Gordon Grigg…scheduled for release 9/29/2014.
Gordon Grigg – staying in Prison says Judge Aleta Trauger. Looks like the “Good deeds” don’t outweigh the “Bad!”May 10, 2010
Not long ago a request was submitted to the court to release Gordon Grigg pending his appeal. Grigg’s wife wrote letters to Judge Trauger in attempts to illustrate a clearer picture of her husband’s “character, his life, his ability and his desperate desire to pay restitution.”
In a recent blog providing an update to the Grigg situation, I received a flood of communication (in various forms) expressing outrage at the idea that Gordon Grigg, who, as they put it, “used God to swindle people out of their life’s savings”, would honestly think that he had a chance at ever earning enough money to make restitution. “That’s a pipe dream,” stated one victim, “clear evidence that all he wants is – out of prison!”
Well…it seems that Judge Aleta Trauger agrees. Judge Aleta Trauger recently denied Gordon Grigg’s motion for release pending his appeal, because Trauger wasn’t convinced by Grigg’s claim he is not a flight risk. She also didn’t believe Grigg’s appeal would result in anything less than hard time.
Grigg is currently serving 120 months in prison on multiple counts of mail and wire fraud.
One thing I can say, time passes slowly in prison. I know, (wish I could say different) but I’ve been there. What will be the outcome of this unfortunate event? My guess…Gordon will come to realize that God does work in mysterious ways and, if open, he might find that this experience will open him spiritually to places he has never gone before. Likewise, there will likely be a realization that, choices once made, can’t easily be undone. Restitution is great, but it doesn’t replace the change that those who were victimized have experienced. My guess, the victims will always have an issue with trust.
I respect Gordon’s wife for sticking by him. There will, in my opinion, however, come a time when reality will set in and all involved will recognize that every choice has a consequence and those choices Gordon made will forever mark all concerned…including his family.
My best to all concerned.
Of course, if you have any opinions that you wish to share…YOUR COMMENTS ARE ALWAYS WELCOME!
White Collar Crime Sentence Reduction Requests – What Do You Think? Sholam Weiss, Gordon Grigg and Barry StokesApril 1, 2010
Over the past several years there appear to have been a proliferation of incidences of white collar crime. And, with increasing amount of fraud have come longer and longer sentences. What seemed to be the overwhelming example was the sentence given to Bernie Madoff – 150 years. But, Bernie’s sentence doesn’t come close. Norman Schmidt got 330 years for his role in a huge investment scam. But, convicted life-insurance swindler Sholam Weiss has time on his hands — 845 years, a record for white-collar crime.
But, along with sentences handed out seem to come legal requests for sentence reductions. On March 24th, 2010, Weiss’s attorney appealed for his client to be resentenced in hopes of shaving off a little time — about 800 years worth – and he’s not the only one. Barry Stokes, former CEO of 1Point Solutions, is currently serving a 12 ½-year sentence for siphoning $19 million from the savings accounts of others and claims he must be released from prison to seek proper medical attention.
Likewise, Gordon Grigg’s wife, Mila Grigg stepped up to the plate for her husband, citing a Nashville Post story from September that reported U.S. District Judge Robert Echols gave Stokes a reduced sentence because he cooperated with investigators and had no prior criminal history.
Let’s look at these three in brief. The questions are:
- Are these sentences too harsh?
- Should the sentences be reduced?
According to the Associated Press:
Weiss was sentenced to 845 years in prison in February 2000 by a federal judge in Florida who said he should be removed permanently from society. Of course, Weiss wasn’t in court at the time. He had fled overseas while a jury was deliberating.
Weiss and six others were convicted or pleaded guilty in a plot that caused the 1994 collapse of the National Heritage Life Insurance Co. and cost many of the Orlando company’s 25,000 customers their life savings.
He disappeared after his nine-month trial but before the jury started deliberating. He was found guilty of all 93 counts of pocketing $125 million and given a sentence that the Department of Justice says is likely the longest ever handed down for a white-collar crime.
While on the lam, he settled in Brazil and traveled to Israel, Belgium and the United Kingdom. Investigators tracked him to Austria, where he was captured in October 2000. He was a shadow of the 260-pound man they had sought — he had lost 50 pounds, shaved his beard and had documents that identified him as Charles Dick.
Now what? First, you have to wonder if he has a chance at a sentence reduction. First pass…the answer would be NO!
Found by Austrian authorities his attorneys want the 11th Circuit Court of Appeals to order a new sentencing hearing hoping a judge would use different guidelines that would give him a sentence closer to 35 years or so. But the question is – why would the government do that considering Weiss’s actions prior to sentencing. Talking about not wanting to take responsibility…!
The Nashville Post reports the following:
As guards brought former 1Point Solutions CEO Barry Stokes down the the 8th floor corridor of Nashville’s federal courthouse this morning, he noted a scale model of the replacement courthouse that the feds have had on the drawing board for some years now. Stokes wondered aloud when the long-delayed structure would be built.
“You’ll probably be out of prison by the time they break ground,” one of his escorts sarcastically remarked.
To which Stokes replied, in apparent sincerity: “I’ll be out by midnight.”
U.S. District Judge Robert Echols this evening proved Stokes prescient, if not entirely accurate. Turning aside prosecution pleas for a sentence of nearly 22 years, Echols sentenced the admitted fraud artist to 12 and a half years in a federal penitentiary for engaging in a five-year scheme that drained some $19 million from the retirement savings accounts of thousands of people.
