What Kentucky’s Retirement Rush Says About The Future of State Pensions

Via The Daily Bell

Just because a Ponzi scheme is run by a government doesn’t mean it won’t collapse.

The situation in Kentucky serves as a dire warning about larger pension systems including Social Security.

What Kentucky is currently facing in like a bank run. When people hear that a bank is failing, they all scramble to get their money out before it goes bust. This snowballs and the bank runs out of cash that much quicker.

Kentuckians are retiring in droves, hoping to get a piece of the pension funds they were promised. Worried that the money might not be there in a few years, they are opting to start collecting now, lest they get nothing. But this is causing a run-on-the-bank effect. The pension system is collapsing that much quicker.

Politicians have long kicked the can down the road. The idea is that there will always be a future generation, unborn children to pay for the promises they make today. There will always be new suckers to pay for their unfunded liabilities.

But the bubble bursts. Unless a population grows exponentially, this cannot work. That is why it is a Ponzi scheme. There’s always a bottom layer that holds up the rest of the pyramid.

Of course, the government of Kentucky has assured potential retirees that they don’t need to panic. The state claims that even if the legislation passes to fix the problem, government employees will have time to retire on the old plans if they choose.

But that hasn’t seemed to ease the high retirement numbers. In past months, between 24-64% more people have retired (depending on the sector) compared to 2016. And with officials floating the idea of raising the retirement age, many have a better safe than sorry attitude.

This also shows that people don’t trust the government assurances. And of course, they shouldn’t. After all, the government also told them not to worry, the pensions they promised were funded. After a history of governments at all levels reneging on their promises, it is better to take the money and run.

And it’s the same old story for how they got into the mess. Spend now, worry about funding it later. There’s never enough money for the government, have you ever noticed that? Companies balance their sheets or go bust. Governments keep chugging along despite breaking promises, overspending, and failing to plan.

PFM mostly blames the approach used to fund the systems, one used by most public pension plans across the country, which based the government’s contributions to the plans on a percentage of a growing payroll. It says that’s like a homeowner basing mortgage payments on a percentage of future income he expects, or hopes, will grow.

Translation: it was a Ponzi scheme. And that same scheme is used by most government retirement plans. The money in these accounts is reinvested. But you don’t control where they are putting the money. Turns out Kentucky made some bad decisions on placing retirement money in certain hedge funds that didn’t do so hot after the 2008 recession.

Also, in the 1990s when the pension plans were fully funded, the General Assembly approved benefit increases without funding them — including an expensive cost of living benefit increase for Kentucky Retirement System members in place between 1996 and 2012.

The bottom line is that you never want to be dependent on the government, or even a private company for your pension. The only way to truly safeguard your retirement is to take it into your own hands.

Maybe some of your retirement goes into a hedge fund, but certainly not all of it. But a better plan is to do the research for what kinds of stocks and investments make sense. Spread the risk across different sectors, and maybe even different country’s stock markets. If you can’t do the research for proper investments, at least do the research to find out who the best person or organization is to inform you.

Your plan may be in part a company pension or retirement plan. But it should not stop there. It is always better to diversify savings (foreign accounts, cash, precious metals) and diversify investments (property, foreign and domestic stocks). Then you can also spend what you can afford to lose on riskier, but potentially high yielding, speculations (cryptocurrency, startups).

But you know the old saying about doing the same thing over and over and expecting different results. With their track record, it’s time to stop putting trust in government to take care of your finances.

Original 'Dr. Doom' Says Next Fed Chair Must Break Up Banks "To Be Small Enough To Fail"

Henry Kaufman, the former chief economist of Salomon Brothers in the 70"s and 80"s who earned the moniker of "Dr. Doom" for his frequent criticisms of the Fed"s interest rate policies, has some advice for President Trump on how to pick the next Fed Chair: find someone willing to break up the "too big to fail" banks.

