by James Walsh
His conclusion: There really aren’t such things as hot tips that need to be whispered on the QT. Useful information comes in pieces that are too small—on their own—to make or break an investment. Top secret information is usually hype.
Case Study: Colonial Realty
Jonathan Googel and Benjamin Sisti formed Connecticut-based Colonial Realty in the 1960s as a vehicle to sell limited partnerships that invested in property in and around Hartford. For the first 15 or 20 years they were in business, the two boyhood friends seemed to do things legitimately. During the 1980s, though, they engaged in scores of secretive and questionable dealings. The reason: Colonial Realty had become a vast Ponzi scheme.
Googel, Sisti and their investors were joined in their downward spiral by a proven loser named Frank Shuch. By most reckoning, Shuch brought the tendency for heavy larceny to the operation.
Shuch joined Colonial Realty as the result of a relationship between the company and accounting firm Arthur Andersen which had begun in 1975, when Googel and Sisti were introduced to Andersen tax partner Richard McArdle.
McArdle helped Googel and Sisti find investors—although he told them that if Colonial Realty “wanted to play in the big leagues, then it had to pay.” Andersen’s initial contributions were “unofficial.” Colonial Realty was not allowed to put the firm’s name on any of the documents it prepared. The accountants said that their involvement was best left a secret.
That came to an end in 1981, when Andersen started formally putting its name on financial documents prepared for Colonial Realty’s syndications. In exchange for the expertise, credibility and business contacts that the Andersen name provided to Colonial Realty, Googel and Sisti agreed to hire Shuch, an alleged embezzler who was the brother-in-law of an Andersen partner.
Shuch also wanted his involvement to be kept secret. Toward this shady end, he started a company called Consulting Enterprises. He performed all his work for Colonial and related entities as an employee of Consulting, for which he received in excess of $5.5 million in payments between 1986 and 1990.
Why all the secrecy? Colonial Realty sold limited partnership interests in various real estate properties located primarily in Connecticut. These investments were offered through Private Placement Memoranda (PPMs), pursuant to the exemption in the registration requirements for “privately placed” transactions.
Colonial Realty offered money-back guarantees, minimum returns of 14 percent, and projected overall returns as high as 300 percent. And the company’s offering materials contained misrepresentations and omissions about revenues, financial reserves, rental income and cash flow. It wasn’t a situation that would stand up to much scrutiny.
The cornerstone of Colonial Realty’s marketing system was a secret network of finders—lawyers, accountants, insurance agents, real estate agents and stockbrokers who were given fees in return for either recommending people to buy Colonial Realty investments or providing lists of wealthy clients.
Most of the finders were, themselves, investors in Colonial Realty projects. Generally, they were paid $1,500 for each person who bought a $50,000 investment. Most received either checks or credits on their investments; some were paid in cash.
Colonial Realty’s head bookkeeper said that Sisti and Googel kept several million dollars of cash on hand for paying finders’ fees.
This aspect of the company’s marketing system was kept secret until after the company was forced into bankruptcy in September 1990. Colonial Realty salesmen maintained that the finders did not want it known that they were getting money in return for recommending their clients, relatives or friends make investments. (Many of the payments violated federal securities laws, which prohibit anyone other than registered brokers from being paid commissions.)
In September 1990, involuntary bankruptcy proceedings were filed against Colonial Realty in federal court. Six banks that had loaned money initiated the proceedings. Investors had a total of more than $350 million in limited partnerships at the time.
In October 1990, Googel, Sisti and Shuch were indicted on federal felony charges.
Shuch killed himself in February 1992 by putting a plastic garbage bag over his head. The suicide took place in his $10 million custombuilt home.
On May 5, 1993, Googel pled guilty to two counts of wire fraud, one count of bank fraud, and one count of attempting to impede the administration of the internal revenue laws. Two weeks later, Sisti pleaded guilty to two counts of bankruptcy fraud, one count of wire fraud, and one count of structuring transactions to evade reporting requirements.