In his handwritten court filing labeled “motion to receive documents for appeal,” Stokes said doctors have discontinued his medication and he has concluded the only way he can receive the proper treatment “is to file appeal and get out [of prison].” Stokes then requested necessary documents to file for an appeal. The basis for his claim is that he was transferred in prison and they discontinued his medications prescribed to him by Nashville doctors, causing him to pass out and require five days in the hospital. He states further that he was told by Nashville physicians that he required care by specialists, “none of which practice in Southern Illinois.” (where he is now located). Stokes said doctors found cancerous tumors on his thyroid and liver, and removed his thyroid but “they refused to operate on his liver as it was beyond their skill set.”
This is not the first time that Stokes has sought a sentence reduction due to health concerns.
Candidly, I don’t doubt the last comment as medical care is prison is minimal at best. There is not attempt at heroic life saving attempts.
Then there is Gordon Grigg who I have written about both pre and post sentence.
The Nashville Post stated the following:
Judge Aleta Trauger handed down the sentence this afternoon following the convicted schemer’s guilty plea this spring.
Sentencing guidelines had called for between 78 and 97 months in jail and two years of suspended release. In her sentencing, Judge Trauger noted Grigg’s pattern of preying on vulnerable people and said his use of religion was an aggregating factor.
“It is not a violent offense, but it has done violence in many ways to his victims,” Trauger said from the bench. “This case had a more vicious twist than Madoff.”
During today’s sentencing hearing, Grigg victims from California, Illinois, Arkansas, North Carolina and Tennessee told of their experiences with him, painting a picture of a man who fashioned himself a savior during troubled times.
Rita Jorgensen of Franklin said Grigg “made a mockery of my faith, quoting scripture all the time.” And Steve Weiland, a former pilot now living in Davidson, N.C., said Grigg “came clothed in Jesus Christ, as a brother in God. He said, ‘I’m praying for you and I’ll take care of you.’ Well, he took care of me alright.”
A sentence beyond the “guidelines” – motivated by what the judge cited as a “pattern of preying on vulnerable individuals, people in crisis in difficult spots in their lives.” Likewise, the judge used as a basis for an upward departure Grigg’s “use of religion” to perpetrate his fraudulent scheme.
Grigg claims in his Motion for Release pending appeal the following:
- His sentence is unreasonable since the Court provided no advance notice of their intent to have an upward departure of his sentence and hence his defense had no time to prepare to the variance.
- His sentence is unreasonable since the court relied on his victims (which he claims provided unreliable) testimony.
The Nashville Post reports the following related to Grigg:
Mila Grigg blames her husband’s lawyer for not delivering to the judge “numerous letters” that would have provided Trauger “a clearer idea of his character, his life, his ability and his desperate desire to pay restitution.”
Had Trauger received such letters, Mila Grigg said, the judge would have learned that the Grigg she sentenced to prison “work[ed] with troubled youth in North Carolina” and “coached [soccer] teams where his own children were not playing and never charged a penny … ” — among other claims.
Mila Grigg went on to claim, “His current sentence victimizes the victims who need restitution, and it is our prayer that you hear his sentencing again. This sentence was not a just sentence based on all I know about my husband and all our attorney told us that he had submitted to you.”
Mine is not to judge. As most of my readers know – I served a federal prison sentence with probation following. I know what these men are going through and hope that those – who will be free someday – can gain from their personal experience and use their future choices to help others. Meanwhile – if you have been connected to either Sholam Weiss, Gordon Grigg or Barry Stokes – as a friend, relative or victim – MAKE YOUR VOICE HEARD. Share your thoughts on whether a sentence reduction is appropriate.
Having been there, I completely understand the impact that choices have – not only on the individual that makes them – but also on the lives of others who are connected. Whether a spouse, a child, a mother or father – whether a brother or sister – or whether a defrauded investor – everyone connected with the individual who perpetrated the fraud is a victim and, for most, the pain can run deep.
I was told that my earlier blog about Gordon Grigg was filled with lies…that it was slanderous and/or libelous. I take those claims seriously. To be clear, my objective is to open a dialogue regarding how a Ponzi scheme is perpetrated and how victims are lured in. But for a moment let’s look at the allegation of slander and/or libel.
According to Wikipedia – slander refers to a malicious, false and defamatory spoken statement or report, while libel refers to any other form of communication such as written words or images. Most jurisdictions allow legal actions, civil and/or criminal, to deter various kinds of defamation and retaliate against groundless criticism. Related to defamation is public disclosure of private facts, which arises where one person reveals information that is not of public concern, and the release of which would offend a reasonable person.
Hum…well my words are written and the facts that I reveal are provided either from the public domain or are provided by people who have been directly affected by the crime committed by Gordon Grigg. Further, as best I can tell, none of the comments made or disclosed are private facts that are not of public concern or should offend a reasonable person. Rather, it would seem that what is disclosed has great public benefit. If facts related to the commission of a crime can, upon public exposure, potentially protect otherwise unsuspecting individuals from being victimized – then their disclosure is for the public good.
Does it mean that victim perceptions and comments made at trial are not painful when retold. NO! No doubt they are to anyone affected. And while it is not my intent to cause pain, I also know that complete transparency is one of the only ways that true healing can take place. To say that Gordon Grigg has received his punishment and now the discussion should cease is more an attempt to quietly sweep under the rug the crime he committed rather than expose the true nature of the actions he took and seek to understand them for what they are.
AUGUST 6, 2009 – SENTENCING
According to the FBI the following took place at sentencing:
United States Attorney Edward M. Yarbrough announced that Gordon B. Grigg (“Grigg”), Franklin, Tennessee financial advisor and owner of ProTrust Management, Inc. (“ProTrust”), was sentenced today in federal court to ten (10) years in prison for perpetrating a Ponzi scheme that resulted in a loss of more than $6 million to more than sixty (60) investor – victims.
