Chasing Phil

by David Howard

  Phil was busy managing his companies’ dizzying growth, which he insisted followed a certain logic: As his insurance companies’ business grew, so did their potential liability. He bought and formed new insurance firms to spread out the risk, so that if one business began to sink from excessive claims, the others could prop it up.

  But his actions suggested another motive: More insurance companies meant more premium money to siphon out. Kitzer soon developed a system for withdrawing cash from their firms. In August 1963, they set up Allied Realty of St. Paul, Inc., the stock of which was owned by American Allied. Allied Realty was a real estate holding company, ostensibly created as a vehicle for investing profits. The scam was simple: Acquire an unwanted piece of property and pay an assessor to artificially inflate its value. Then assign the property to Allied Realty and withdraw from the business the equivalent amount in cash—a classic con man’s ploy also known as asset substitution. On the books, it looks like an even swap.

  The foundation of this overnight empire began to spring leaks in 1964, when it came under the scrutiny of George Head, an enterprising thirty-eight-year-old postal inspector who wore oversized glasses and punctuated his sentences with exclamations like “dad bust it!” That year, Head’s boss told him about the Kitzers and said, “The U.S. Attorney in Minneapolis thinks these people are committing a crime. But he doesn’t know what the crime is, and the FBI hasn’t been able to find out.”

  The U.S. attorney, Miles Lord, handed Head stacks of records from the Kitzers’ fifteen interlaced companies. Head was baffled, and sought out accountants who had worked their entire careers in insurance companies. None of them could penetrate the Kitzer labyrinth either, but one contact referred Head to someone who had himself committed insurance fraud. “If you steal money from an insurance company,” this source told Head, “you steal it by taking out good money—cash or other assets—and hide it by putting in bad or worthless stuff. Take a look at the assets. They can cover a multitude of sins.”

  Head holed up in a hotel room and studied the array of million-dollar assets in American Allied’s records. Some looked highly suspect. He telephoned the state examiner who had audited the Kitzers’ books. “Have you checked their securities?” Head asked.

  “Didn’t have to,” the examiner replied. “The National Association of Insurance Commissioners certified them as okay.”

  Head then queried brokers in Chicago and New York and discovered that the stocks were a mirage. The daily Wall Street listing of over-the-counter stocks, called the pink sheet, described two of them as “no bid,” meaning worthless. A third stock sometimes sold at one cent a share. The entire portfolio, the state of Minnesota later discovered, was worth no more than $750. But the Kitzers had swapped out more than $500,000 in company cash for it.

  Head subpoenaed the broker who had sold the Kitzer stocks. Under oath, the broker conceded that the Kitzers didn’t even own the stocks—he had, in fact, rented them the inflated assets. The $478,000 worth of real estate the family claimed was another facade: They didn’t own much of that, either. After swapping out cash for these phony assets, the Kitzers then mailed false statements and misleading letters to insurance agents to assure them that they were on solid footing. The decision to expand to Minnesota had been calculated. The Kitzers knew that state regulators would look only at companies within their borders. When it was time for Minnesota to scrutinize the insurance companies there, the family would transfer assets over from Illinois.

  Head’s investigation triggered alarm bells in both states. In June 1965, the Illinois insurance commissioner ordered the Kitzers to temporarily stop issuing policies. In July, a policyholder filed a lawsuit asking the court to order the company to restore nearly $600,000 in missing U.S. Treasury notes. A month later, Minnesota declared the two-year-old American Allied Insurance Company—one of the many spinoff firms—insolvent. That agency had one hundred thousand policyholders in thirty-two states but carried more than $1.2 million in debt and far fewer assets than the Kitzers had claimed. Head finished his investigation that summer and handed the findings to the U.S. attorney in Minneapolis.

  Federal prosecutors targeted the entire Kitzer enterprise in an indictment announced on October 29, 1965. Both Phillip Kitzers and Minnesota insurance commissioner Cyrus E. Magnusson were among seventeen people—including bankers, attorneys, and a securities broker—from five states charged with mail fraud, wire fraud, and conspiracy. The government contended that the Kitzers had built a sham empire off a single firm, Adequate Mutual, that was itself insolvent within a year—and that the recently collapsed American Allied had been a shell game from the start, having been created with $150,000 borrowed from two other firms, one of them bankrupt. If convicted, Junior faced as many as fifty-five years in prison. “A proper investigation of this transaction at [that] time would have shown that American Allied Insurance Co. was insolvent the day it commenced business,” said Minnesota’s attorney general.

