Trading program raised red flags

Courts to decide if son of 'Fit for Life' guru was running a scheme


Published: Sunday, August 2, 2009 at 1:00 a.m.
Last Modified: Saturday, August 1, 2009 at 10:18 p.m.

SARASOTA - It will be up to the courts to decide whether Beau Diamond was running a fraud or a legitimate foreign currency exchange trading program when he lost $38 million in other people's money.

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Beau Diamond says his Diamond Ventures LLC simply fell victim to a turbulent world market.

The 31-year-old's explanation is that his high-risk Forex play simply capsized in a turbulent world market.

But a suit against Diamond and his father, "Fit for Life" guru Harvey Diamond, filed by Bradenton attorney Andre Perron, alleges something else -- that Diamond was running a Ponzi scheme from the get-go that bled his more than 200 investors of their savings.

Diamond's Forex program -- purportedly based on "Four Magic Pillars" of currency trading that he told his advocates he had mastered -- bears hallmarks laid out in the "Scams and Swindles" publication produced by National Futures Association and "red alerts" for Forex fraud disseminated by the U.S. Commodities Futures Trading Commission, or CFTC:

Starting through an affinity group and spreading the word from there.

High promised monthly dividends on a venture that is inherently risky.

An agreement signed by investors not to divulge their deal.

A lack of filings to the Internal Revenue Service.

Hefty referral fees early on and late bonuses to encourage fresh inflows.

A "reload" or recovery phase.

The Herald-Tribune has confirmed that the CFTC, FBI and IRS all are scrutinizing Diamond's ventures.

Diamond Ventures and Arthur G. Nadel's Scoop Management were both forced to admit their multimillion-dollar cupboards were bare in the same December-to-January time frame during which Ponzi schemer Bernard Madoff's investment empire blew up, prompting a run by skittish investors across the nation.

Perron obtained Diamond's trading records in April, laying his hands on the trader's computer by threatening him with court-ordered contempt. The lawyer is now taking on clients in the hope that Diamond stashed some investors' money somewhere.

Neither Beau nor Harvey Diamond have responded to repeated requests for comment by the Herald-Tribune.

High leverage

When a trader buys off-market foreign exchange contracts, he is typically making a highly leveraged bet on whether a given currency will go up and down in terms of another. He might bet on a decline in the dollar measured in euros.

Forex trading is something that the mass audience of investors only has been able to tap in the last decade.

"Back in the mid-90s, the currency market was available only to institutions and high-net individuals," said Brian Dolan, chief currency strategist at Gain Capital, a large Forex firm and one of the four at which Diamond maintained his accounts.

"What we have done by bringing it online is bring it down to the retail level," Dolan said. "We are giving them access to what was called the interbank market. That is where the big money changes hands."

As this new field of speculation blossomed, it created a ready marketplace for unregulated fund managers like Diamond.

"We don't regulate those guys at all," said Larry Dykeman, a spokesman for the National Futures Association.

Gain offers standard account holders leverage of 100 to 1, meaning a trader could put up $100,000 and be riding a move in $10 million worth of currency. That kind of leverage magnifies the effect of what to outsiders seems like small currency moves. If a trader were betting on the dollar going down and it went up three cents, in that example, they would owe $300,000.

"That is one of the risks in trading Forex," Dykeman said. "It doesn't take much of a movement in the market to wipe you out."

Crystallizing referrals

Nothing expresses the New Age nature of Diamond's efforts in Forex better than the beautiful sets of crystals he sent out to his investors in early 2007.

In the gift box was a deep purple amethyst, which "stabilizes and balances the aura," he wrote in an accompanying message. An amber-colored citrine would help in "working out problems on both the physical and subtle levels."

But the centerpiece was not one but three "white clear double terminated quartz crystals," and that is where the gift turned into a pitch for new money.

Original investors like the one who shared Diamond's crystal message with the Herald-Tribune had coasted through 2006 receiving magnificent monthly checks, or letting their money ride or compound for an even higher promised rate of return.

Diamond invited the happy investors to share their good fortune by keeping one quartz and giving away two.

The gems were for investors to "give as gifts to two people you would like to see have more prosperity in their lives this year," Diamond wrote.

His investment club started with a Sarasota clique, an inner circle of people with New Age or alternative beliefs or lifestyles -- crystal healing just one example.

