returns of up to 22 percent annually. However, the SEC claims, he didn't actually invest any money since 2002.
The SEC alleges that Donnelly approached a small circle of friends in 1998 about making $5,000 and $10,000 investments in something called the Tower fund. Donnelly raised $100,000 from these efforts by assuring his investors that he neither invested in stocks nor bonds, but instead "studied the markets to identify opportunities to take short term positions that would result in small profits."
Instead, the government alleges, Donnelly used investor funds to repay other investors–- and pay himself approximately $1 million in salary and fees during the last three years. The complaint also alleges that Donnelly has been soliciting investors for a new fund called Nadia Capital Partners LP, "based on misrepresentations about his past trading results," the government contends.
Donnelly's own marketing materials, as the government quotes them, claimed returns of 12.5 percent on investments of $100,000 or greater thanks to something he called Blue Logic which he described as a "proprietary model of financial markets using algorithms derived from the quantification of a fractal wave frequency model."
There was at least some truth to this. In 1982, Donnelly appears to have defended his UVA senior thesis in astrophysics: "Astronomical Catastrophes and the Evolution of Intelligence."
Last month, however, "Investor B" came forward, telling the SEC that Donnelly had confessed that all the statements Donnelly had sent him were fictitious and that Donnelly never actually made any trades on behalf of his Tower clients.
The federal district court in Charlottesville entered a temporary restraining order preventing Donnelly's company's from further activities and froze all assets under his control.
–last updated 5:08pm, March 11
–This story is online-only