United States District Court Judge Aleta Trauger, in sentencing Grigg, stated “This case has a more vicious twist than the Madoff case.” Judge Trauger described Grigg’s crimes as “ . . . preying on vulnerable victims in crisis,” noting that Grigg’s scheme “ . . . destroyed families, relationships, marriages, and wreaked incredible havoc.” Prior to imposing sentence, Judge Trauger heard from seven (7) victims who testified as to the devastation Grigg’s fraud had caused to their lives and the lives of their families.
Notes taken at the sentencing hearing reflected the following:
The judge started by saying there were several factors she took into consideration when sentencing Grigg. They were the nature of the crime and the circumstances. This was not a violent crime, but violence was done in many ways. It was similar to the Madoff case but with a vicious twist. It was done in an aggravating way. Two factors keep arising in the pattern that Mr. Grigg worked. The first was that he preyed on vulnerable people and the second was the way he brought religion into the scheme.
People who commit a fraud (most of you who read my blog regularily know I committed a fraud back in the mid ’80’s – not proud of that fact, but it is a fact), typically have a pattern of behavior – a mode of operation if you will – that becomes successful and natural as they seek out victims and attempt to sell them on their scam. More than one victim has said that Gordon Grigg used his faith as an effective lure. Clearly stated, I wasn’t there, but it seems to be born out in testimony at sentencing that this is true.
The FBI new brief goes further to say:
Grigg pleaded guilty on April 29, 2009, to mail fraud and wire fraud. Grigg admitted during the plea hearing that, between 1996 and 2009, he operated an elaborate Ponzi Scheme designed to defraud investors who deposited more than $11,000,000 in funds with his company, ProTrust Management. Grigg promised clients that he would invest their money in pooled-client purchases of fixed-term certificates of deposit, private placements, corporate notes and debentures, with the accounts being titled collectively in the Protrust company name. Grigg further promised to personally manage client funds, and promised investors that he would generate and sustain high rates of annualized returns on investment. However, Grigg admitted that it was never his intention to invest the client funds he solicited. Instead, Grigg stated that he used the money placed with ProTrust for his personal benefit and expenses, to operate ProTrust, and to maintain the Ponzi scheme by disbursing “fictitious” earnings and return of deposits to clients who cashed out or closed their ProTrust investment accounts.
The pattern is so common! NOTE: If an investment adviser promises sustained high rates of returns (something special that you can’t get anywhere else) – RUN! There is a better chance than not that a fraud is somehow – somewhere – in the works. And, more times than not, the illusion created is so great that people close to the fraudster have no clue. Spouses, children and relatives often experience some of the most severe pain when the find that their trust has been broken – no shattered.
Notes from the trial showed the following:
Investors not only lost money themselves, but they got their friends, families and bosses to also invest with Grigg. He caused financial ruin to these investors. They lost college funds for their children and grandchildren, retirement funds were lost or diminished. He destroyed families and marriages. He wreaked havoc with investors. The investors are not only sad, angry and guilt ridden, but are probably in need of counseling. They have suffered great mental anguish because of the nature of this crime and the circumstances.
From a personal perspective I know I will receive criticism for what I am about to say, but Gordon did not destroy families and marriages. Rather, the choice to blindly invest money with Gordon and the repercussions that followed from his fraud had that effect. I have a problem with being a “victim”. Although I use that term (it’s one that people can understand and connect with) – the reality is – EVERY CHOICE HAS A CONSEQUENCE. Gordon made choices that had direct and far reaching consequences. Investors also made choices that had a consequence. In my earlier article Steve Wieland stated that he did not do his due diligence. That failure had a consequence. Every choice does have a consequence!
To conceal and sustain the Ponzi scheme, Grigg admitted that he fabricated documents, including invoices, forged correspondence, and fraudulent account statements purporting to reflect client ownership of non-existent securities. To deceive investors into believing that their investments were safe, Grigg admitted that he falsely claimed to have negotiated partnerships and special business relationships with several of the nation’s most successful investment firms, including Berkshire Hathaway, Inc., Goldman, Sachs & Co., Morgan Stanley & Co., Incorporated, and Kohlberg Kravis Roberts & Co. However, as Grigg admitted to the Court, no such business relationships ever existed, and Grigg used counterfeit corporate letterhead and the forged signatures of national investment firm executives to create fictitious documents and correspondence that appeared to confirm unique pooled investment opportunities between ProTrust and national investment firms.
Grigg further admitted that, between November 4, 2008 and January 28, 2009, he repeatedly solicited funds from investors by falsely representing that he had access to “government-guaranteed commercial paper and bank debt” available as part of the newly-created Troubled Assets Relief Program (“TARP”). Grigg told investors that he had committed more than $5,000,000 in ProTrust pooled client funds towards purchase of TARP guaranteed debt as part of a private placement partnership between ProTrust and the investment firms Berkshire Hathaway, Inc. and Kohlberg Kravis Roberts & Co. However, no such private placement partnership had ever existed between ProTrust, Berkshire Hathaway, Inc., and Kohlberg Kravis Roberts & Co., and no such TARP-guaranteed investment opportunity had ever been offered or made available to individual investors or national investment firms.
The finding of fact reflected in the FBI’s news release is quite interesting. FOR THE RECORD, rarely does the Federal Government (or an Agency thereof) catch a criminal. The crime is typically exposed by either an unsuspecting investor or a dramatic change of circumstance that forces what is done in the dark to be brought to the light.
Almost as this was happening (or at least soon thereafter) I received a call from Steve Wieland who shared with me a profound revelation that he uncovered related to his investment with Gordon and the investment of friends he recommended. His comments follow:
I had advised a third friend, another medically retired airline pilot, of what a good job Gordon had done for us. He was selling his house, moving from Pennsylvania and had some extra money. This was the end of 2008.
