Quogue mayor indicted on fraud charges

Quogue Village Mayor George Motz pleaded not guilty on Thursday afternoon to charges that he “cherry-picked” profitable accounts for his Manhattan-based investment firm over a four-year period, and altered documents in an attempt to impede a subsequent investigation by the U.S. Securities and Exchange Commission.

Mr. Motz, who is the president and chief executive officer of Melhado, Flynn & Associates, entered his plea in front of U.S. Magistrate Judge Kathleen A. Tomlinson in U.S. District Court in Central Islip, a day after he was indicted on the two criminal counts. Mr. Motz surrendered on Thursday morning to federal authorities, according to Robert Nardoza, a spokesman for the U.S. attorney’s office.

Mr. Motz, who has served as mayor since 2002 and is married to Quogue Village Justice Kittric Motz, was released on $500,000 bond, money that was secured after he put up his home in Quogue. He is scheduled to return to court on Friday, September 26, at noon, also in U.S. District Court, in front of U.S. District Judge Arthur Spatt.

Mr. Motz, 66, was indicted on one count of security fraud and one count of document alteration, both felonies, for illegally earning more than $1.4 million for the investment company, according to a copy of the indictment. The document alleges that, from November 2000 until June 2005, Mr. Motz engaged in a fraudulent trade allocation scheme known as “cherry-picking,” an improper practice in which a person execute trades without assigning those trades to a specific trading account.

If found guilty on both counts, Mr. Motz could face up to 45 years in prison, according to federal authorities. He faces up to 25 years on the security fraud count, and up to 20 years on the document alteration charge. Mr. Motz could also be ordered by the court to pay a fine.

Both Mr. Motz and his lawyer, Manhattan-based G. Robert Gage Jr., were not immediately available for comment.

Though the indictment states that several unidentified employees of Mr. Motz’s were also involved in the scheme, Mr. Motz, to date, has been the only person charged with a crime. He owns 9.3 percent of the investment company and has approximately $318 million assets under management from 749 clients, according to the indictment.

Authorities are also alleging that Mr. Motz attempted to cover up his tracks during an early part of the investigation. The Securities and Exchange Commission carried out an independent investigation of MFA between November 2003 and December 2003. During that time, the indictment charges that Mr. Motz altered documents, making it appear as though the trades in question were allocated earlier in the day than they actually were processed.

The document notes that the cherry picking scheme favored certain accounts at the expense of other public accounts, in spite of Melhado, Flynn & Associate’s (MFA) claim that the firm’s account would not be favored over those belonging to other clients.

The accounts Mr. Motz controlled were extremely profitable. Of the 204 trades Mr. Motz assigned to MFA between November 2000 and September 2003, 202 were profitable, according to the indictment. “Because those trades were closed out and the gains thereon already realized at the time of allocation, these profits were virtually risk-free,” the indictment notes.

“The defendant’s scheme tilted the playing field to the advantage of favored investors at the expense of the investing public,” stated U.S. Attorney Benton J. Campbell in a prepared statement. “Such conduct undermines the public’s confidence in our securities markets and will be vigorously investigated and prosecuted.”

The indictment charges that Mr. Motz “engaged in a fraudulent cherry-picking scheme in which he retroactively allocated profitable trades to MFA’s proprietary account,” while allotting unprofitable trades to clients’ accounts. The charges are not related to Mr. Motz’s work in Quogue Village.

According to the indictment, Mr. Motz “was the sole individual responsible for the trading in the MFA proprietary trading account,” as well as 183 discretionary accounts and six non-discretionary accounts. Between July 2002 and March 2003, Mr. Motz was also given 50 percent control of assets belonging to the Third Millennium Fund, a group made up of high-end investors.

The prosecution is alleging that Mr. Motz frequently submitted orders to purchase securities with his investment firm’s trading desk in the morning, sometimes without marking on the tickets which account the trade was to be placed. The indictment goes on to say that Mr. Motz would wait until the end of the day to see if a trade was profitable before allotting it to MFA’s account. If the trade was unprofitable, Mr. Motz would place it into the Third Millennium Fund, Investment Fund 1, which is a group of potential investors whose identity is known to the grand jury, or one of his discretionary accounts—or all three groups.

In November 2002, Mr. Motz made a presentation to Investment Fund 1 describing the success of MFA’s proprietary accounts. He did not alert the investors that the profits were a result of the cherry-picking scheme, according to the indictment. Following the presentation, Investment Fund members invested $2 million with MFA.

Investment Fund 1 did not turn a profit until, along with the Third Millennium Fund, it became a beneficiary of Mr. Motz’s cherry-picking scheme, according to the indictment. Between June 2003 and May 2005, Mr. Motz stopped placing profitable funds in the MFA and began assigning them to the Third Millennium Fund to prevent investors from withdrawing funds, according to prosecutors.