You Can't Cheat an Honest Man

by James Walsh

  In January 1995, the Securities and Exchange Commission sued Foos—to keep him out of the investment business for the rest of his life. The SEC asked that he be permanently barred from future transactions, repay his “ill-gotten gains” with interest and be assessed unspecified civil penalties.

  In February, Foos accepted a plea agreement with the government in which he admitted that he “retained and used for his own purposes” between $6.8 million and $7.2 million. Four months later, he was sentenced to five-and-a-half years in prison. Foos opened his presentencing remarks by saying, “When a man loses his honor, he’s a dead man. That’s me, I’m a dead man. I chose the coward’s way out.”

  Judge Ruben Castillo also ordered Foos to pay $500,000 in restitution and perform 300 hours of community service. The judge placed him on five years of supervised release after he completed his prison term. Castillo went on to say, “You betrayed the [legal] profession, you betrayed your clients and their trust, you did something incredible in betraying your family and ultimately you betrayed yourself.”

  Using a Legitimate Business to Build Trust

  Some Ponzi perps will do something which only makes sense to an especially avaricious criminal: They’ll set up legitimate businesses to camouflage their schemes. When the schemes collapse, investigators and burned investors are left wondering why someone who could build a real business resorts to theft.

  The answer usually has something to do with bad impulses overwhelming good skills. It’s a psychological variation of Gresham’s Law. In this context, the urge to steal money devalues legitimate efforts—which the perp considers only a means to the thieving end.

  Or, as one New York prosecutor says, “It’s really amazing how much work some of these [Ponzi perps] will put into their schemes. They’re smart and make a good impression. You can’t help wondering what they could do if they put the effort into honest work.”

  Ponzi perps know they have to build at least a pretense of trust with their investors. Most tell stories or use tricks that, in retrospect, seem plainly dubious. In these cases, the best practice for avoiding a loss is to keep your eye on the traditional tells of a Ponzi scheme—exceptionally high returns combined with anything resembling a guarantee or no risk offer.

  Few perps go to the length that Michael Rosen or Saul Foos did to exploit investors’ trust. But, of course, the ones who do are the most dangerous criminals in this field.

  A perp like Foos is probably the hardest to detect. He builds trust legitimately for a long time and then decides, long after a relationship has been established, to exploit it. The same red flags apply in this scenario that work in all Ponzi schemes. But they are harder to see. There’s no doubt Foos’ clients already trusted the man and were—as the one lawyer pointed out—“slow to suspect.”

  To discourage people from following the tracks of these perps, investors have to rely on aggressive enforcement by prosecutors and judges. If fear of the lowest rung in Hell won’t stop another Saul Foos, maybe fear of the darkest cell in San Quentin or Marion will.

  Case Study: Joseph Taylor

  People trusted Joseph Taylor. To everyone who knew him, the Knoxville, Tennessee, financial planner embodied integrity and perseverance. He was a dedicated husband, father and friend. In business, he quoted inspirational speakers like Zig Ziglar. If he gave you his word, he kept it. “He always espoused doing the right thing,” said one investor. “In his dealings with his kids he was like that. He required them to be respectful and the old-culture thing of ‘Yes, sir,’ and ‘No, sir.’”

  Taylor was a Tennessee native. Born in 1949, he grew up on a farm in rural Jefferson County. In the late 1960s, he attended the University of Tennessee; he graduated in 1971 with a degree in agricultural science. But Taylor was too ambitious to spend his life plowing fields. He went into insurance, selling policies, investments and financial planning services.

  During the 1970s, Taylor built a business based in the Knoxville area, but growing out over most of eastern Tennessee. He concentrated on small towns and suburban communities. Methodically working through the ranks of professionals and successful business people, he always based his deals on a foundation of trust.

  “He would sit down with [investors] and talk about his family. They loved him,” says one person familiar with Taylor’s operation. “He was a likable guy. But—and I don’t want to be unkind—he was not a handsome guy.”

