A barred broker and tax preparer bilked clients out of $1.8 million in a Ponzi-like scheme involving fake account statements, forgery and other lies, the FBI says.

IRS and FBI agents arrested Scott Newsholme this week on criminal fraud charges as the SEC hit the former SII Investments advisor with a parallel civil rap. Newsholme, 42, spent his clients’ investment funds on cars, gambling and even office rent for his suburban New Jersey practice, prosecutors say.

FBI case against Scott Newsholme

One client compared him to Bernie Madoff in a separate lawsuit. The movement of the victims’ funds into his personal accounts stretched as long as a decade, continuing after he was barred by FINRA, fired by SII and forced to pay $120,000 in a settlement with state securities regulators, according to investigators.

The enforcement actions set Newsholme’s case apart from other advisors accused of carrying out fraud undetected for years. Similar Ponzi schemes have also tarred the industry, though. Newsholme’s former clients face a difficult struggle to collect any refunds, says lawyer Bryan Arce.

“There’s no money there, the guy spent it all,” says Arce, who filed a lawsuit against Newsholme in February on behalf of three of his clients. “From what I can tell, he’s a very good liar.”

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UNEXPECTED ILLNESS
Newsholme’s attorney didn’t return a phone call on Wednesday, and efforts to reach Newsholme directly at his Farmingdale, New Jersey, home were not successful. A voicemail in the Howell office of his tax and planning practice, MVP Financial, said he had been out for a long time with an unexpected illness.

Newsholme had followed his father and brother into the tax preparation business, later branching off on his own to sell annuities and offer planning services, according to the SEC’s complaint. He worked nine years with Royal Alliance Associates starting in 1999, later joining SII, his FINRA BrokerCheck file shows.

He seized clients’ funds by cashing their investment checks and depositing the money into his own accounts, according to investigators. The FBI connected the fraud to his purchases of at least three cars, a master bedroom mattress and to outings in Atlantic City and Disney resorts.

Newsholme would pay clients out of his own accounts when they asked for funds, investigators say. He supplied clients with periodic fabricated account statements, going as far as pretending that a Morningstar investment-tracking tool showed a retired couple’s account, according to the SEC.

“Morningstar regrets any misuse of its website, and encourages investors to vigilantly scrutinize all financial account information they receive, even from an otherwise trusted source such as a financial advisor,” a spokeswoman said in a statement.

BANNED BUT STILL IN BUSINESS
SII fired Newsholme in July 2014 after his first victim found out she had no actual account with the firm and alerted FINRA, according to the FBI. FINRA barred him from the industry two months later when he didn’t respond to the regulator’s request for information, a BrokerCheck entry shows.

In June 2015, Newsholme agreed to pay a $35,000 fine and restitution of $85,000 under a settlement with the New Jersey Bureau of Securities in which he admitted he fabricated the client’s statements. Royal Alliance also paid the client a $55,000 settlement a year earlier, according to state regulators.

Newsholme preyed on at least six other clients, the SEC’s complaint shows. He peddled fake investments in nonexistent independent movie projects and video games, along with bonds in a local country club that hadn’t issued any for years, investigators say.

“Newsholme perpetuated his scheme by winning his clients' trust through personal relationships, and providing clients sufficient reassurances and fake documentation to conceal his ongoing fraud and to quiet their concerns when they arose,” according to the SEC’s complaint.

'THEY ALL GET CAUGHT'
Government agents began contacting some of his clients, though Newsholme acted as though there was nothing amiss, the SEC’s complaint shows. Law enforcement launched a criminal investigation around 2015, according to the FBI special agent who filed the criminal complaint.

Most of the victims didn’t catch on to the scheme until either late 2016 or early this year, though, according to the charging documents. The former clients represented by Arce had lost $1.2 million they entrusted to Newsholme, a high school friend of theirs, according to their lawyer.

“Eventually they all get caught,” Arce says. “I’m just afraid that my clients are going to end up with not even pennies on the dollar.”

The SEC is seeking full disgorgement under its civil case, which charges Newsholme with two counts of securities fraud and one count of fraud, manipulation or deception of an advisory client. He also faces a criminal rap of mail, wire and securities fraud, according to the Trenton U.S. Attorney’s Office.

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Tobias Salinger

Tobias Salinger

Tobias Salinger is an associate editor for Financial Planning, On Wall Street & Bank Investment Consultant.