Both men cooperated extensively with prosecutors and the civil attorneys. Under federal sentencing guidelines, Googel and Sisti faced sentences of between two and five years. They hoped their cooperation would convince the sentencing judge to impose even less time.
It didn’t. The judge not only concluded that they deserved no leniency but found that the guidelines did not adequately reflect the severity of their crimes. He chastised Googel for recruiting millions in investments even after bankruptcy experts had advised that Colonial Realty was failing. And he concluded that Googel had obstructed justice by attempting to arrange a meeting with a witness being interviewed by federal authorities.
Worse still, as Colonial Realty was collapsing, Googel had transferred millions to relatives. Much of that had been recovered as part of a deal with the bankruptcy trustee; but Googel’s family was allowed to keep about $1.25 million in cash and other assets—including a halfmillion dollar house.
The judge sentenced Googel to nine years in a federal prison camp.
The judge sentenced Googel to nine years in a federal prison camp. square-foot mansion with a movie theater and shooting range and ordered custom-made multimillion-dollar yachts. At his sentencing hearing, though, Sisti seemed delicate and humble. He spoke in a calm, unimposing voice, telling the judge he was sorry for his crimes and sorry he could not make things right. “I can’t change what I did,” Sisti said, “but I can change the person who did them. I just hope I live long enough to make it all up to [my family].”
The judge gave him an eight year sentence to work on the change.
The criminal sentences moved the focus to various civil lawsuits. In April 1994, a panel of mediators approved a settlement worth about $100 million. The deal resolved some 3,000 lawsuits, representing most of the civil actions spawned by Colonial Realty’s collapse; it bailed out investors who’d not only lost their investments but also owed banks for loans that had paid for limited partnerships. All but $18 million of the $100 million owed by the investors was forgiven by the banks under the settlement.
In exchange for the forgiven debts, the banks reserved the right to collect half of any judgment from Andersen or other defendants.
Two of the legal and accounting firms accused of improprieties by Colonial Realty investors and creditors were also part of the settlement, agreeing to pay a total of $11 million. Admitting no wrongdoing, the law firm of Levy & Droney agreed to pay $10 million and the accounting firm of Kostin Ruffkess & Co., $1.1 million. (The payments were covered by professional liability insurance.)
A few months later, Sisti and Googel reached a settlement with the investor groups that allowed each of their families to keep about $1.1 million in return for assurances that they had fully explained their tangled finances and disclosed all assets. The perps turned their burned investors into reluctant allies by helping their lawyers prepare lawsuits against accounting and legal firms that participated in selling Colonial Realty partnerships.
In 1996, a federal appeals court considered the burned investors’ claims against Arthur Andersen in detail. They alleged that Andersen had prepared or approved financial projections for the limited partnerships that “bore no relation to reality” and misrepresented the real estate market.
The investors alleged that Andersen “knew that the projections would make an investment in [the limited partnerships] appear economically feasible...notwithstanding the excessive fees
charged by the general partners and made the projections, which they knew to be excessive, for the express purpose of distracting the attention of plaintiffs from those fees.”
Andersen argued that the language contained in the PPMs concerning the limited scope and inherent uncertainty of the projections prevented reliance on the projections as a matter of law. The court disagreed.
According to Andersen, the investors could not sustain their negligent misrepresentation claims because they failed to allege either that they had a fiduciary relationship with Andersen or that Andersen possessed actual knowledge that the investors would rely on the alleged misrepresentations. The court disagreed.
Because Shuch was merely the “brother of a member’s spouse,” Andersen argued that he could not have jeopardized its professional independence. Therefore, the firm believed it was not required to disclose Shuch’s relationship with its errant employee. The court disagreed.