“You’ve got to be small enough to fail” without that failure causing problems that cascade through the financial system, Kaufman said in the question-and-answer session of an Economic Club of New York breakfast on Oct. 5 at the imposing University Club on Fifth Avenue. As it is now, Kaufman said, “We are trying to preserve conglomeration.”

 It’s more important for the next Fed chief to have a good understanding of how markets work than it is to own a Ph.D. in economics or to have been a business titan, Kaufman said.

William McChesney Martin, who ran the Fed from 1951 to 1970, never earned a graduate degree in economics. But he “turned in a good performance” in overseeing a period of healthy economic growth, Kaufman said. In contrast, he said, the two Fed chiefs who followed Martin allowed high inflation to become embedded in the U.S. economy in the 1970s. The first, Arthur Burns, was a distinguished Ph.D. economist from Columbia University. The second, G. William Miller, came to the Fed from Textron Inc., where he was chief executive officer.

Of course, even though Kaufman is credited with accurately calling the market bottom on August 17, 1982, he has proven on several occasions that he doesn’t quite always get things right.  He invested some of his personal wealth with Bernie Madoff, which ultimately turned out to be one of the biggest ponzi schemes in American history, and was the chairman of the Lehman board"s finance and risk committee before the bank collapsed into bankruptcy in 2008...not a great track record of late.

That said, Kaufman seems to have learned from those mistakes after leaving the Economic Club of New York with the following uplifting thought: "There will be another financial crisis. And it will pop out. And we’ll all say, ‘How did it happen?’”

One Chart Explains What Bernie Madoff And Kentucky Public Pensions Have In Common

If Bernie Madoff taught us anything it"s that every successful ponzi scheme requires precisely one critical component to keep it afloat: a steady stream of fresh capital to fund redemptions.  Absent that key component, even the most carefully crafted ponzi, with the best, most creative accounting fabrications in the world, will inevitably fail from a lack of real, cold, hard cash to keep the illusion going.

Unfortunately, it seems that Kentucky"s public pensions are now running into the very same problem that ultimately brought down Madoff"s multi-billion dollar "empire".  As the Lexington Herald Leader points out today, it"s no coincidence that the Kentucky public pension system is suddenly collapsing just as the number of retirees (redemptions) has surged beyond the number of active employees (fresh capital) required to keep the ponzi going.

It’s impossible to know exactly who, where or when, but one day in 2016, a Kentucky state employee packed up her desk, said goodbye to her colleagues and retired.

Once she hit the exit, the number of retirees drawing a pension from the Kentucky Employees Retirement System (Non-Hazardous), the struggling $2.6 billion fund that serves most of state government, officially topped the number of active workers paying into it.

The 60-year-old fund has been mathematically upside down from that day forward.

Social Security, by comparison, has a roughly 3-to-1 ratio of workers supporting retirees, but KERS’ ratio is less than 1 to 1. Its numbers are expected to worsen as state government continues to cut its work force and aging baby boomers keep heading into retirement. The average age of a worker in KERS is 45, up from 43 just a few years ago. And they retire at age 57 on average to draw a lifetime pension.

“You just can’t depend on this model anymore,” said state Sen. Joe Bowen, R-Owensboro.

As Senator Joe Bowen notes, "it creates a cash flow problem"...

Bowen is working with Gov. Matt Bevin and other GOP lawmakers on proposed changes to Kentucky’s public pension systems, which face tens of billions of dollars in unfunded liabilities due to inadequate contributions and unrealistic financial assumptions by state government over much of the past two decades.

Bowen said Wednesday that an outline of their pension proposals could be unveiled within the next week, with a special legislative session to enact those changes possible later this year.

“The model of a defined-benefits plan doesn’t work for us anymore because we can’t raise enough money from this work force to pay for everyone who is going into retirement,” Bowen said. “This is why moving to 401(k) accounts, moving to defined-contribution plans, and then committing to paying down the existing liabilities … that’s really the only option we have.”

