Fraud suspects held as FBI swoops on finance world

Authorities in the US had custody yesterday of two high-profile alleged fraudsters, dubbed "mini-Madoffs", in an intensifying sweep against financial wrongdoing.

Arthur Nadel, a 76-year-old Florida fund manager who tried to fake a suicide earlier this month, turned himself in after two weeks on the run, and investigators in New York charged a separate fund manager of defrauding 1,500 investors out of $370m (£261m) in a Ponzi scheme similar to the one run by Bernard Madoff.

The breakthroughs came as regulators from the Securities and Exchange Commission pleaded for more money from Congress, saying that a lack of resources explained how the organisation had repeatedly failed to spot that Mr Madoff, a former Nasdaq chairman, was operating the biggest fraud in Wall Street history.

Mr Nadel, who ran a firm in Sarasota called Scoop Management, was rep-orted missing by his family on 14 January. He left behind a suicide note that expressed guilt for losing clients' money and said someone might try to kill him, but police never believed he went through with the plan to kill himself.

Instead, they noted that he transferred at least $1.25m to a secret bank account. They traced his cellphone use as he fled to Louisiana. At the same time, employees found the shredded remains of a note for his wife, Peg, which set out instructions on how to withdraw money before all his trust accounts were blocked. "If you want to survive this mess, what follows is for your eyes only," the letter began, according to a criminal complaint filed yesterday.

The authorities believe Mr Nadel had more than 100 investors in his six hedge funds, which he told them were valued at more than $300m. In fact, there was less than $1m left.

A New York FBI spokeswoman said Mr Nadel would make an initial appearance in a federal court in Florida. "Arthur Nadel surrendered in the company of two lawyers to FBI agents in Tampa," she said yesterday.

Meanwhile, on Monday night FBI officers in New York arrested Nicholas Cosmo, at the end of a day of drama when the offices of his Agape World hedge fund business in Long Island had been besieged by furious investors. Screaming through locked, glass doors, they had demanded that Mr Cosmo "stand up for your money". On Friday last week, when Mr Cosmo had first told some investors that he was suspending redemptions, he had to be escorted from the building with a police guard.

The FBI now believes that his $370m investment business was a Ponzi scheme, where existing investors were paid using money from new clients. He had claimed that he would use the money raised to make loans, but investigators say only $10m was used for that purpose, and that $100m went into a trading account that he controlled.

Both Mr Nadel and Mr Cosmo have murky pasts. Mr Nadel was disbarred from being a lawyer in 1982 after taking money out of a client's escrow account. Mr Cosmo was sentenced to 21 months in prison for fraud in 1999. Theirs are the biggest in a string of Ponzi schemes and other frauds uncovered since the arrest of Mr Madoff on 11 December. Madoff Investment Securities, his firm, was the biggest Ponzi scheme in history, totalling $50bn, he told the FBI at the time.

The SEC has launched an internal investigation into why numerous warnings over the past decade went unheeded and why, when investigations were carried out, they failed to uncover the fraud.

Linda Thomsen, the SEC's enforcement director, told the Senate banking committee yesterday that the agency needs more authority to regulate parts of the financial system that escape oversight and more funding to carry out more investigations. "While we always do our utmost to do more with less, if we had more resources, we could clearly do more," she said. Lori Richards, who heads the SEC's inspections office, said agency officials are thinking "expansively and creatively" about changes that could improve the detection of fraud.