The end of 2008 was the beginning of the massive financial meltdown. I have been asked over and over why the proliferation of Ponzi schemes. My response was – there are no more than usual. The Ponzi schemer (and I speak from personal experience) is a bit like a bottom feeder fish. You can’t see them till there is a major drought. When the water is low the bottom feeder seems to come to the surface. So as Steve said – it was the end of 2008…that makes perfect sense…especially since it takes new money to prop up a Ponzi scheme.
Looking back now I can see how it all fell apart for Grigg. Money was so tight he was scrambling to get new Ponzi victims to placate the ones he already had. He became pushy. My friend in Pennsylvania called me very upset because Gordon wanted the money immediately. My friend was uncomfortable. That night, December 16, 2008, I called Grigg and ask him to kindly verify my investments with him. I asked him to provide the phone number for the investments or anything that would make my Pennsylvania friend want to invest with him. I knew that would not be a problem, until Grigg questioned as to why I would want that information. The discussion then started heating up to the point where I knew down in my stomach something was very wrong.
Only a few days before, the California friend and myself had received notice that Grigg could place us in an investment with the company by the name of KK and R. This investment would yield 12.5% guaranteed by the national T. A. R. P. Guaranteed by the federal government paying 12.5% interest. The only catch was that we had to roll over our existing investments for yet another three years. He sent us documents to this effect.
That’s another tell tail sign…if asked to extend your investments you might begin to question – why. In order to a Ponzi scheme not to collapse you either need new funds or at a minimum keep existing funds longer so as not the erode the ability to maintain the illusion.
The following day I called my friend in California to tell him of my concerns. Like most victims of Ponzi schemes, they don’t want to believe it. So I set about doing the work myself. I contacted KK and R. They had never heard of Grigg or Pro-Trust management. However if I would kindly fax a statement showing that I had previous investments with them, as well as the new potential federally backed investment they would be sure to investigate and get back to me right away. I then contacted Goldman Sachs and told them of the potential investment with KK and R. Goldman Sachs was supposed to be the administrator of this investment. The gentleman at Goldman Sachs immediately told me it was bogus and to contact an attorney.
It only takes one slip – one request – one inquiry – to cause the house of cards to collapse. Most of the time the fraudster is the one who slips up stating something or producing something to maintain the illusion – only to find that he/she (in this case “he”) is not the smartest man in the room. Once the card is pulled – the house of cards is destined to collapse because the foundation of illusion is pierced.
“Mr. Grigg’s crimes were not merely irresponsible manipulations of the financial system without consequences, they were acts of extraordinary destruction to his victims,” United States Attorney Edward M. Yarbrough said. “Grigg defrauded investors by repeatedly and falsely promising them ‘safe’ growth based on ‘unique’ pooled-investment opportunities, including promises of access to TARP guaranteed funds. Instead, the investors lost their ‘nest eggs’ and retirement savings as part of an elaborate Ponzi scheme. The effect of Mr. Grigg’s crimes was devastating to his victims. The United States Attorney’s Office will continue to diligently and aggressively prosecute the perpetrators of such schemes.”
Steve Wieland continued…”Two days later, the federal S.E.C. contacted me about the information I had sent regarding K. K. and R. They wanted to talk to me. I hired an attorney, who told me this was an outright Ponzi scheme. She could sue on my behalf and win every judgment. She also told me there would probably be no money for me. This would be throwing good money after bad. After a week my friend in California knew I was telling the truth.”
Was this the origination of the downfall of Gordon Grigg’s scheme? I don’t know. Many media reports share essentially the same story, so I have to believe that (short of being reputed) the call made by Mr. Wieland to the investment firms was the incident that represented the removal of the card from the house of cards that Grigg built.
Once pulled…the consequences began and continue to this day. Is there more to this story? Certainly, but for now…perhaps…readers can begin to understand how easy it is to be drawn into the illusion of a fraud and how simple it is to find that one day the card is pulled that begins the collapse.
More to come…but for now…YOUR COMMENTS ARE WELCOME…
The article stated, “Thanks to taxpayer protector and crusader of bailout transparency, Inspector General Neil Barofsky — under the guide of the ever-noble Obama administration — Tennessee is in the headlines as the home to the first exposed bailout-related criminal case. Franklin’s very own Gordon Grigg was accused by the U.S. Attorney’s Office in Nashville on Wednesday for his creation of a $10.9 million fraudulent investment scheme.” But that’s not the total truth…the real exposure of Gordon Grigg’s fraud started well before Neil Barofsky got involved. Frankly, it started with a little known retired US Airways pilot named Steve Wieland.
I can’t forget the call I received from Steve. I didn’t know what to make of it at first, but quickly I began to realize that he was spewing a tale of an ongoing fraud that in many ways he uncovered. Carefully I listened to his story and understood that not only had he been defrauded, but he became unknowingly entwined in the web of deceit having expanded the trust network that Gordon Grigg so carefully played upon.
But this story is not so much about Gordon Grigg’s fraud – that is clearly known. Rather, this is about how the fraud was exposed and, likewise, how Grigg lured his victims into the web of deceit. For this series of blogs I asked Steve Wieland to share with me answers to many questions I asked. Here I will, with Steve’s help, show how easy it is to become a victim of a talented fraudster. Let the interview begin…
HOW DID I GET SUCKED IN?
I had met Gordon Grigg in the summer of 2005. He fathered my girlfriend’s child. This child was a product of an extramarital affair between the two of them. He had moved away from our town with his family. I had just started to connect with his son where I live. He was divorced and had a new, young fiancée. He was extremely charismatic, funny and generous.
For the next two years he came to visit on multiple occasions. But in that second summer, after I met him, I became sick. I was a professional pilot and my illness caused me to lose my medical license to fly airplanes. I had broken my back and had extreme pain due to nerve damage in my feet. I was on 17 medications a day and under psychiatric care due to depression. Additionally my girlfriend and I had broken up, although we remained friends.