“It creates a cash-flow problem,” said David Eager, interim executive director of Kentucky Retirement Systems, which manages KERS (non-hazardous) and other state and local government pension funds. “The benefit payments are going to continue to go up. The contributions are going to continue to go down. That’s just the math of it.”

Of course, the demographics of the Kentucky pension system are hardly unique.  A surge in Baby Boomer retirements over the next couple of decades, combined with technological advancements that ensure that only a fraction of those retirees will have to be replaced with actual human workers, will inevitably result in a wave public pension ponzi failures as they meet with the same "cash flow problem" as Bernie Madoff.

That said, unlike the Madoff ponzi, no one will go to jail when the public pension ponzi schemes of the U.S. are exposed because, for some reason, defrauding taxpayers, as opposed to investors, is perfectly legal.

SEC Files First-Ever Civil Fraud Charges Against ICO Companies

That didn"t take long.

After issuing a ruling in July that officially declared that the tokens sold during initial coin offerings must be registered as securities - a ruling that many hoped would lend a badly needed veneer of legitimacy to the shady ICO market - the SEC is following through with what we imagine will be the first of many civil actions against ICOs and the individuals who launch them.

The agency on Friday announced civil actions against two companies and their founder, businessman Maksim Zaslavskiy, for violating anti-fraud and registration provisions of federal securities laws after misleading investors in a pair of so-called initial coin offerings (ICOs) purportedly backed by investments in real estate and diamonds.

It"s important to remember that this is civil complaint - the SEC doesn"t have the power to make arrests; to do that, it must work in tandem with the FBI. Zaslavskiy is a free man. However, his assets - and those belonging to his companies - have been frozen. Instead, the agency is seeking to permanently ban Zaslavskiy from participating in any future digital-currency offerings, along with what we imagine will be hefty fines.

In its press release, the SEC accused Maksim Zaslavskiy and his companies of selling unregistered securities, while also alleging that the digital tokens or coins he was peddling didn"t really exist. According to the SEC"s complaint, investors in REcoin Group Foundation and DRC World (also known as Diamond Reserve Club) were told (presumably by Zaslavskiy) that they could expect sizeable returns from the companies" operations, when neither had any real operations to speak of.

As we"ve previously reported, the ICO market has exploded since late last year. The total sum raised has already reached $1.3 billion, with more expected by year"s end. However, the ease with which unscrupulous people could fraudulently market their tokens (and earn big money) has attracted attention from regulators all over the world. China cited fears about abuses related to ICOs as the reason for shuttering all local digital-currency exchanges. Russia briefly flirted with the idea as well.

Earlier today, FINMA, the Swiss government body responsible for regulating markets, said it was investigating several ICOs for possible fraud. In its press release announcing the investigations, the regulator explained that because ICOs are structured in a similar way to traditional stock offerings, they fall under the agency"s purview. So every time it has received a complaint related to ICOS, its representatives have pursued that complaint.

To the best of our knowledge, these are the first indications that any official regulatory action is being taken against ICO purveyors in either the US or Switzerland.

In its civil complaint, the SEC alleges that "from July 2017 to the present, Zaslavskiy, the President and sole owner of the Companies, fraudulently raised at least $300,000 from hundreds of investors, through various material misrepresentations and deceptive acts relating to supposed investments in digital “tokens” or “coins” offered, first by REcoin, then by Diamond, during the ICOs."

Zaslavskiy allegedly touted REcoin as "The First Ever Cryptocurrency Backed by Real Estate."  Alleged misstatements to REcoin investors included that the company had a "team of lawyers, professionals, brokers, and accountants" that would invest REcoin"s ICO proceeds into real estate when in fact none had been hired or even consulted. Zaslavskiy and REcoin allegedly misrepresented they had raised between $2 million and $4 million from investors when the actual amount is approximately $300,000.

