Kevin Carney presented himself as a seasoned investment manager with a revolutionary stock trading software, but his operation was one of the most elaborate Ponzi schemes ever uncovered. He promised investors staggering returns of 15 to 20 percent per month, claiming his computer program could predict stock price movements before they happened. Over 300 investors poured roughly $17 million into his scheme between January 2007 and October 2008, lured by the prospect of turning modest savings into small fortunes. Carney began his scheme from his home in Elk Grove Village, Illinois, a suburb about 20 miles south of Chicago, before later moving to Prospect Heights.
He was already carrying debt from a failed storage company and had no prior experience in the investment industry. Rather than hiring a professional, he took on the role of investment manager himself. Starting around 2005, he launched a campaign of promises, offering returns that seemed too good to be true. To make the offer even more attractive, Carney sweetened the deal by offering to cover capital gains tax for investors.
He also provided additional returns, referred to as commissions, to those who brought new investors into the scheme. Investors could earn even higher returns on these commissions than the already impressive monthly yield. When questioned about how the investment mechanics worked, Carney gave vague answers and spun different stories. To some investors, he claimed he had developed the investment plan from scratch with his brother.
To others, he said he had purchased software designed for penny stocks and modified it to suit his needs. Carney described himself as a scalper, a trader who holds stock positions for a maximum of 15 minutes and places orders on a stop-loss basis to minimize risk. He claimed the software he invented could predict stock price fluctuations a few minutes before they occurred. He asserted that he never held stocks overnight, always selling by the end of each trading day, and famously claimed he had never suffered a loss on any transaction.
Initially, Carney operated from his home and did not actively seek investors. They came to him through word of mouth, drawn by the allure of his purportedly revolutionary software. By spring 2008, the constant influx of visitors to his home became overwhelming, prompting him to move operations to a nondescript office at 60 Turner Avenue in Elk Grove Village. Inside, rows of computers displayed real-time stock prices and market trends, creating the appearance of a legitimate investment firm.
In reality, while he projected an image of trading up to $200,000 at a time, he was losing as much as $500,000 a year on failed investments. Carney crafted bogus monthly statements on his computer that appeared to confirm he was consistently delivering returns of at least 20 percent. It turned out he was operating a textbook Ponzi scheme, using funds from new investors to pay returns to earlier ones. There was no separation of funds, and he used various payment methods, including checks from his Washington Mutual Bank and JP Morgan Chase accounts, as well as cash from his office drawers.
The scheme grew as successful investors displayed their newfound wealth. One such investor, Craig Gutowski, was introduced to Carney through intermediaries Christine Hart and Don Swanson. Gutowski invested $90,000 and claimed to be making at least $50,000 every month. He brought friends Eli Sharich III and Paul Nicolo into the scheme, and Paul brought his father Chris Nicolo.
Gutowski created a company called CMG for the purpose of investing with Carney and acquired a Mercedes, a motorcycle, and a trailer, renting an industrial building to store it. By the time authorities uncovered the scheme, Gutowski’s account balance claimed to total $246,900. Investors came from a spectrum of backgrounds and motivations. Bill Harmony, who shed light on the psychology behind the scheme, noted that some investors simply did not know any better and truly believed they would receive the promised returns.
Others knew in their gut the scheme would eventually collapse but could not stand the idea of being left behind while others made money. At its peak, investors had poured $2. 5 million into the scheme, with 95 percent of that amount funneled back to earlier investors in a futile attempt to maintain the illusion of success. The facade began to crumble when investors sought to cash out their investments.
Carney resorted to robbing Peter to pay Paul, using new investor funds to satisfy redemption requests. The scheme was running at a loss from the beginning, with no true assets to offset mounting liabilities. In October 2008, the schemes operations began to unravel. The Illinois Attorney General’s office received reports of Carney’s unauthorized sale of securities, a violation of state and federal securities laws.
Authorities obtained a court order to freeze Carney’s accounts, and the Illinois Secretary of State issued a prohibition against his continued involvement in rendering investment advice or soliciting investments within the state. Carney was indicted in both DuPage County and Cook County. Authorities uncovered evidence of his attempts to conceal ill-gotten gains and obstruct justice by transferring property totaling $115,000. After withdrawals and other transactions, investors were left with losses totaling approximately $10 million.
Carney pleaded guilty before Judge George J. Bakus in DuPage County Circuit Court to theft by deception over $500,000, mail fraud, wire fraud, and securities fraud. Illinois Attorney General Lisa Madigan announced the indictment and detailed how Carney used a personal trading account with E*Trade to con people he knew personally in Cook, DuPage, and Lake counties. He leveraged their trust to advance his fraudulent scheme, then expanded his network to encompass investors from 20 different states and the District of Columbia.
“Mr. Carney’s scheme promised big returns but instead only resulted in financial devastation for his victims. His criminal acts have forever altered their lives,” Madigan said. Judge Nicholas Ford sentenced Carney to 13 years in the Illinois Department of Corrections.
Eight years were allocated for theft and financial exploitation convictions, with an additional five years for the securities fraud plea. The judge also ordered Carney to pay $10. 2 million in restitution to more than 300 victims. Madigan called it “a fitting punishment for the fraudulent acts that Mr.
Carney committed to enrich himself at the expense of clients who entrusted his word and alleged expertise. ”
Illinois Secretary of State Jesse White, whose office had investigated Carney’s activities before referring the case for prosecution, also condemned the fraud. “Financial fraud hurts innocent people, and scammers like Carney need to know that they will be prosecuted and sent to jail. Investors need to investigate before they invest and make sure that the person they invest with is properly registered,” White said.
In a separate Cook County case, Carney served an additional eight-year prison sentence at Jacksonville Correctional Center. That case involved a similar scam perpetrated on victims who invested with him after October 2008. Four additional consumers lost $110,000 in December 2008 and January 2009, even after authorities had seized his bank accounts and ordered him to cease business. In that case, Carney pleaded guilty to theft, securities fraud, and financial exploitation of an elderly person, and was ordered to pay more than $1.
3 million in restitution. Carney’s fraudulent exploits were later chronicled as an episode on the television show “American Greed,” serving as a cautionary tale about the dangers of participating in unregulated investment schemes.