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John S.Cotton jailed for selling investment fraud victims in Kentucky a bogus stock deal that guaranteed a high return on their investment in a short time period.

03/22/06 - Louisville stockbroker John Sheldon Cotton has been sentenced to two years, nine months in jail for his orchestration of a "ponzi scheme," an investment scam in which early investors are paid with money from later ones in order to create the illusion of profitability.

Cotton, 39, also will have three years of supervised release following his incarceration, according to a news release from David L. Huber, United States Attorney for the Western District of Kentucky.

The original restitution amount of $3.2 million was offset by $2.65 million, which has been recovered by Huber's office and the Federal Bureau of Investigation. Cotton must pay the remaining $550,000 and a fine of $7,500.

Cotton victimized about 33 investors, most of whom were his clients through his former employers, Morgan Keegan & Co. and Sterne, Agee and Leach. Some of the investors who profited from the scheme returned the money to investigators. The money will be distributed to victims in the next few weeks.

Cotton previously pled guilty and admitted that between May 1, 2002, and May 12, 2004, he convinced investors to send money directly to other investors by selling them on a bogus stock deal that guaranteed a high return on their investment in a short time period.

The investors wired money from their personal accounts to the personal accounts of other investors, believing that the money was for a person-to-person stock purchase of a lightly traded stock. The funds were never invested and no stock or other security transferred ownership. Instead, Cotton directed the funds from one investor to another in order to maintain the existence of the scheme outside of the normal business of Morgan Keegan and Sterne, Agee and Leach.