My finances were not going well, my airline had already taken my pension, and I was 57 years old with mandatory retirement at age 60. One day my ex-girlfriend told me I should seek financial advice from the father of her child, and now my friend, Gordon Grigg.
Interesting that many, if not most, fraudsters find victims that are susceptible or vulnerable to a scam based on their expanded need. Steve exposed his need based on the varied circumstances he found himself in at the time. And Gordon, being the astute fraudster saw a weak individual that became easy prey to advance his Ponzi scheme. But back to the story…
Gordon Grigg’s website was exemplary. He touted advising everyone from racecar drivers to foreign rock stars to country music singers and professional athletes.
Since we had been friends for over two years and my girlfriend, the mother of his child, had recommended him, I felt comfortable in having an interview with Gordon to take over my finances.
As a side note, it is quite common that a fraud is expanded to new victims based on a close relationship of trust. Note: Gordon first got close to create the bond of trust, so that when it was time to lure Steve in – closing the sale was easy!
This would be the first time we’d ever talked about money. He came into my home, opened his briefcase, and after four hours we had never talked about finances. Instead he talked to me about religion. He asked me how long I’d been angry at God. He told me about his own depression and how he had to commit himself for 30 days to a psychiatric ward to become normal again.
He held my hand and prayed with me. At the time, he seemed like a godsend. I mean what more could I want? Here was a man who had been a college football star, handsome charismatic, extremely versed on investing and was willing to take on my financial package. When he left my home I asked him about the finances. He just smiled and told me not to worry about it and to get myself better. He said that was the most important thing. He said he would take care of me. And believe you me, take care of me he did!
The mark of any good sales person is to first find out what motivates you and then meet those needs. NOW CAREFUL…not all salespeople are bad or use their talents for unscrupulous means. But, Gordon was, well lets call him, an unconscious competent. Perhaps, at some point he became a conscious competent…in other words he was an expert at what he was doing – all be it, what he was doing was WRONG!
Two months went by and Gordon had taken away all of my control of my finances by having me sign a limited power of attorney up to and including my will where he made himself the executor. My health was starting to come back, but nowhere like it should have been. He invested me in legitimate TD Ameritrade accounts and then sold and bought in these accounts without my knowledge until I received the monthly statements. He would visit periodically and I would take HIM to dinner. He would tell me that in 12 months I would kiss the ground he walked on. And then he told me of some special investments that only he could make because he pooled other investor’s money. These investments would be for millions of dollars and I alone could not make these investments without being in his pool.
I often refer to victims of Ponzi schemes as having fallen into the PIT – PROMISE, TRUST and ILLUSION. Based on what Steve shared above, Gordon got in based on trust, created the illusion (so Steve would continue to believe) and then made promises that enticed the victim – giving the illusion that they were special – that what they would receive was unique and only offered to a select few. Actually, in that last part they were telling the truth – only a few select people would become victims!
As it turned out, I have a friend in California who is much like myself being medically retired from the airlines. We talk all the time and visit occasionally. After investing with Grigg, he asked me what I was doing with my dwindling investments. I told him about Grigg and what a fantastic job he was doing for me and suggested he call him. After talking with him on the phone, Grigg suggested that he fly to California and meet with my friend.
Many of the fraudsters find that they grow their fraud based on the referral of those who are fully sucked into the scam.
At the time Grigg had advertised that he had offices all over the United States. But neither one of us did due diligence to investigate any further than what Grigg had published or had promised.
Interesting, but as I interview victims of frauds one of the most common comments is, “we were so caught up in the belief that our financial needs could be met that we forgot or ignored doing due diligence.”
After two or three meetings my friend decided that he was going to invest with Grigg as well. Grigg did the same thing to him. He took over all his finances, reinvested them, and then put hard cash in bogus investments.
We were both very happy to see our investments growing while the rest economy was falling dramatically. What we didn’t understand was that the investments were only growing because Grigg typed the statements up on his laptop and generated them to us via his website.
I told yet another pilot friend, who was and is still active, and suggested he talk to Grigg as well. Grigg made a couple of trips to Phoenix where he met with my friend, driving a lavish rental car, dressed to the nines. This friend, however was skeptical, and did some research. He found out that Grigg had a $560,000 judgment against him by the state of North Dakota. When my friend called to inform me of this I immediately called Grigg. He assured me that it was a bogus complaint made by a widow, who did not know her husband’s investments and that no one could be in the business for 20 years or more and not have a complaint. I relayed this to my friend, and although he was still skeptical, chose to invest $20,000. That is less than 10% that myself or my friend in California invested.
For PART ONE…this sets the stage. The fraud that Gordon Grigg had taken from North Dakota to Tennessee was soon to be completely exposed. But, for now in the time we have this is quite enough.
Let me thank Steve Wieland for his courage to step out and expose (through his experience) how a fraud is perpetrated and how easy it is to be sucked into the PIT. I regret Steve’s loss, but know that others will, perhaps, avoid the same disaster Steve and others faced at Grigg’s hand.
I have been alerted that Steve Wieland’s perceptions of the facts (from his perspective) stated above are inaccurate and untrue. My objective is to uncover and/or discover what motivated folks to “invest” with Gordon Grigg, to review how a Ponzi scheme takes place in reality and identify how it unraveled or was exposed. As such, according to the SEC:
Grigg and ProTrust defrauded at least 27 clients out of approximately $6.5 million by obtaining such funds from them and claiming to have invested them in securities that do not exist. Specifically, the Complaint alleges that the defendants have: (1) obtained control over client funds and falsely claimed to have invested such funds in fictitious securities that were described as “Private Placements;” (2) created false and fraudulent account statements reflecting the clients’ ownership of non-existent securities; (3) falsely claimed that the defendants had the ability to invest client funds in government-guaranteed commercial paper and bank debt as part of the U.S. government’s Troubled Asset Relief Program (“TARP”), and that they did invest client funds in the TARP program; and (4) falsely claimed to have partnerships and other business relationships with several of the nation’s top investment firms.