  The Kitzers were living in high style on the $4 million in premium payments they had vacuumed out. The family had recently acquired lake homes and speedboats and had renovated those houses, filling them with new furniture. They hosted huge parties at the Blue Ox nightclub in Minneapolis. Phil traveled to Miami, Las Vegas, San Francisco, Acapulco, and Honolulu. The charges contended that insurance commissioner Magnusson had overlooked all this, having been promised a job with the Kitzer companies.

  On November 10, the defendants all pleaded not guilty and were freed after posting bail. But the following January, the state of Illinois sued the Kitzers and others for fraud related to Bell Casualty and Bell Mutual Casualty, claiming the family had misappropriated $650,000.

  The Kitzers were suddenly living under a microscope. Minnesota prosecutors charged Phil with writing an illegal $2,000 check from one of his companies for the reelection campaigns of Minnesota’s Governor Karl Rolvaag and Senator Walter Mondale. The scandal resonated so widely that Vice President Hubert Humphrey, a resident of Minnesota, came to the politicians’ defense, charging that their opponents had distorted the facts about their relationship to the Kitzers. “Phony charges and personal vilification never have been acceptable to our voters in the past, and they won’t be today,” the vice president inveighed.

  Only a few decades earlier, the elder Phillip Kitzer had been an anonymous Hungarian immigrant on the streets of Chicago. Now the Kitzers had made millions of dollars, adopted an opulent lifestyle, and were a topic of discussion in the White House.

  Instead of conceding defeat, the Kitzers went on the offensive. In June 1966, they sued the National Association of Insurance Commissioners, claiming that the agency had falsely described the stock of three Kitzer companies as worthless. Six months later, in December, they filed a $3 million libel lawsuit against Reader’s Digest for a story about Head’s investigation, titled “Riddle of the Vanishing Insurance Companies.” They also sued George Head.

  Young Phil Kitzer’s life was by then unrecognizable to people who’d known him a few years earlier. Helen learned that Phil was seeing Audrey Jensen, a stewardess he’d met during one of his trips, whom he would soon marry. “I don’t know what happened to him,” Helen said. “He just changed completely.”

  By late 1966, he had fully moved out, and Helen and the kids hardly ever saw him again. “He walked out the door,” she said, “and he never looked back.”

  —

  Fortunately for the agents, who sometimes couldn’t get enough space from Phil, Kitzer had plenty of distractions in Hawaii. He was often locked in his room with a woman named Ruby, whom he knew from previous interludes; they had registered at the hotel as Mr. and Mrs. Phillip Kitzer. He asked the Junior G-Men to hold his address book and had his calls routed to their room to avoid having Ruby become entangled in his business.

  Kitzer’s extracurricular romantic activities were now a familiar sideshow on their travels. For every lost cause like Candy, whom Wedick had quietly intercepted, Kitzer added another trophy to hi
s case. He liked the thrill of the chase—as a king dealmaker, he was constantly practicing his trade—and by now Brennan and Wedick were accustomed to him disappearing during their evenings out. He would show up a couple of hours later, flushed and smiling, ready to continue partying. Kitzer had made a point of calling Wedick a few weeks earlier to say he had someone he wanted J.J. to talk to. It took Wedick a minute to remember Cheryl, the young woman they’d sent flowers to on their first trip together. Kitzer wanted to make sure that Wedick knew he had hooked up with her. Other times, Kitzer, short on time or energy, suggested that they hire a couple of high-class escorts. Wedick wiggled out of those situations, saying he didn’t want to miss out on the pursuit.

  On the business front, Kitzer had meetings lined up on the third-floor swimming pool deck. The hotel’s architects had designed the pool area as a gathering place, with lounge chairs and a neighboring bar with tables shaded from the withering sun.

  The Kealoha deal was proceeding steadily. Kitzer instructed Iuteri to raise the amount in the original appraisal slightly, to $9.75 million, so that Kealoha could ask for a large enough loan to justify Kitzer’s $80,000 fee. Inside the hotel coffee shop, the promoters gloated about how smoothly things were going. “The marks in Hawaii say ‘thank you’ after you take their money,” D’Amato said, triggering laughter.

