Andrew W.W. Caspersen was on the phone with an investor in the southwestern U.S. with what sounded like an enticing deal: Invest a few million dollars alongside sophisticated institutions—as well as Mr. Caspersen’s friends and family—and earn a 15% annual return with minimal risks.

The investor was intrigued, and Mr. Caspersen’s pristine pedigree added to the allure. He hailed from a wealthy, well-connected family and had years of experience working for top-tier financial institutions. In a few months, Mr. Caspersen gathered in tens of millions of dollars, including substantial funds from a charity backed by billionaire Louis Bacon, the founder of hedge fund Moore Capital Management.

Then, say authorities, the money vanished, lost into a black hole of bad stock-market bets. Mr. Caspersen, 39 years old, was charged last month with using the money to bankroll a large fraud. Among the alleged victims: college friends, his brothers and even his mother.

Mr. Caspersen was able to perpetrate his alleged fraud even though some investors suspected things seemed amiss. The scandal marks a stunning fall from grace for a man who seemed to have everything going for him, including a family name that was once synonymous with Wall Street privilege.

Some people who know Mr. Caspersen well now say they believe he was feeding an addiction, not to drugs or casino gambling, but to market speculation. To those close to him, it went beyond aggressive trading and became a compulsion that consumed a personal fortune that once stretched well into the eight figures.