I welcome any of the 27 client “investor” victims to contact me in an effort to seek the truth about how you became involved with Grigg and ProTrust. There are many victims in a circumstance like this, and if there is a way to expose how what happened – happened, perhaps in the future others will have the benefit of learning from others mistakes. Likewise, if there is anything stated above that is inaccurate, please contact me with details so that corrections can be made.
STAY TUNED FOR PART TWO!
YOUR COMMENTS WELCOME!
What’s happening with BizRadio and Daniel Frishberg – well…probably more than meets the eye. For those who have been following this story, you know by now that investors are up in arms about the apparent collapse of their investments in BizRadio while others believe that it was mostly a scam scattered with some helpful information from time to time. What is true is that investors and/or potential investors seem willing to share their experiences – hoping that bringing to light their story might help others to avoid what has turned into a mess.
As a business ethics and fraud prevention expert, I know that there are three things that come together to effect a fraud or turn an otherwise investor into a scam victim. Those three components are: PROMISE – ILLUSION and TRUST. As the story here unfolds all three seem to come to light, now almost daily.
First lets look up what we can find about Daniel Frishberg’s background. The following is now found in Wikipedia (not that Wikipedia is a trusted source, but I have found that more times than not it is accurate):
Daniel Frishberg is an American businessman, author and talk-radio host. He is the founder and president of the Biz Radio Network, where he broadcasts his own show, “The MoneyMan Report”, under the nickname, “The MoneyMan”. He is also a partner of the private equity trust Laffer Frishberg Wallace Economic Opportunity Fund and the CEO and chief investment strategist for the management firm Frishberg and Kaleta Advisors.
Frishberg was born in Staten Island, New York, where his parents raised him and his two brothers. He graduated early from Fair Lawn High School in New Jersey at the age of sixteen and later attended New York University.
Frishberg worked for the financial services division at Prudential in San Antonio and later did radio advertising for the company; he appeared frequently on air. Radio station KTSA hired him to do a financial program. After the show gained popularity, Frishberg formed the BizRadio Network in Houston.
Frishberg hosts The MoneyMan Report on the BizRadio Network. The network broadcasts in Houston, Dallas, Fort Worth, and San Antonio.
Frishberg and BizRadio recently opened the BizRadio Academy in Houston which was operated for approximately 4 months before closing it’s doors.
Frishberg also operates Daniel Frishberg Financial Services Inc. The majority of the firm’s clients come from the BizRadio audience. The firm has partnered with Wallace Bajjali Development Partners, L.P.
The Laffer Frishberg Wallace Economic Opportunity Fund has committed millions of dollars in capital over the past two years to real estate, media, and other holdings.
Based on what is show here, Frishberg is a self-made man and has some background that reflects his ability to provide investment advice and manage investments. However, it is interesting that the following statement is made above:
The majority of the firm’s clients come from the BizRadio audience.
This is not a statement of fact or conclusion, but when you own your own station that airs your own show that feeds investors to you – well, that is the foundation of a prospective will oiled ILLUSION. I think that most who read would agree – there is power in the media. What people hear on air or in print (which I am aware of in these blogs) carries weight and credibility. It is therefore important to state facts when we know them and expose opinions when we state them. OPINION: The statement that most of the firms clients came from the BizRadio audience doesn’t make it so or wrong. Yet, that statement has come from many sources including investors themselves and seems suspect when there is a cloud of impropriety over their investment and the BizRadio – Frishberg motives.
NOW TO THE PROSPECTIVE INVESTORS COMMENTS:
I have had personal experience with their incompetence. I signed up for a bond course last spring or summer. When the night came, I went to the office and they had postponed it but not contacted me. From then on I kept calling and calling trying asking when it would be rescheduled. Finally, after about 3 months, I had my money refunded (even that was like pulling teeth).
COMMENT: Reputable financial firms know that their reputation is their lifeblood. After all, if you can’t trust the firm you won’t invest your money. So having to wait that long for a simple refund is a sign that something is a miss… but the Prospective Investor Comments continue…
The next nail in the coffin was when I went to a free open house update. Frishberg touted “his” market X-ray of buying power and selling pressure. He did it all on the time on the radio. He threw up a graph and it was someone else’s technical research. I know because I buy the same research. I spotted it right off. Frishberg is the one who first recommended it to me. It was in that moment I knew he was a fraud.
COMMENT: Well…nothing is new in this world. Mostly what we hear is a repackaged thought that someone else surely has had. But, in fairness, it enhances ones reputation if they acknowledge their sources rather than claiming them as their own. Does this make Mr. Frishberg a fraud – no, but again, it does challenge his self proclaimed reputation. But the Prospective Investor Comments continue…
I started to notice he stole ideas from other guests like John Rutledge and a University of Houston professor who specializes in natural gas. After a few weeks, those ideas became his originals. If I noticed a few, how many did I miss?
COMMENT: While this may seem unrelated, there is a story today in the Chronicle of Higher Education about a University President resigning because some suspect him of plagiarism in his work. POINT: It is important to be honest. If you idea is your idea – by all means CLAIM IT. On the other hand, give credit where credit is due – if nothing else, it shows that you are well read and seeking knowledge outside of your own experience. Just a thought. And still the Prospective Investor Comments continue…
Another disturbing thing is Frishberg became like a cult figure. At that same open house market update, I observed it during a break. About 15 people hovered around him like he was a celebrity. It was creepy. Whenever I see hero worship like that, I know something is wrong.
I also recall that he said something about how it was difficult to attract rich people (doctors, lawyers, business people) because they already knew other rich people. What rich people want is to be around celebrities. So, that is why he started to get celebrities on his radio show and then try and become one himself by going on CNBC, Fox etc.