  That sparked a debate about whether it was easier to rip off Hawaiians or Floridians. D’Amato insisted that Hawaii was the softer target.

  “It’s like a candy store,” Iuteri agreed.

  D’Amato had other pressing business but planned to stick around until they “popped the deal” and cut up the proceeds. As they left the coffee shop, Brennan began singing a song they’d heard at a show at the Ala Moana the previous night that featured the phrase “aloha Hawaii.”

  “No, you have the words wrong,” D’Amato said. “The words are ‘rip off Hawaii.’ ” He sang a bar substituting those lyrics, and they cracked up.

  Back at the pool, Iuteri and D’Amato belted out the revised song, breaking into a jig by the poolside and snapping their fingers. The ecstatic mood carried over into the evening. The agents felt a kind of awe for Kitzer’s stamina and alcohol tolerance, the way he could stay out drinking until three in the morning and rise and be dressed for meetings at eight. At times they thought he’d passed out in his room and figured that they were safe to slip out and work on their reports—but the next morning Kitzer would ask them, “Where did you go last night? I couldn’t find you when I got up from my nap.” His memory was remarkable—who had been sitting at a table, and where, and what had been said—even after four or five Scotches.

  During the daytime, the promoters combated the heat with steady poolside rounds of cold beer. Brennan and Wedick experimented with different strategies for handling the constant drinking. Brennan told the waiter to take away half-full pints. Wedick wandered off and deposited his beer on a table on the far side of the pool. Other times they dumped their brews anyplace that was convenient and inconspicuous. The agents joked that the government would later face a lawsuit over the number of plants they’d killed by flooding them with alcohol.

  Everyone kept a wary eye on Iuteri, who evinced little interest in the promoters’ careful preparations. When Kitzer asked him a question, drilling each actor for his role, Iuteri would pause and say “Okay” before hesitantly replying. He used words like anywheres. The contrast with Kitzer, whom Brennan thought of as “an artist at talking,” was vivid.

  Once, sitting by the Ala Moana swimming pool, the promoters watched a pair of young women settle into lounge chairs nearby. The men wore flowered shirts and bathing suits that, according to the fashion of the day, covered only their upper thighs. A shirtless Iuteri walked into the girls’ field of vision, dropped to the deck, and knocked out a set of push-ups. Kitzer and the Junior G-Men snickered; they started calling him “Bimbo” and “Bimbo Boy.”

  Beneath the booze and banter, Brennan and Wedick couldn’t shake a simmering tension. The FBI’s lack of oversight and rules for undercover agents left open the question of what kind of crimes they could participate in or observe and ignore. But at the start of OpFoPen, Wedick and Brennan had decided that they would interrupt any crime in progress. This might mean warning banks not to accept Seven Oak paper or finding other ways to discourage marks. The previous October, after learning of Kitzer’s new vehicle from Howard, the agents had contacted Scotland Yard about Seven Oak.

  The trick was to avoid triggering Kitzer’s suspicion that someone was ratting him out—and the Kealoha scheme was particularly challenging in that regard. If they asked local FBI agents to come and start asking questions, the promoters might suspect that Wedick and Brennan were snitches. But if they did nothing, Kealoha would lose another $80,000.

  —

  At nine-thirty the next morning, Kitzer was sitting at a poolside table with Brennan and Wedick when Iuteri appeared, looking bleary-eyed. He and D’Amato had been out late partying, and Kealoha had roused them at six a.m.

  “Did you do your appraisal?” Kitzer asked.

  “Yeah. I went out there and kicked some dirt around.”

  Brennan asked whether he’d purchased new boots for the job, and Iuteri laughed and said he’d poked at the concrete with his shoes and waved his hands around. He and D’Amato had admired the location, across from the beach. Kealoha had offered to make the architect available, but Iuteri had said that wouldn’t be necessary. He had asked just one question: “This is the site where the building is supposed to come up?” After less than thirty minutes, Iuteri recounted, he’d said, “Okay, Jimmy, it’s done.”

  Iuteri had appraised the property at $9.75 million, as instructed. Squinting in the morning sun, he told Kitzer and the others that he would’ve spouted out any number Kealoha had asked for in order to get his $25,000.