Sarasota tax attorney John McKenney, one of the last investors to join, fit that bill: "I teach Ashtanga yoga. We do 65 postures. This is the real deal," he said.

People like him loved being friends with Harvey and Marilyn Diamond -- well-known as the authors of a 1980s book on food combining -- and their precocious son.

It's a secret

To become part of "the club" as Beau Diamond and others called it, an investor had to sign a "participation agreement."

In it, they were promised a specific monthly return of 5 percent. As more investors joined, that percentage was adjusted downward to 4 percent, and then 3.5 percent.

But to get their high yields, investors had to agree to complete secrecy: "Participant agrees that he or she shall not publish, disclose or otherwise make available any Confidential Information, including this agreement, except as expressly authorized by the Manager."

In its description of a commodities-related Ponzi scheme, the futures association says "the swindler initially approaches a small number of people and convinces them to invest in his program. He then widens his net and uses the money he receives from a second group of investors to pay large profits to the original group."

No IRS reports

In a February 2007 e-mail to an investor obtained by the Herald-Tribune, Diamond specifically addressed the subject of whether he needed to send out 1099 forms to the IRS, normal practice for funds with outside investors, whether they are registered or not.

"Since my attorney did not finish his research completely in time for the cut-off date to send out 1099s, he advised me that it's best just not to send them out this year," Diamond wrote. "He said that just a normal 1099 implies that you are an employee and that we do not want to do that."

Diamond then notes that a 1099 is "really for the person or entity issuing it, to report to the IRS that they have paid someone a certain amount of money. The payee does not need it. "

Joy Freeman, a former Sarasota resident and the investor who supplied the e-mail about taxes, said that Diamond told her to "report the taxes," and she did.

Referrals and bonuses

The referral fees came and went during the 2006-08 run of Diamond's club, but lucrative offers of sign-up bonuses accelerated during the last half of 2008.

During and after the credit crisis that enveloped the country in summer 2008, investors became more risk-averse. People letting their money ride in unregistered operations started pulling money out, while fresh contributions also dried up.

McKenney, the Sarasota investor and tax attorney, wrote his first check to Diamond's fund in August 2008 and his last in November, when he upped the ante.

"He had this offer for a certain period of time, if you added to your account, he would give you an additional 10 percent in a few months," McKenney said. "This was September-October that he sent this e-mail out to everybody."

"I put $175,000 in and was supposed to receive a bonus of $17,500 on Feb. 8 of this year, and then another $25,000 in and the bonus was to be on the 19th of February, and then another $10,000 in," he said.

The reload

By early December, Diamond was telling investors that their checks were not in the mail because his bank had mismanaged his accounts.

Ponzi schemes often have as their finale what is called a "reload." The promoter admits that because of unforeseen circumstances, he has lost investors' money, but has a plan to get it all back, one that involves writing more checks.

In a Jan. 9 e-mail acknowledging that investors' money was gone, Diamond puts forward a recovery plan. Its goal is "to return all losses to every club member" not "for me to earn income or commission from the new venture," he wrote.

At a mid-January meeting at the spacious Lakewood Ranch home owned by one of his investors, Diamond introduced Commonwealth LLC and another currency trader, Eric Collins. Investors were to give fresh money to Collins and then he and Diamond would do the trading. Proceeds would be split between those doing the fresh investing and those who had lost money.

The withdrawal

In the futures association's scenario of a classic Ponzi, the number of investors continues to grow and the swindler continues to collect more money. "Then, he abruptly disappears."

Perron, the plaintiffs' attorney, said he has not known Diamond's whereabouts since obtained his trading records in April.

But in a long letter to investors on June 9, Diamond says he is still in town, but has had to backtrack on plans to recoup investors' money. He wrote that his life had been threatened, and that the investors who were going to back Commonwealth dropped out because of the FBI investigation.

"Funds were not stolen, they were lost and misinvested," Diamond wrote. "Anyone who had nearly $40 million in his sole control for that long and aimed to steal the funds would be long gone."

Today, Diamond still has supporters among his investors. Joy Freeman, who supplied Diamond's IRS-related e-mail, is one.

"He should have told us the truth when he started dipping into the hedge fund," Freeman said.

"Instead he kept trying to recover and even took people's money at that late date," she said. "But I don't think at any point he was maliciously scamming us or ripping us off or anything like that."

This story appeared in print on page A1

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