The operator of a Highland Park mutual fund was sentenced to prison in a federal prison for losing millions in risky trades and then lying to a client to persuade him to make further investments.
David Swartz, 59, of Highland Park, was sentenced last week by U.S. District Judge William M. Conley to two years in a federal prison for wire fraud and aiding and abetting the preparation of a false tax return.
Swartz pleaded guilty to the charges in April. He was also ordered to pay $181,915 in restitution to one of his victims.
The U.S. Attorney’s Office for the Western District of Wisconsin said Swartz worked as an unregistered investment adviser and fund manager.
According to court documents, he operated the North Shore Alternative Strategies Fund, LP.
Swartz had a close personal relationship with one of his victims, who lived in Madison, Wisconsin.
Starting in January 2009, the victim invested regularly and at regular intervals in Swartz’s mutual funds, believing that he would invest the money conservatively, according to federal prosecutors.
In 2018, Swartz began making false statements to the victim about the fund’s performance.
“For example, the fund lost approximately 23% of its value in 2018, but Swartz sent Victim 1 an email on December 31, 2018, stating that the fund had its ‘best year yet,’ with ‘a net gain of nearly 9% through November and only a 1.5% loss in December,'” prosecutors said.
In January 2019, Swartz wrote the victim in an email that the fund had “an incredibly great year in 2018” and made “solid gains for the year,” even though the fund had incurred heavy losses.
When the fund lost significant value in February 2020 due to a series of risky trades, Swartz again lied to the first victim about the fund’s performance and persuaded her to invest another $150,000, prosecutors said.
The significant loss in February 2020 was over $5 million, according to court documents, adding that Swart lost the money when he bought large amounts of Tesla stock on credit.
On March 18, 2020, Swartz emailed the victim a purported copy of a Charles Schwab bank statement for the fund.
He altered the statement to show that the total value of the fund was $1,017,191 as of December 31, 2019, while the actual value of the fund was $58, prosecutors said.
In March 2020, Swartz also submitted a false Form K-1 for the 2019 tax year to the same victim, showing that net capital gains from his investment in the fund exceeded $500,000, prosecutors said.
Prosecutors said Swartz knew the victim did not realize any capital gains from the fund in 2019 because the fund suffered significant losses.
The victim filed a U.S. federal income tax return (Form 1040) in October 2020 for the 2019 tax year in which he significantly overstated his investment income, resulting in him reporting an unjustifiably high amount of federal income tax due.
The charges against Swartz were the result of an investigation by the IRS Criminal Investigation.
