NEW YORK — Dana Giacchetto, the 37-year-old high-profile Gotham-based financier who invested funds for movie stars and Hollywood dealmakers, has been charged with securities fraud in a federal criminal complaint that alleges a scheme in which he misappropriated at least $6 million in client funds.
The three-count complaint, unsealed Monday in Manhattan Federal Court, also charges Giacchetto with fraud under the Investment Advisers Act as well as lying to the U.S. Securities and Exchange Commission.
If convicted on all charges, Giacchetto faces up to 20 years in prison and a fine of $1.5 million.
Separately, in a civil action unveiled by the SEC Monday, the commission charged Giacchetto with diverting $20 million from the accounts of his clients and stealing more than $4 million of it.
Giacchetto was out of the country Monday and is expected to fly back to New York as early as today to turn himself in, at which time he will be arrested and formally charged, the U.S. Attorney’s Office said.
Meanwhile, a U.S. District Court judge granted an SEC request to freeze assets of Giacchetto and his financial firm the Cassandra Group Inc., and appointed a receiver to manage the accounts of any clients with money still controlled by Cassandra. Another hearing is scheduled for April 12. A spokesman for Giacchetto said he had no comment.
The federal complaint is the latest blow in a downward spiral for Giacchetto that began last year (Daily Variety, Dec. 6) when he abruptly lost as many as 17 high-profile clients from a list that once included Matt Damon, Ben Affleck, Leonardo DiCaprio, Tobey Maguire, Edward Burns, Cameron Diaz, Heather Graham, directors like Brian Gibson, dealmakers like Mike Ovitz and Rick Yorn and a host of other managers, producers and studio executives.
According to the charges unveiled Monday by the SEC, Giacchetto and his Cassandra Group unlawfully gained possession of at least $20 million in client funds, diverting more than $4 million to pay Cassandra’s operating expenses as well as Giacchetto’s own living expenses. The SEC charged Giacchetto with using those funds to repay other clients who had been defrauded earlier.
Much of the contents of the criminal and civil complaints is similar, but the criminal complaint goes into explicit detail on how Giacchetto allegedly misappropriated millions in client funds.
While the identities of specific clients were kept secret, the complaint provides details on eight out of 15 instances of misappropriation, plus another one after a search warrant was executed at Cassandra offices and Giacchetto’s apartment on March 16. In that instance, Giacchetto is alleged to have diverted $121,850 from an unsuspecting client to Cassandra’s account to pay for Cassandra’s operating expenses.
The feds also charged Giacchetto with lying to SEC examiners by fraudulently providing a portion of Cassandra’s balance sheet altered to appear as an entire balance sheet. It falsely represented no liabilities for Cassandra and more than $1 million in capital, when Cassandra actually had more than $9.3 million in liabilities and was insolvent by more than $2.2 million, per the federal complaint.
Giacchetto also used more than $12,000 in client funds for a downpayment on a Mercedes-Benz provided for a law enforcement officer, according to the SEC and the U.S. Attorney’s Office. Lead federal prosecutor Assistant U.S. Attorney David Raymond Lewis said he was “not in a position to elaborate” on the relationship between Giacchetto and the law enforcement official.
This kind of direct, unauthorized access to client money was entirely inappropriate, per the charges, since Cassandra touted itself as never taking custody of client assets, but rather bestowing them on an independent entity to safeguard against the very improprieties of which Giacchetto is accused.
Giacchetto is charged with stealing money by diverting checks issued from client accounts at Brown & Co., the independent custodian. He is alleged to have gotten Brown to issue checks payable to particular Cassandra clients that went into the coffers of the firm instead. Giacchetto endorsed the checks in his own name, and deposited them in Cassandra’s corporate bank accounts at U.S. Trust Co., per the federal complaint.
Both the SEC and the U.S. attorney essentially charge that Giacchetto engaged in an “asset-kiting'” scheme, with Giacchetto using one unwitting client’s funds to pay another who complained about inconsistent investment reports.
While reports were rife about sloppy and inconsistent accounting practices back when Daily Variety and the Los Angeles Times published the first articles, Alex Vasilescu, senior trial counsel for the SEC, indicated there was more at issue than undisciplined bookkeeping.
“An investment adviser who advertises himself by touting that he does not have custody of their funds to emphasize how safe it is to invest with him, should not be signing his own name to checks,” Vasilescu said. “This is not a situation where maybe somebody cut a corner for an innocent purpose. This is an extensive scheme that goes back to 1997 to steal people’s money.”
Advisers, said Vasilescu, who want direct access to client funds must meet strict criteria to ensure money is protected. “He represented to the SEC and to his clients that he wasn’t going down that road because he didn’t want to have to do all those things.”
The investigation uncovered that Giacchetto allegedly concealed this diversion of funds by telling clients Cassandra had invested their monies in securities transactions that never took place; and that monies had been put in “private placements” when they actually were held by Cassandra.
Giacchetto also allegedly provided false order tickets and portfolio statements to some clients who asked pointed questions about where their money was going. He also, according to the indictment, falsely stated that client funds were held in “trust” or “escrow” accounts that didn’t exist.
Giacchetto is a former musician who learned the investment ropes at an old-money Boston bank and ascended in Hollywood by applying conservative investment tactics to the portfolios of young stars and dealmakers who found themselves flush with cash with little idea of how to grow that money.
As his reputation for picking winning investments grew, Giacchetto’s client list swelled — and so did his glamorous reputation. He became a staple of gossip columns for his hard-partying travails with the Damons and DiCaprios, was oft photographed for magazine articles with a bird perched on his shoulder and made ill-advised mogul-in-the-making comments in a New York Times Magazine article about Mike Ovitz.
Last year, Giacchetto was profiled in GQ magazine as the coolest money cat on the block, “donning hipster mufti for late-night sit-downs with rockers.” CNNfn’s rhapsodic portrait of Giacchetto described him as “an endearing blend of frankness and ego and old money / New Age,” wrapping up with his plans for a Zimbabwe vacation, certain to provide “candid photo ops with an arm around Leo’s shoulder. They went to Cuba last year.”
While clients tired of those antics, many grew particularly wary when Giacchetto strayed from blue-chip investments and put many of his customers into speculative investments like a telecommunications satellite venture that went bankrupt. Worse, according to the SEC, he put them into speculative investments in which he had a personal stake.
According to the SEC and U.S. Attorney’s Office, Giacchetto led clients into such high-risk securities as Paradise Music & Entertainment, engaging in a blatant conflict of interest because he had a personal stake in stock and warrants in the troubled enterprise that briefly was headed by former CAA agent Jay Moloney, who committed suicide last year.
Giacchetto is alleged to have bought Paradise securities at escalated market prices for clients who had told him they did not want a stake in the company even at the substantially lower prices that had been available in a private placement.
The SEC investigation, Vasilescu said, was completed despite Giacchetto’s unwillingness to be cooperative. “One thing that developed in the course of the investigation was that it was clear that Mr. Giacchetto was not maintaining or refused to provide financial records that advisers are required to maintain.”
Asked if the rumors were true that high-profile clients lost large amounts of money and that Giacchetto might have engaged in cherry-picking winning investments to show high returns to bigger clients while lesser investors were stuck with the bad bets, Vasilescu replied only that they will exhibit in court exactly what monies were taken in, how they were invested and what funds were ultimately paid out.
“Various of his clients are likely to figure out that they lost money, and they’ll take whatever course they want to take,” he said. “The exhibits speak for themselves, in terms of who was getting money back.”