  “That’s the extent of your appraisal?” Kitzer asked. “[For] $25,000?”

  “Yeah, that’s it.”

  “When are you going to write it?”

  “I’ll get it done later,” Iuteri said, plopping onto a seat. “Get me a drink.”

  Kitzer cringed and exchanged looks with the Junior G-Men: Bimbo Boy is at it again. Kitzer had vouched for the guy. “That’s a good price for an MAI appraisal,” he’d told Kealoha. “The man is not robbing you, I’ll tell you that. That’s a hell of a good price.”

  Kealoha had gone along with everything the promoters asked for, and D’Amato had in return given him a “pre-advice letter” from the Eurotrust—a document recommending a $10 million long-term loan. This was a promoter’s confection—a meaningless document that appeared to move Kealoha a step closer to a loan. Still, he might be able to use it to delay foreclosure.

  Iuteri said D’Amato was at Kealoha’s bank, First Hawaiian, making a presentation about the Eurotrust. The four of them sat for a while, and as the hour tilted toward noon, D’Amato arrived by the pool with Kealoha. Kitzer sat up and asked how it had gone.

  “Fantastic,” D’Amato said.

  They looked pleased. Kealoha excused himself to make a call, and Kitzer eyed D’Amato. “Tell me what happened,” he said.

  D’Amato recounted that he’d delivered his full spiel at First Hawaiian—including, of course, flashing the phony CDs in his briefcase. “Their eyes got big,” D’Amato said.

  The First Hawaiian bankers had tentatively agreed to provide short-term financing.

  “All right,” Kitzer said. “Let’s see what happens.”

  —

  The agents were developing a grudging admiration for Kitzer’s operation, in which, they now understood, there were three tiers of participants. Kitzer himself formed the top level, as the operator of Seven Oak or whatever vehicle he was running at the time.

  The second tier of the operation included the brokers—people who sold his fraudulent paper. The brokers lived in cities like Charlotte and Miami and New York, connecting with victims and taking their money and forwarding half of it to Phil. Brokers
swarmed Kitzer because of his unique ability to make a vehicle stand up. Sometimes brokers even put up seed money to help him start a new briefcase bank, once an old one had been “blown out” by overexposure or an investigation.

  The third tier comprised the people who paid for the paper, and that was where things got interesting. Some were unwitting victims: Jimmy Kealoha types. But many others who bought Kitzer’s paper were co-conspirators of a sort.

  John Kaye was one such person. A septuagenarian from Marietta, Ohio, Kaye ran a company called Globe Natural Gas and had recently paid $10,000 for a $100,000 certificate of deposit from Seven Oak through a broker, Tom Bannon. Kitzer had instructed Bannon to tell Kaye that he should never present the CD to a bank—it was to be used on his balance sheet only. Kaye had to know that he was getting a fraudulent certificate: No legitimate bank would hand out a $100,000 CD for $10,000. The idea was that Kaye, in turn, would try to victimize a bank—to obtain a loan that he otherwise would be unlikely to obtain.

  Kitzer’s meetings with brokers had three purposes: First, everyone involved needed to understand what they were trying to do, and how they were going to do it. Second, he would have “a more or less pep talk on what they’re going to have to tell bankers whenever they start dealing with banks about this letter of credit,” Brennan later recounted. And third, they planned their cover story—which would start with a declaration of how eager they were to cooperate with the FBI because they certainly hadn’t intended to do anything wrong.

  Kitzer made countless thousands of dollars providing a “reader” service, or a phony reference. Say Kealoha wanted to check out Seven Oak before Kitzer used his letters of credit to buy up the condos. Kitzer would produce a list of bankers who would tell Kealoha, “Yes, we have done business with them, and they live up to their obligations.” Kealoha would have no idea that he was speaking to other promoters. For a fee, Kitzer would also send Chase Manhattan a telex falsely informing the bank that John Kaye maintained an account of $200,000—to try to jiggle loose a loan. He could also arrange for confirmation from a major European bank—the more you were willing to pay, the more credible the reference. For $3,000, Kitzer could obtain the imprimatur of the venerable Union Bank of Switzerland—a real institution he had “wired” with a corrupt banker.