Zaslavskiy then carried his scheme over to Diamond Reserve Club. He marketed the organization as one that invests in diamonds and obtains discounts with product retailers for individuals who purchase "memberships" in the company. Despite their representations to investors, the SEC alleges that Zaslavskiy and Diamond have not purchased any diamonds nor engaged in any business operations. Yet they allegedly continue to solicit investors and raise funds as though they have.

Read the rest of the complaint below:

2017.09.29icocomplaint by zerohedge on Scribd

 

Australia Mortgage Market Is Now A $1.7 Trillion "House Of Cards"

Over a decade ago, the U.S. residential housing market was revealed to be perhaps the biggest ponzi scheme ever created as easy financing enabled people to buy/build countless investment properties, that they were in no way adequately capitalized to own, with no money down all based on the premise that the house could be "flipped" before the first mortgage payment even came due.  It was a classic ponzi that worked great for a while but inevitably turned south when home prices suddenly soured and their was no cash equity backing the trillions of dollars in outstanding mortgage debt.

But, if a new report from LF Economics is even directionally accurate, then the bubble currently percolating in Australia could take the residential housing ponzi game to a whole new level courtesy of a "creative" little product called "cross-collateralized residential mortgages."

The Australian mortgage market has “ballooned” due to banks issuing new loans against unrealised capital gains of existing investment properties, creating a $1.7 trillion “house of cards”, a new report warns.

The report, “The Big Rort”, by LF Economics founder Lindsay David, argues Australian banks’ use of “combined loan to value ratio” — less common in other countries — makes it easy for investors to accumulate “multiple properties in a relatively short period of time despite high house prices relative to income”.

“The use of unrealised capital gain (equity) of one property to secure financing to purchase another property in Australia is extreme,” the report says.

“This approach allows lenders to report the cross-collateral security of one property which is then used as collateral against the total loan size to purchase another property. This approach substitutes as a cash deposit.

“This has exacerbated risks in the housing market as little to no cash deposits are used.”

Yes, you read that correctly...Australian housing speculators can literally use unrealized gains in investment properties as a "cash substitute" for down payments on other investment properties.  Of course, we"re not experts at "the mathematics," but if you constantly take every dollar worth of equity you accrue and pledge it as collateral toward a new purchase then doesn"t that mean the entire system is built on debt and no actual equity at all?

As LF Economics points out, just like the American mortgage bubble, the current ponzi scheme in Australia is also completely dependent on constantly rising prices.

The report describes the system as a “classic mortgage Ponzi finance model”, with newly purchased properties often generating net rental income losses, adversely impacting upon cash flows.

“Profitability is therefore predicated upon ever-rising housing prices,” the report says. “When house prices have fallen in a local market, many borrowers were unable to service the principal on their mortgages when the interest only period expires or are unable to roll over the interest-only period.”

And, just like the American bubble, much of the madness is being funded by unsuspecting foreign investors.

LF Economics argues that while international money markets have until now provided “remarkably affordable funding” enabling Australian banks to issue “large and risky loans”, there is a growing risk the wholesale lending community will walk away from the Australian banking system.

“[Many] international wholesale lenders ... may find out the hard way that they have invested into nothing more than a $1.7 trillion ‘piss in a fancy bottle scam’,” the report says.

Meanwhile, there is no shortage of "success stories" from people who make next to no money doing their "day jobs" but have been able to acquire dozens of investment properties with nothing but debt.

Last month, a young Sydney couple revealed how they had racked up $1.2 million in debt on a portfolio of five properties in just two years.

Roy Palleson and Rowena Ebona, appearing on the ABC’s Four Corners, said they had no concerns about their debt — nearly 10 times their combined income of $135,000 — and were hoping to expand their portfolio to 20 investment properties “initially”.

Prominent Sydney property investor Nathan Birch, who accumulated more than 200 properties worth an estimated $55 million by channelling the equity from capital gains into deposits for new purchases, earlier this year announced he was selling off some of his portfolio.