The burned investors alleged that Andersen broke RICO law because it secretively “sought to place Shuch as an employee of Colonial so as to obtain control of Colonial,” that “[t]he dramatic increase in Colonial’s business was a direct and proximate result of Andersen’s control over the Colonial syndications,” and that Googel and Sisti “may not have fully understood” the financial status of their burgeoning operations, while Andersen “knew everything” because it was “[sophisticated] and highly skilled in business, real estate finance and syndication.” In short, they claimed that:
Andersen created in Colonial an industry giant which Andersen could and did display to other potential clients as an example of the success and prestige which any company could attain if it hired and paid Andersen.
But the court doubted that Arthur Andersen controlled Colonial Realty through Shuch. The investors’ lawsuit described Googel and Sisti as “Ponzi Participants,” which the court called “an unlikely description for entirely subordinate, dominated toilers in the Ponzi vineyard.”
Finally, in May 1996, Arthur Andersen agreed to pay $10.3 million to settle the charges. This brought its total settlement to about $15 million. (After a state investigation in 1993, Andersen had paid $3.5 million in refunds and fines.)
As a result of the various settlements and the bank forgiveness, most of the burned Colonial Realty investors were able to recoup more than half of their losses. Of course, it took them more than five years to get the money back.
CHAPTER 13
Chapter 13: Loneliness, Fear and Desperation
White-collar thieves often think they can make up a loss and come to believe they deserve what they are taking. But these rationalizations usually crumble under the weight of anxiety and paranoia.
Pyramid and Ponzi schemes exploit impulses like trust, greed and secrecy. But these schemes are built on darker foundations. For both Ponzi perps and investors, the impulses which get them involved are pretty bleak—usually wrapped around loneliness, fear and desperation.
These factors fit the circumstances. A Ponzi scheme requires a certain amount of fatalism on the part of the perp. The schemes always collapse. When the perps go in, they know there’s going to be a reckoning. The battle is to delay the reckoning as long as possible.
Many people find the impulses that motivate crooks more interesting than those that motivate their marks. It’s almost a staple of crime novels and magazine stories to portray con men as characters from the psychological and philosophical theories of Friedrich Nietzsche. That is, perverse supermen with a twisted strength for shouldering the weight of their crimes.
The truth is less dramatic. There’s no doubt that Ponzi perps are affected by some dark impulses. But they usually aren’t supermen. They’re more like unexamined people who give in to fairly common weaknesses.
Time and again, in the wake of a collapsed Ponzi scheme, burned investors and participants ask “How could this person sleep at night?” The answer seems to be that, from the perp’s perspective, the fraud is usually impossible or inevitable.
Perps candid enough to speak truthfully about their deeds will admit that they’ve always felt like they don’t belong—in any group. “It’s been like that since I was in school,” says one perp who ran several Ponzi schemes in the Midwest, got in legal trouble for two, and then moved to southern California—where he insists his start-up multilevel marketing company is legitimate. “You know how it is—kids gather in cliques. I could get along with just about every clique, hang out with them. But I didn’t really belong in any. I’m in my fifties now and it’s the same way. I can get along with all kinds of people but I don’t belong with anyone.”
To a psychoanalyst, this probably sounds like impostor syndrome— the disabling feeling that a person doesn’t rightly deserve his place in any circle, system or organization. Asked if he suffers from impostor syndrome, the talkative perp shrugs. “Maybe. But I’m not a big believer in psychology or dwelling on the past. I focus on the future.”
This standard dodge may mark the limit of a criminal’s ability for selfexamination. The most relevant downside of the impostor syndrome— a shifting code of circumstantial ethics necessary to get along with everybody—is beyond most Ponzi perps. It’s too much a part of the charm or charisma that’s often the perp’s strongest personal asset.
Everyone feels some part the impostor syndrome at some point in his or her life. People deal with the feelings of isolation in different ways. Most well-adjusted people realize that the feelings of an impostor’s isolation are a common part of life. Less well-adjusted people are so disturbed by the feelings that they slip down a slope of egocentrism...and even pathology.