  The homeliness only seemed to add to Taylor’s credibility. Besides securities, he was authorized to sell insurance for 25 companies. He was a top performer in a down-home state. And he was clean. Tennessee’s Department of Commerce and Insurance recorded no complaints against him.

  By the time the roaring 1980s were under way, Taylor was selling mutual funds, life insurance policies and even real estate limited partnerships. His client list continued to swell in size and significance.

  Taylor began attracting a wide circle of friends and acquaintances. He was making a six-figure income. He and his wife started to socialize with Knoxville’s elite. “You couldn’t have a better bunch [than this group] to vouch for you if you were selling something,” said one investor.

  Flush with success, Taylor began to describe his work in more “visionary” terms. He talked in New Age jargon about using financial planning as a means to achieve less specific life goals.

  Then things took a darker turn. Taylor’s clients had typically received official paperwork confirming their accounts through a wholesale brokerage. In the early 1990s, Taylor started pitching his own securities deals, like private debt offerings and limited partnerships. These deals didn’t produce a detailed paper trail. This change should have tipped investors off that something was wrong. But the returns were so high— as much as 10 percent in few weeks—that they went along with his slightly eccentric ways.

  “I think he was a charming gentleman, obviously,” said one local attorney who knew Taylor. “I think he had to be. He came across to people very honestly. Even if they thought that it was irregular that they could not get paperwork, that they all attributed it more to Joe’s disorganization than to his dishonesty.”

  Besides, rumors swirled about Taylor’s platinum connections. People in Knoxville talked about his contacts in the J. Peter Grace family, his friends at the state capitol who’d tip him off to hot muni bond deals and his ability to extract prime real estate at rock-bottom prices from probate and divorce court. “I used to say, ‘Joe, you’re one of the most well-connected people I’ve ever met,’” one investor marveled.

  In fact, Taylor had started operating a Ponzi scheme with investors’ money some time in the late 1980s or early 1990s. By most reckoning, Taylor had stolen a six-figure sum from investors’ accounts in late 1992 or early 1993 and started the Ponzi scheme to cover his tracks.

  Like many Ponzi perps, Taylor had a considerable ability to keep a complex web of detailed lies in his head. In another common move, he controlled what his clients knew about each other’s investments. He’d often tell investors to keep the details of their deals private because he wasn’t making them available to anyone else.

  Jim Rogers was the president of Ben Rogers Insurance Agency, Inc. in LaFollette, Tennessee. Rogers met Taylor in the late 1970s and made a series of investments through Taylor & Associates. The investments went conservatively and successfully until the spring of 1994, when Rogers told Taylor that he was interested in some more aggressive investments.

  A pattern emerged. Taylor would contact Rogers and ask for a cashier’s check in exchange for several post-dated checks from Taylor & Associates in the amount of the investment plus a hefty return. In a short time—often between seven and 30 days—Rogers could cash the checks.

  However, Taylor would usually offer Rogers the chance to roll over his investment in another short-term deal. In these cases, Rogers would cash the interest check but hold on to the principal check. At the end of the next investment cycle, Rogers could make the same choice again.

  Ro
gers thought that he was a limited partner of Taylor & Associates, L.P., because he received investment income tax reports from the limited partnership and was issued individual partnership checks at the time he delivered cashier’s checks to Taylor. He assumed each of his investments, regardless of whether the check was made payable to Taylor & Associates or Joe Taylor, was being made with Taylor & Associates.

  In a little more than a year, Rogers gave Taylor about ten cashier’s checks and cashed about eighteen Taylor checks. All but two of the cashier’s checks went into Taylor’s accounts; the two that didn’t were endorsed over to third parties—other investors anxious to get their money back.

  This was the surest sign that Taylor was running a Ponzi scheme. But Rogers never noticed the third-party endorsements.

