Redlands Man Sentenced to 10 Years in Ponzi Scheme, Ordered to Pay $16.8M in Restitution

A Redlands man who pleaded guilty in January to securities fraud stemming from an alleged Ponzi scheme was sentenced earlier this month in Texas to 10 years in federal prison and ordered to pay more than $16.8 million in restitution, according to the U.S. Department of Justice.

Jeffrey J. Sykes, owner of  Gemstar Capital Group, Inc., a private equity company formerly located at 19 E. Citrus Ave. in downtown Redlands, was ordered to surrender to the Bureau of Prisons by May 24. Federal prison records indicated he was in custody as of May 30. Sykes, 55, was listed as "in transit," Kathy Colvin of the Department of Justice in Dallas said in a phone interview Thursday afternoon.

Sykes and his attorney could not be reached to comment for this report. At 19 E. Citrus Ave. on Thursday, across the street from City Hall, signs for Gemstar Capital Group remained in place. People in the building said they'd never heard of the business.

According to documents filed in the case, Sykes owned and operated Gemstar out of Redlands. In 2006, Sykes and an individual identified as former Canadian football, NFL and XFL lineman Michael J. Kiselak, of Westlake, Texas, met at a golf tournament, justice officials said.

"Sykes told M.K. that Gemstar was a venture capital company interested in investing in emerging growth companies and that Gemstar was looking to supplement its planned venture capital operations by engaging a brokerage firm to assist it in buying and selling U.S. Treasury Bills," justice officials said.

According to justice officials, Kiselak asked Sykes if he could participate, and in April 2007, Sykes and Kiselak entered an agreement in which Kiselak solicited investors to participate in the T-Bill trading program Sykes described.

"The next month, M.K. formed a limited liability company, known as KCG, and began to solicit investors," justice officials said. "Using information Sykes provided, M.K. secured approximately 37 investors who invested more than $20 million. M.K. sent the money, minus fees he withheld for himself, to Gemstar to be invested by Sykes."

But neither KCG nor Gemstar was engaged in any T-Bill trading program at the time of Kiselak's solicitations, and the investors were unaware of this, according to justice officials.

In addition to the funds raised by Kiselak, Sykes personally raised more than $20 million from investors "by making representations about a T-Bill trading program that were materially false or omitted material facts," justice officials said.

"In fact, none of the money was invested in a T-Bill trading program," justice officials said. "Instead, Sykes and M.K. used some of the money for personal expenses. Some of the money was invested in ventures that the investors were unaware of and had not given their consent to participate in."

Some money was also returned to investors, but in some cases, Sykes falsely claimed the funds represented returns of capital and/or profits from the T-Bill trading program, according to justice officials.

"Although Sykes used some of the investments he received for personal expenses, to pay partners, and for other purposes, he held a large portion of the invested funds in low-risk money market accounts," justice officials said. "Because a substantial portion of investor funds were held in these accounts, investors were able to recover some of their investments."

Justice officials estimated that, accounting for payments made to investors during the scheme and money returned to investors after termination of the scheme, investors collectively lost more than $16.8 million. The amount includes losses incurred by the investors solicited by Kiselak, funds he subsequently sent to Sykes after taking a fee for himself.

The two counts of securities fraud Sykes pleaded guilty to in January "specifically stem from false Gemstar account statements that Sykes used to deceive investors about the value of their investments," justice officials said.

Sykes was sentenced May 3 in Fort Worth by U.S. District Judge John McBryde to 120 months in federal prison and ordered to pay $16,867,037 in restitution, justice officials said.

Kiselak was not charged in the criminal investigation, but he was found liable in 2009 for more than $20 million in a civil complaint filed by the Securities & Exchange Commission, according to federal court records.

The case was investigated by the U.S. Postal Inspection Service and the FBI.