Mr Birch blamed the move on tougher loan serviceability restrictions by the banks. “Anytime you withdraw equity, you need to show income to service that new loan,” he said. “Sadly, the banks don’t value rental income as highly as they once did.”

Eddie Dilleen, a young investor with 10 properties worth about $2 million, last month said he was not fazed by tightening lending environment or talks of a housing bubble.

Mr Dilleen said the majority of his portfolio was positively geared, largely because he avoided borrowing against existing properties, instead saving up for each new deposit by working several jobs.

Conclusion: "Short everything that guy has touched."

America's Pension Bomb: Illinois Is Just the Start

We"ve written quite a bit over the past couple of months about the pending financial crisis in Illinois which will inevitability result in the state"s debt being downgraded to "junk" at some point in the near future (here is our latest from just this morning: "From Horrific To Catastrophic": Court Ruling Sends Illinois Into Financial Abyss).

Unfortunately, the state of Illinois doesn"t have a monopoly on ignorant politicians...they"re everywhere.  And, since the end of World War II, those ignorant politicians have been promising American Baby Boomers more and more entitlements while never collecting nearly enough money to cover them all...it"s all been a massive state-sponsored scam.

As we"ve noted frequently before, some of the largest of the many entitlement "scams" in this country are America"s public pension funds.  Up until now, these public pension have been covered by stealing money set aside for future generations to cover current claims...it"s a ponzi scheme of epic proportions...$5-$8 trillion to be exact.

Of course, the problem with ponzi schemes is that eventually you get to the point where the ponzi is so large that you can"t possibly steal enough money from new entrants to cover redemptions from those trying to exit...and, with a tidal wave of baby boomers about to pass into their retirement years, we suspect that America"s epic ponzi is on the verge of being exposed for the world to see.

And when the ponzi dominoes start to fall, Bloomberg has provided this helpful map to illustrate who will succumb first...

Of course, if you live in a state like South Dakota, you may take some solace from the fact that your public pension is fully funded...don"t. 

Once the dominoes start to fall, and they will, those "ignorant politicians" we mentioned above will think they"re doing the right thing when they attempt to "socialize the issue" with federal bailouts and tax hikes.  Unfortunately, this is one crisis that will be too large for even American taxpayers to bailout.

WARNING: U.S. Ponzi Retirement Market In Big Trouble As Withdrawals Now Exceed Contributions

By the SRSrocco Report,

The U.S. Retirement Market is in BIG TROUBLE as annual benefits paid out are now larger than total contributions.  Actually, the amount of net withdrawals were the highest in history.  When payouts become larger than contributions... then we have the making of the typical PONZI SCHEME.

Americans who have invested their hard-earned money into a 401K, had no idea that it was the Greatest Ponzi Scheme in history.  Unfortunately, when the markets crack, so will the value of the U.S. Retirement market.  On the other hand, Americans who were wise enough to purchase physical precious metals will protect their wealth as the U.S. Paper Retirement Market collapses.

According to the most recent data by the ICI - Investment Company Institute, the U.S. Retirement Market ballooned to a new record high of $25.3 trillion at the end of 2016:

As we can see, the U.S. Retirement Market has nearly doubled since the collapse of the Housing & Banking sectors in 2008.  Total value of the U.S. Retirement Market increased from a low of $13.9 trillion in 2008 to $25.3 trillion at the end of 2016.  It"s not quite double... but close enough.

Furthermore, the surge in U.S. Retirement assets from $19.7 trillion in 2012 to $22.6 trillion in 2013 was due to the Federal Reserve QE 3 policy (Quantitative Easing #3).  This was the year that the monetary stimulus was funneled into the Stock, Bond and Real Estate Market and away from the precious metals.  Thus, the precious metals suffered huge price declines in 2013.