This is where the circumstantial ethics exact their price. Dwelling on themselves, these egocentric types can’t get past the idea that they are outsiders—and even frauds—within any social or economic circle. From this place, committing an actual fraud is easier than most people would think.
In August 1996, a Florida woman who’d bilked almost 200 investors out of nearly $8 million—and then plotted the murder of the federal judge who put her out of business—was sentenced to more than 24 years in prison. Jan Weeks-Katona, founder of Premier Benefit Capital Trust, had been convicted in December 1994 of fraud, money laundering and conspiracy to commit murder.
Immediately after her conviction, Weeks-Katona started lobbying for easy treatment. She argued that, if she hadn’t been medicated during her trial, she could have assisted her attorney. “I’m sure the jury would have found me not guilty if I had been able to do so,” she’d later say.
Her sentencing was delayed for more than a year, while she underwent court-ordered psychiatric evaluation and treatment.
In the early 1990s, Weeks-Katona and her son had operated Premier Benefit Capital. Through the company, they sold unregistered securities on the guarantee of a 12 percent return on investments of at least $25,000. Using radio programs and free seminars to attract investors, they quickly amassed millions—mostly from senior citizens.
They spent some of the money buying two gulf-front homes near Tampa, Florida.
But complaints followed as the Ponzi scheme collapsed. The Securities and Exchange Commission sued the company in 1993. U.S. District Judge Steven Merryday promptly ordered a receiver to take over operation of Premier. (The receiver eventually recovered some assets and returned about 40 cents on the dollar to Premier Benefit investors.)
Weeks-Katona, her son and others involved in the company fled to Mexico, where they plotted to kill Merryday and other officials. The group was eventually arrested by Mexican law enforcement officials working with the FBI.
At her sentencing hearing, Weeks-Katona appeared calm and relaxed. But her doctors and her attorney said she still suffered from a combination of mental disorders, which produced “delusions of grandeur and extreme paranoia” that led her to commit her crimes. So, her court-appointed lawyer argued for an unusually light 10-year sentence.
Federal Judge Susan Bucklew agreed that Weeks-Katona was mentally ill but said she ha
d to consider protection of the public. (Bucklew had sentenced Weeks-Katona’s son, Jason Spencer Weeks, to 30 years in prison from the same case.) “She feels no responsibility for any of this,” Bucklew said. And the judge cited other problematic testimony. Weeks-Katona had said that she hadn’t taken medication for her condition in two-and-a-half months. “That’s sort of scary,” Bucklew concluded, as she rejected the pleas for leniency and sent the perp to jail for a long time.
Stealing Becomes More Natural than Earning
Another question that burned investors often ask is: “Why did they commit this crime? They could have worked straight and gotten as much money.”
This is a natural but flawed assumption. Yes, many Ponzi perps hang around the rich and famous...and seem to work close to legitimate business. But, in most cases, it’s their fraud that got them even that close.
With a very loose sense of loyalty or obligation, the Ponzi perp is always susceptible to thieving temptations. That’s why so many are repeat offenders. They don’t feel the constraints that most people do. Ponzi perps are usually loners by preference, inevitably drawn toward the action or situation that leads to their break with people around them.
This impulse away from others may be connected with the fact that Ponzi schemes have a certain element of class envy to them. Repeatedly, the perp is someone with notably less education or a weaker financial background than the people with whom he or she lives and works.
In this sense, the scheme may be a slightly-thought-out insult to the relatively rich and mighty.
This is the biggest refutation of the hack screenwriters, magazine journalists and commentators who argue that Ponzi perps are Nieztschean supermen. A Ponzi scheme is the tool of a relatively weak criminal. It’s indirect, takes a while to collapse and is non-violent. And—in the ultimate affront to Nietzsche’s machismo—many Ponzi perps offer whining rationalizations for their crimes, when they come to light.