  In September 1995, Rogers gave Taylor a cashier’s check in the amount of $62,000. The money was supposed to be used to buy short-term municipal bonds that would be liquidated in 30 to 60 days. Taylor gave Rogers four checks for $16,759.78, $11,173.18, $22,346.37, and $18,994.41—for a total of $69,273.74.

  If all went as planned, Rogers would make a 12 percent profit in less than seven weeks. But he was never able to cash any of the four checks.

  Taylor became noticeably erratic in the fall of 1995. He seemed in a constant hurry and—for the first time in his working life—could be tough to reach. He confessed to at least one investor that he was getting psychological counseling for stress. “He probably had psychological problems,” said one person close to Taylor’s operation and who added, “Some people have said he was a manic depressive.”

  September and October proved a particularly frantic time for Taylor during which he called on dozens of investors, pitching an array of weird deals. He called one of his richest investors with a big one. Taylor said he had an exclusive option on a Memphis muni bond deal. If the high roller could raise $2 million immediately, he could make about $200,000 profit in about a week.

  Taylor’s deals had always worked before, so the high roller agreed. He wired the money the next day. A week later, Taylor said it was going to take a couple of extra days to liquidate the bonds.

  Two weeks later, the high roller told Taylor he wanted to cash out his account. Taylor agreed, promising to hand over the money within five days. On the fifth day, Taylor showed up at the high roller’s office and gave him a stack of 18 cashier’s checks totaling $2.5 million. It was a 25 percent return in less than a month.

  The high roller noticed that many of the checks bore the names of third-party remitters—other Taylor investors. This seemed suspicious. But the bank had no problems with the checks.

  A few days later, Taylor stopped in at the Rose Mortuary in suburban Knoxville and made burial plans for himself and his wife. He picked his casket and named his pall bearers—all investors. As soon as he was finished, he drove his black 1995 Mercedes into the mortuary’s rear lot, parked the car and shot himself in the head.

  At his funeral, Taylor was carried by people whose money he’d stolen. A rumor circulated around Knoxville that, right before he killed himself, Taylor had called his wife and asked her to join him at the mortuary. But investigators who checked Taylor’s phone records said this didn’t actually happen.

  In the last three months of his life, Taylor had made 174 deposits totaling more than $52.3 million into his limited partnership account; in the same period, he made 322 withdrawals totaling $53.2 million. Once again, frenzied banking marked the end of a Ponzi scheme. “It’s on the same scale as some of the largest [Ponzi schemes] in the country,” said Assistant U.S. Bankruptcy Trustee William Sonnenberg.

  Taylor’s investors moved quickly when word of his suicide got out. Within three days, several restraining orders had been issued freezing assets and records related to Taylor & Associates, Joseph C. Taylor L.P. and Taylor’s estate.

  Within two weeks, retired FBI Agent William Hendon had been appointed trustee for most of Taylor’s operations.

  Hendon didn’t find much at first: $36,814.52 from the limited partnership’s NationsBank account and $25,000 from the settlement of a lawsuit. He said that he expected to exercise his right under federal bankruptcy law to force those who’d received money within 90 days of the bankruptcy filing to give it back.

  This proved easier than Hendon expected. In an unusual move, some clients who received money from Taylor before he died volunteered to pay it back. Knoxville was still a small town, in many ways, and trust was important. They didn’t want to be linked to dirty money.

  CHAPTER 10

  Chapter 10: Greed

  Ponzi perps are moved by greed. In most cases, they’d rather steal money quickly than earn it gradually. (It’s the exceptional perp who has the discipline to move slowly; typically, they are more crude) But they also count on the greed of their investors to make the schemes work.

  No exploration of pyramid and Ponzi schemes would be complete without a consideration of what greed means in this context—and how it works.

  The greed that leads an investor to make a foolish investment in a Ponzi scheme may not be an obvious thing. In an age when 25-yearold computer software designers can become millionaires overnight and even conservative investments like stock mutual funds have given investors returns of 30 percent or more in a year, many people lose perspective on how hard it is to make money.