As Americans continue to contribute into their "supposed" retirement plans, few realize that more funds are now heading out than going in.  This is not a good sign at all.  If we look at the most recent data from the Investment Company Institute, Americans contributed a total of $373.6 billion into their Private Sector DC Plans in 2014 versus total benefits paid out of $402.3 billion.  Which means, net contributions were a negative $28.7 billion... the highest on record:

The grey bars represent total contributions while the red line shows total benefits paid.  The net result is shown in the GREEN & RED bars at the lower part of the chart.  Green bars are positive net contributions, while the red bars are net withdrawals.  Unfortunately, the Investment Company Institute does not provide data for 2015 or 2016 yet.  It will be interesting to see if these net withdrawals continue to increase.  My gut tells me that they most likely have.

NOTE: The majority of the Private-Sector DC Plans were 401k"s, which accounted for roughly 98% of total contributions and 91% of total benefits paid.

So, why is the U.S. Retirement Market is BIG TROUBLE?  Well, if we look at the next chart, we find our answer:

The chart shows that the U.S. Retirement Market has increased right along with surge in total U.S. public debt.  Thus, the U.S. Retirement Market"s value is being propped up by debt.   As the U.S. debt exploded from $875 billion in 1980 to $20 trillion currently, the U.S. Retirement Market surged from $822 billion to $25.3 trillion during the same time period.  We must remember the following:

DEBT IS NOT AN ASSET.  Also, the true value is subtracting total debt from total assets

Thus, if we just applied simple math here, the U.S. Retirement market"s net value is approximately $5 trillion... 80% less than what it is currently.  And that $5 trillion figure is likely inflated.  I do realize I am making a very general calculation here, but DEBTS are not ASSETS.

I discussed this in my recent interview on the Hagmann Report, which I highly recommend watching if you haven"t already:

The reason the U.S. Retirement Market is a huge Ponzi Scheme is that it has stored "Digital IOU"s" rather than real physical wealth.  A typical stock price is based on "Net Present Value."  They take the future value of the company"s earnings and give it a price today.  Unfortunately, companies earnings are based on the burning energy in the future.   There lies the rub.

Back during the 1930"s, most stock prices were based on the BOOK VALUE.  Basically, what the value of the company was worth if all its assets were sold.  Today, a stock price is based on EARNINGS.  Earnings can and will implode when the markets crack due to massive debt and falling oil production.

However, the few Americans who were wise enough to purchase physical precious metals rather than put their money into the Greatest Ponzi Scheme in history, will be protect wealth while most paper assets disintegrate.

$100,000 Physical Gold Investment vs $100,000 Invested in 401K

If an American decided to purchase $100,000 in physical gold over the past 30 years, they would have a true physical asset that they can sell close to that $100,000 figure.  If an American had $100,000 in their 401K, they would have to pay a 10% penalty for early withdrawal.  While a 401K withdrawal is taxed as regular income compared to physical gold taxed at a maximum of 28% capital gains, at least you can hold onto nearly three-quarters of your wealth (likely much higher percentage).

That being said, once the market crash occurs, the value of most American"s retirement assets are going to implode.  I would not be surprised to see at least 50-75% collapse (or more) in the typical U.S. Retirement Account.  Thus, the $100,000 invested in a 401K could fall to a low of $25,000, while $100,000 invested in physical gold, could easily double to $200,000.

Actually, this is the likely outcome.  Mark my words.  A typical American who has invested $100,000 into a typical 401K will find that his or her retirement account will fall to one-tenth its value versus someone who purchased physical gold instead.  The coming collapse of the U.S. and Global Oil Industries, due to lower oil prices, will be the factor that destroys the U.S. Retirement Ponzi Scheme.  It is not a matter of IF, it is a matter of WHEN.

Please continue to check back at the SRSrocco Report as I will be providing updates on the continued disintegration of the U.S. and Global Oil Industry.  Paying attention to what is taking place in the Energy Industry will provide CLUES to the timing of the Market Collapse.

