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For 30 years Philip Barry ran a $40 million pyramid scheme alongside a secret porn business

from www.forbes.com – Say federal prosecutors: The financial crisis has unearthed another Ponzi schemer. Philip Barry swindled $40 million from 800 investors, many of whom were his neighbors, while appearing to lead a near-poverty level lifestyle. Whether or not Barry will mount a defense is unclear.

Leverage Management Co, one of the companies in the group Barry started in 1978 as part of a consortium called Leverage Group claimed that client money would be invested in securities and stock options that would produce returns ranging from 12.55%-21%. Like Bernie Madoff, Barry sent investors false financial earnings statements and used money from new investors to pay off the guaranteed profits.

Pulled from the government’s case, a letter Berry sent to investors in December 2002 reads:

“We are now entering our 25th year of providing the members of the Leverage Group with high yields and a 100% record of safety of principal…we will continue to adhere to our proven practices…so that we can continue to be the absolute safest place for your money to continue to grow.”

Word of mouth spread that Barry was a stand-up guy. He laid low in a $700-a-month walk-up in the same Brooklyn neighborhood as many of his customers and operated his business out of a dingy storefront. The office’s shag-carpeting, black and white TV, cheap metal office furniture and his love of TV dinners created a front that saw Barry through 30 years of deception. His 800 clients — retirees, prisoners, senior citizens, at least one charitable trust and a religious organization — and their $40 million, provided Barry with assets he used to purchase real estate though he outwardly lived a frugal life.

Though he has denied the “smut” earned him any profits, Barry also reportedly used the stolen money to fund a mail-order porn business. Barry Publications sold risqué videos on eBay ( EBAY – news – people ) is listed with the same Brooklyn business address as the companies in Leverage Group. A public online listing awards the business its lowest rating and warns that Barry Publications pays slower than most companies, a red flag that clients might have noticed had they done a background check before investing with Leverage.

The SEC didn’t catch on to Barry’s scheme until recently either. John Jay, a senior analyst at AITE group saysthat the SEC, which is taking heat for not investigating potential Ponzi schemes like Bernie Madoff’s, previously established much of their oversight by a company’s ability to fill out forms and return information in a timely manner.

“For the longest time, a lot of the SEC’s regulatory requirements were really just ‘check boxes a, b and c’ — literally and figuratively,” he says. “There was no attempt or need [for more oversight] because there was no apparent blow up as catastrophic as what has happened over the past year.”

Though none of Barry’s other companies included in Leverage Group were ever formerly registered, North American Financial Securities (NAFS) registered with the SEC as an investment advisor from 1979 until 1987, when the SEC cancelled the registration. “It’s great from [Barry’s] standpoint because he can say, I’ve registered but for some reason, they don’t want me to be a part of the entities that they govern,” says Jay. Unregistered after ’87, NAFS wasn’t required to submit their books to be checked by the SEC.

Barry continued to use NAFS letterhead to report fake quarterly earnings to his investors and to remind them that their investments were protected from loss by privately obtained insurance and by the Securities Investors Protection Corporation (SIPC), even though they weren’t.

Confused investors are wondering where their $40 million went, but many don’t want to see Barry end up in jail. Like Madoff’s prey, they fear if he does, they’ll never get their money back. The 60-odd real estate transactions Barry spent their money on are reportedly worthless after he used them to leverage loans.

Barry filed for bankruptcy in October 2008 and in a financial affidavit after his arrest Sept 8th, disclosed that he’s received $250 in food stamps. True to frugal form, Barry showed up to his bankruptcy court hearing in August 2009 wearing shoes with holes and a tattered t-shirt.

The first group of Barry’s clients sued him in May 2008 after his refusal to liquidate their stakes in Leverage Group. Around 40 have since followed suit and on Tuesday Sept. 8th, the SEC charged Barry, who is currently being held without bail, with a single count of securities fraud. The SEC would not comment on NAFS’s registration or its cancellation. Barry’s court-appointed lawyer, Lisa Hoyes, also remained mum as Barry awaits the verdict after his hearing Sept 10th at the US District Court of Brooklyn.

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