A New York money manager has been arrested and charged with running a $40 million Ponzi scheme over three decades, diverting some investor money to a pornography mail-order business, investigators said.

The government filed criminal and civil fraud charges on Tuesday against Philip Barry, 52, over a scheme it said falsely promised investors guaranteed positive returns as high as 21 percent a year through his firms Leverage Option Management Co, Leverage Group and North American Financial Services.

It said Barry's reported ending balance of more than $45 million far exceeded assets on hand, leading to substantial losses for investors.

Barry, a resident of Brooklyn's Bay Ridge, filed for Chapter 11 bankruptcy protection last October, after the Ponzi scheme had begun to unravel in 2007, court records show.

He ran these investment schemes for relatively small, unsophisticated investors, said Alan Nisselson, the court-appointed trustee for Barry's bankruptcy estate, in an interview. Unfortunately, they were duped.

It was not immediately clear whether Barry had hired a lawyer. A call to his office was not immediately returned.

According to the FBI and the U.S. attorney's office in Brooklyn, Barry attracted money from 1978 until early 2009 by guaranteeing returns that were in fact made up, issuing account statements that showed growing balances, representing that investments were safe, and promising easy withdrawals.

They said Barry in 2006 distributed a letter saying the Leverage Group had produced annual returns ranging from the recent 12.55 percent to a high of 21 percent back in 1979.

The U.S. Securities and Exchange Commission said Barry had by about 1999 stopped investing funds, and instead used new investor cash to repay earlier investors or for other uses.

The SEC said Barry used some of the funds to buy real estate, pay expenses of a mail-order business that sold pornographic materials, and support his lifestyle.

This case is fundamentally about deceit, FBI Assistant Director-in-Charge Joseph Demarest said. Hundreds of investors stand to lose many millions of dollars.

Prosecutors said Barry faces up to 20 years in prison on the criminal charge. The SEC said Barry has settled its claims without admitting wrongdoing, and agreed to a civil fine in an amount to be determined later.

According to his bankruptcy filing, Barry had between $1 million and $10 million of assets, between $10 million and $50 million of debts, and between 200 and 999 creditors.

Nisselson, a partner at Windels Marx Lane & Mittendorf LLP, is seeking court permission to convert the Chapter 11 case into a Chapter 7 liquidation. In a court filing, he said the estate is insolvent, and Barry's only apparent business is a mail-order video business generating $4,500 of income a month.

The criminal case is U.S. v. Barry, U.S. District Court, Eastern District of New York (Brooklyn), No. 09-0876. The civil case is SEC v. Barry et al, U.S. District Court, Eastern District of New York (Brooklyn), No. 09-3860. The bankruptcy case is In re Barry, U.S. Bankruptcy Court, Eastern District of New York (Brooklyn), No. 08-47352.