Lastly, if you haven"t checked out our new PRECIOUS METALS INVESTING section or our new LOWEST COST PRECIOUS METALS STORAGE page, I highly recommend you do.

Check back for new articles and updates at the SRSrocco Report.

Famous Twitter "Trader" Arrested For Stealing $1.5 Million, Running A Ponzi

With nearly 64 thousand followers, the name Randall Rye will likely be familiar to those who follow finance Twitter:

Having built up the substantial following since joining August 2011, the famous Randalph "Randy" Rye unexpectedly stopped tweeting just after the new year, with his last tweet hitting on January 5.

6.8668 Yuan fix vs 6.9307 just yesterday

— Randy Rye (@R_Rye) January 6, 2017

Why the sudden silence?

It appears that"s about the time the 26-year-old Randall found out the authorities had figured out that instead of running a legitimate trading operation as he had represented to people gullible enough to give him their money, something called Faster Than Light Trading LLC, he was - allegedly  - merely the latest fraud, stealing and using up to $1.5 million in cash for his own personal expenses and engaging in the latest criminal Ponzi scheme.

Instead of using the money to trade, Randy "misappropriated the investors’ funds for his own personal expenses, such as air and hotel travel costs, including vacations to St. Lucia and Bali, tickets to sporting events, including the World Series and the Masters golf tournament, and on other luxury items and large cash withdrawals."

And, according to a DOJ indictment released last night, Randy won"t be tweeting again under this account, because last month Randy was arrested and remains in federal custody. "At the time of the arrest, law enforcement searched his home and office, seizing his business records and several expensive watches."

In retrospect, Randy was a far more convincing twitterer than trader. The allegations behind his misconduct were disclosed in the full complaint filed by the US Attorney"s Office for the Northern District of Illinois.

* * *

Chicago Trader Indicted on Fraud Charges for Allegedly Misappropriating at Least $1.5 Million in Client Funds

CHICAGO — A Chicago trader defrauded more than a dozen clients out of at least $1.5 million by pocketing their money instead of investing it, according to an indictment returned in federal court in Chicago.

RANDALL RYE, the owner of Faster Than Light Trading LLC, told investors that they would earn substantial profits from his proprietary trading program. Rye claimed that he would invest their money in options and futures contracts using a computer algorithm. In reality, Rye misappropriated the investors’ funds for his own personal expenses, such as air and hotel travel costs, including vacations to St. Lucia and Bali, tickets to sporting events, including the World Series and the Masters golf tournament, and on other luxury items and large cash withdrawals, according to the indictment.

As a result of the scheme, Rye fraudulently misappropriated at least $1.5 million from at least 15 investors, the indictment states.

The indictment was returned Wednesday in federal court in Chicago. It charges Rye, 26, of Chicago, with six counts of wire fraud. Arraignment is scheduled for March 21, 2017, at 1:15 p.m., before U.S. Magistrate Judge Michael T. Mason in Chicago.

According to the indictment, Rye falsely represented to investors that their money was generating substantial returns from his purported algorithmic trading program. Rye sent his investors numerous false account statements that appeared to be from established financial services companies, stating that all of the investors’ principal and profits were invested and profitable, the indictment states. However, Rye knew when he prepared the bogus statements that the documents were false and that investors’ funds were not actually maintained at the financial services companies.

Rye also used newer investors’ funds to make Ponzi-type payments to earlier investors.

Rye was arrested last month and he remains in federal custody. At the time of the arrest, law enforcement searched his home and office, seizing his business records and several expensive watches.

The public is reminded that an indictment contains only charges and is not evidence of guilt. The defendant is presumed innocent and is entitled to a fair trial at which the government has the burden of proving guilt beyond a reasonable doubt.

Each count of wire fraud carries a maximum penalty of 20 years in prison. If convicted, the Court must impose a reasonable sentence under federal sentencing statutes and the advisory U.S. Sentencing Guidelines.