COMMENT: Now here’s where I think there is something more than meets the eye. There is nothing wrong with celebrity – Oprah has it, Glen Beck has it, President Obama has it. Now, there are three folks that conjurer up strong opinion by many, but the one thing they have in common is that they earned the status (in some form or another). On the other hand, if CELEBRITY is created to find investors to perpetuate some scam and thereby support the ILLUSION – then we have CELEBRITY that is ill gotten and soon to fail.
Is that the case with Mr. Frishberg? Only time will tell. But, one has to wonder if a guy who worked at Prentice Hall and later earned a living trading part-time on Wall Street, who then worked for the financial services division at Prudential in San Antonio and later did radio advertising for the company is really “The Money Man” or is that just a radio ILLUSION?
Gordon Grigg, now a felon serving time in federal prison, convicted of a Ponzi scheme was too a reputed investment adviser who gained credibility by his appearances on Fox Business, etc. Gordon was (almost) the master of the ILLUSION till some of his investors wised up. There are so many similarities in his case to the BizRadio Frishberg drama that it isn’t funny.
Perhaps not all is as it seems and BizRadio will emerge stronger and the investors will get the returns they seek. Frankly that would be good for all concerned. For now however, the drama continues to unfold. It is true, YOU DO REAP WHAT YOU SOW. I know I’ve been there and lived that. I hope for the best, but know that more is to come.
YOUR COMMENTS ARE WELCOME…
“I have an inside track on a great investment. You’ll get better than a 12% per year return. But, there are only a limited number of folks that I can get in on this offering. You interested?
STEP ONE – make a promise that seems ‘special’ or ‘better’ than what anyone else can get on their investment funds!
“Wow…this is great. I just got our statement in the mail and you know that investment I made in that private fund that Joe recommended…well its done better than he projected. The market has been down, but this has returned over 16% thus far. Man…I’m glad we got in on this deal!”
STEP TWO – Create an illusion that the investment is real. This is done with fake statements (Bernie Madoff has had co-workers indicted for their role in creating fake documents). Gordon Grigg is now in jail for his Ponzi scheme when he made a simple mistake on one of his fake statements. He reversed the names and instead of calling them Fannie Mae and Freddy Mac he stated Fannie Mac and Freddy Mae…oops.
“Hey Frank…I know you told me the other day how badly your portfolio has been. Well, I got connected with one of my friends on a private placement investment and, well, I was hesitant at first, but it’s been going great guns. We’re up over 16% this year and I have a guarantee of 12%. I didn’t say anything at first, but I thought that you might want to connect with this guy. He’s really got it together. Who knows, if you put some money with him…you might be able to dig yourself out of the hole a bit quicker. Want me to call him and see if he could take you on?”
STEP THREE – Grow the fraud using trust. First you trusted the person who hooked you into the fraud, and now you’re using that same blind trust to lead others to the slaughter. Ouch…it will be painful both emotionally and financially on the back side.
Charles Ponzi arrive in Boston on November 15, 1903, aboard the S.S. Vancouver. By his own account, Ponzi had $2.50 in his pocket, having gambled away the rest of his life savings during the voyage. “I landed in this country with $2.50 in cash and $1 million in hopes, and those hopes never left me,” he later told The New York Times. He quickly learned English and spent the next few years doing odd jobs along the East Coast, eventually taking a job as a dishwasher in a restaurant, where he slept on the floor. He managed to work his way up to the position of waiter, but was fired for shortchanging the customers and theft.
NOTE: There was a pattern of theft and unethical behavior, but the consequence of his actions were not significant enough for Ponzi to change his ways.
Imprisoned for forgery, Ponzi spent three years in the prison St. Vincent-de-Paul near Montreal. Rather than inform his mother of this development, he posted her a letter stating that he had found a job as a “special assistant” to a prison warden. After his release in 1911 he decided to return to the United States, but got involved in a scheme to smuggle Italian illegal immigrants across the border. He was caught and spent two years in Atlanta Prison, where he met inmate Charles W. Morse, a wealthy Wall Street businessman and speculator, where he learned of greater opportunities than simple petty theft.
Ponzi seized on, what he said was an opportunity, to use postal coupons (I guess today we’d call them stamps), to make money. IRCs (the postal coupons referred to) were priced at the cost of postage in the country of purchase, but could be exchanged for stamps to cover the cost of postage in the country where redeemed; if these values were different, there was a potential profit. Here’s where Ponzi dreamed up his opportunity for fraud.
Ponzi went to several of his friends in Boston and promised that he would double their investment in 90 days. The great returns available from postal reply coupons, he explained to them, made such incredible profits easy. Some people invested and were paid off as promised, receiving $750 interest on initial investments of $1,250.
NOTE: The scheme always involves a promise of something that the average bloke just can’t get. So when someone – especially someone you trust tells you that they have a fail safe investment that offers great returns…be prepared to be scammed.
Soon afterward, Ponzi started his own company, the “Old Colony Foreign Exchange Company,” to promote the scheme. He set up shop in a building on School Street. Word spread, and investments came in at an ever-increasing rate. Ponzi hired agents and paid them generous commissions for every dollar they brought in. By February 1920, Ponzi’s total take was US$5,000, (approximately US$54,000 in 2008 dollars). By March, he had made $30,000 ($328,000 in 2008 terms). A frenzy was building, and Ponzi began to hire agents to take in money from all over New England and New Jersey. At that time, investors were being paid impressive rates, encouraging yet others to invest. By May 1920, he had made $420,000 ($4.59 million in 2008 terms).
