Brokerage Firm Fined For Its Dealings With Middletown Man

MIDDLETOWN, NJ — An online brokerage firm agreed on Monday, Feb. 11, to pay a $100,000 civil penalty for enabling a three-time convicted financial felon — who calls Middletown home — to run a hedge fund scheme that lost millions of dollars for his clients.

The Middletown man, Peter Zuck, 67, is currently in a state prison, serving a three-year prison sentence for running a multi-million hedge fund scheme. He previously pleaded guilty to one count of conspiracy to commit wire fraud and four counts of tax evasion.

Zuck was a co-founder of Osiris Partners LLC and Osiris Partners Fund Limited, based in Jersey City. He was a managing member and "portfolio manager" of the fund. The brokerage firm that worked with him is Interactive Brokers, LLC.

This is hardly Zuck's first conviction for financial fraud: He previously pleaded guilty to three different incidents of security fraud, in 1994, 1997 and 2002, according to a report in the Asbury Park Press. He spent five years in prison for the 1994 conviction.

Yet when he got out, he founded Osiris and collected a salary of more than $1.3 million.

State investigators say Zuck used Interactive’s online trading platform in a scheme to defraud New Jersey residents and others who invested in Osiris. Between June 2009 and November 2011, he solicited 76 investors to invest $12 million in the fund, U.S. attorneys allege.

Zuck was convicted in April of 2017. Also named by U.S. attorneys for their participation in Osiris were Michael J. Spak, 45, of Chesterfield, Joseph C. Spak, 71, of Milltown and John R. Najarian, 36, of Hillsdale.

Zuck admitted that members of the Osiris Fund Limited Partnership diverted $4 million in investors' funds from the fund and fraudulently drew $3.9 million in management fees to themselves. Zuck also admitted that he was issued a $1.3 million salary from Osiris, which he used to pay for personal expenditures but did not report as income to the IRS. Instead, Zuck had his payment checks deposited into an account that he controlled, but was in his son's name. He falsely assigned the income to his son on IRS forms, but was caught by IRS agents. He admitted that he attempted to evade $273,417 in income tax.

Despite his criminal background, Zuck was able to open at least 16 accounts on the Interactive platform — two master accounts in his own name and eleven sub-accounts in the names of other individuals that were linked to the Zuck master account, as well as in the name of the Osiris Fund.

Zuck proceeded to trade the Osiris Fund account in a wildly speculative manner that exposed the investors’ savings to extraordinary market risk, according to the Division of Consumer Affairs and the Bureau of Securities. After some early trading profits, Zuck and others working with him lost approximately $4.5 million trading in April and May 2010.

Zuck and his co-defendants also defrauded investors by preparing and sending false investor account statements outside the Interactive platform, and by overstating the hedge fund’s net asset value to produce higher management fees and conceal losses. As a result, Zuck fraudulently later withdrew $3.9 million in management fees to which he and his co-defendants were not entitled from other financial accounts at other financial institutions.

Although it conducted other automated checks into Zuck’s background, Interactive failed to conduct a commodities industry BASIC search on Zuck that would have revealed that he had been permanently barred by the National Futures Association (NFA) for failing to cooperate in an investigation, unrelated to the Osiris Fund matter, regarding his potential embezzlement of client funds.

Read Patch's original story about Peter Zuck: 3 Years In Prison For Middletown Man Who Ran Hedge Fund Scam

“Broker-dealers have an obligation to reasonably supervise their trading platforms to prevent bad actors from accessing them,” said Paul Rodríguez, Acting Director of the New Jersey Division of Consumer Affairs. “Had Interactive Brokers fulfilled that obligation, the accounts of this financial predator would have been rejected at inception or shut down.”

“Interactive Brokers allowed a three-time convicted felon, who had been barred by the NFA, to open accounts and trade other people’s money on its platform where he recklessly traded millions of dollars,” Christopher W. Gerold, Chief of the New Jersey Bureau of Securities. “As this action evidences, online broker-dealers have a duty to supervise their platforms and when they don’t, they will be held accountable for their actions and inaction.”

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