  “You hear about Bill Gates being worth $40 billion. You hear about Netscape or Yahoo! going public and making receptionists millionaires. You hear about the guy who started Dell Computer being a billionaire—and he’s not 30,” says a California prosecutor. “And you believe there’s got to be some quick money for you out there somewhere. It may be subconscious, but you believe it. And this affects your decisions.”

  When lots of money is being made, scam artists will be there trying to take some. They rely on the greed of potential investors. This reliance gets to one of the key issues that law enforcement agents face when dealing with the schemes. They tend to look at these things—like prostitution and certain forms of illegal gambling—as victimless crimes.

  “There’s a long tradition of ambivalence about ‘protecting’ people who get involved in con schemes,” says another West Coast prosecutor. “You have to be a lot greedy and at least a little stupid to get sucked into a chain letter or Ponzi scheme. If you lose money, that’s the price you pay. You’re not going to be on the top of anyone’s victims list.”

  On the other hand, it’s hard to tell someone who’s just lost her life savings that she was greedy and stupid. This is especially true if the scheme involved her family or church.

  This is why other law enforcement types give the Ponzi investors a break, drawing an important distinction between greed—which perps and investors both may have—and dishonesty—which usually only the perp has.

  Arthur Lloyd, director of investigations and financial risk management with Control Risks Group, says that there are important differences between a greedy person and a dishonest one. He says, “An honest person can still be greedy, and you could fool him. A bank that sees profit in fees may be greedy, but it does not come by the money dishonestly.”

  Applying the Greed-vs.-Dishonesty Distinction

  In late 1995 and early 1996, an illegal pyramid scheme swept across southern California’s Coachella Valley. All kinds of people got involved—from the country club set in resorts like Palm Springs to working-class families in dusty desert towns like Cathedral City and Indio.

  Most believed the scheme, known as “Friends Helping Friends” and the “Gift Exchange,” was no more dangerous than an office football pool. But a number of lower-middle-class people invested thousands of dollars that they couldn’t afford to lose.

  The scheme’s participants rented banquet rooms in local hotels to hold their meetings—and recruiting campaigns. The meetings had the feel of a pep rally. As players forked over $2,000 in cash, a hundred-dollar bill at a time, giddy participants shouted aloud: “One hundred! Two hundred....”

 
; Charts decorated with foil stars showed the structure of four-tiered pyramids: eight places on the bottom, then four, then two, then finally one at the top. When the bottom eight people each paid $2,000 to the person at the top, the recipient “retired,” the pyramid split in two and everyone moved up a level. Eight new participants then had to be recruited to sustain each new pyramid.

  “It was amazing how much these people were motivated by greed,” said one undercover police officer who attended several of the meetings. “These were supposedly upper-crust people acting like junkies. Screaming and whooping for the money.”

  The people running the meetings seemed to understand that the scheme had a problematic relationship with the law. Promotional material handed out at the meetings touted the scheme’s supposed legality. One brochure said vaguely and rather lamely that a player’s neighbor who was “a judge” had looked at the plan and concluded, “Go for it!”

  Players were warned to pay “all appropriate income taxes” on their profits from the pyramids. Brochures announced an ending date of December 31, 1996. By that date, new players would be “weaned off.” This deadline, the promoters said, made the scheme legal.

  Even if it were legal (a big if), the scheme wasn’t any more financially sound than any other pyramid or Ponzi scheme. It collapsed during the summer of 1996.

  People at the top of the pyramid had taken out as much as $100,000 while people at the bottom lost between $5,000 and $6,000. Of more than 1,000 people who allegedly exchanged an estimated $1 million during the scheme’s lifespan, nine were eventually indicted by a Riverside County grand jury. They were charged with enticing people to pay money into an endless chain. “Many Riverside County residents lost thousands of dollars as a consequence of this criminal activity,” District Attorney Grover Trask said.