NOTE: The illusion was in full force. Just as soon as folks began to see the promised returns happening (just as promised) they began to believe that what they were seeing was real. Bernie Madoff, Gordon Grigg, and many many more in just 2009 did exactly the same thing. They promised something and delivered…creating the illusion that all was just as portrayed. What investors didn’t know was that the returns they were seeing came from other peoples investments.
By July 1920, Ponzi had made millions. People were mortgaging their homes and investing their life savings. Most did not take their profits, but reinvested.
NOTE: Another psychological part of most Ponzi schemes is that once there is an element of trust, greed sets in and investors (wanting more and more) do not take their profits, but rather leave them for yet bigger and bigger profits. In effect, victims would rather gamble with their funds than protect their assets.
Ponzi was bringing in cash at a fantastic rate, but the simplest financial analysis would have shown that the operation was running at a large loss. As long as money kept flowing in, existing investors could be paid with the new money. In fact, new money was the only way Ponzi had to pay off those investors, as he made no effort to generate legitimate profits.
NOTE: It seems odd, but the obvious somehow becomes clouded in the quest for more money. In the Madoff scam…people now looking back could have seen that what he was doing couldn’t work…yet, Madoff survived three SEC investigations with flying colors. It seems that it is human nature to want to believe that what is not real somehow is real.
Ponzi lived luxuriously: he bought a mansion in Lexington, Massachusetts with air conditioning and a heated swimming pool, and he maintained accounts in several banks across New England besides Hanover Trust. He also brought his mother from Italy in a first-class stateroom on an ocean liner.
NOTE: Most Ponzi schemers use the funds (for the most part) for an illusory lifestyle. That’s part of the illusion that causes people to trust the schemer. Madoff, Grigg, Stanford (although he’s not yet been found guilty) Huffman and others all have become part of the illusion that promotes trust so that more people will invest (oops…become scammed).
Joseph Daniels, a Boston furniture dealer who had given Ponzi furniture which he could not afford to pay for, sued Ponzi to cash in on the gold rush. The lawsuit was unsuccessful, but it did start people asking how Ponzi could have gone from being penniless to being a millionaire in so short a time. There was a run on the Securities Exchange Company, as some investors decided to pull out. Ponzi paid them and the run stopped. On July 24, 1920, the Boston Post printed a favorable article on Ponzi and his scheme that brought in investors faster than ever. At that time, Ponzi was making $250,000 a day. Ponzi’s good fortune was increased by the fact that just below this favorable article, which seemed to imply that Ponzi was indeed returning 50% return on investment after only 45 days, was a bank advertisement that stated that the bank was paying 5% returns annually. The day after this article was published, Ponzi arrived at his office to find thousands of Bostonians waiting to give him their money.
NOTE: At the height of the schemes most fraudsters find that their false promise supported by an illusion and reinforced with trust (many times of well known and influential individuals) drives ever more folks to be sucked into the PIT. (PROMISE, ILLUSION AND TRUST). Likewise, at its height that is generally when the pendulum is preparing to swing in – well lets say – a more truthful direction. In other words the house of cards is soon to collapse.
On July 26, the Post started a series of articles that asked hard questions about the operation of Ponzi’s money machine. The Post contacted Clarence Barron, the financial analyst who published the Barron’s financial paper, to examine Ponzi’s scheme. Barron observed that though Ponzi was offering fantastic returns on investments, Ponzi himself was not investing with his own company. Barron then noted that to cover the investments made with the Securities Exchange Company, 160 million postal reply coupons would have to be in circulation. However, only about 27,000 actually were. The United States Post Office stated that postal reply coupons were not being bought in quantity at home or abroad.
The stories caused a panic run on the Securities Exchange Company. Ponzi paid out $2 million in three days to a wild crowd outside his office. He canvassed the crowd, passed out coffee and donuts, and cheerfully told them they had nothing to worry about. Many changed their minds and left their money with him. However, this attracted the attention of Daniel Gallagher (no relation by the way – although that would be quite a coincidence), the United States Attorney for the District of Massachusetts. Gallagher commissioned Edwin Pride to audit the Securities Exchange Company’s books—an effort made difficult by the fact his bookkeeping system consisted merely of index cards with investors’ names.
The denouement for Ponzi began in late July, when McMasters found several highly incriminating documents that indicated Ponzi was merely robbing Peter to pay Paul. He went to his former employer, the Post, with this information. The paper offered him $5,000 for his story. On August 2, 1920, McMasters wrote an article for the Post declaring Ponzi hopelessly insolvent. The article claimed that while Ponzi claimed $7 million in liquid funds, he was actually at least $2 million in debt. With interest factored in, McMasters wrote, Ponzi was as much as $4.5 million in the red. The story touched off a massive run, and Ponzi paid off in one day. He then sped up plans to build a massive conglomerate that would engage in banking and import-export operations.
On August 11, it all came crashing down for Ponzi. First, the Post came out with a front-page story about his activities in Montreal 13 years earlier—including his forgery conviction and his role at Zarossi’s scandal-ridden bank. That afternoon, Bank Commissioner Allen seized Hanover Trust after finding numerous irregularities in its books. Although the commissioner did not know it, this move foiled Ponzi’s last-ditch plan to “borrow” funds from the bank vaults after all other efforts to obtain funds failed.
With reports that he was due to be arrested any day, Ponzi surrendered to federal authorities on August 12 and was charged with mail fraud for sending letters to his marks telling them their notes had matured. He was originally released on $25,000 bail, but after the Post released the results of the audit, the bail bondsman withdrew the bail due to concerns he might be a flight risk.
The news brought down five other banks in addition to Hanover Trust. His investors were practically wiped out, receiving less than 30 cents on the dollar. The Post won a Pulitzer Prize in 1921 for its exposure of Ponzi’s fraud.
WHERE ARE WE TODAY?
Same place we were when old Charles created what we now call the “Ponzi scheme.” Robbing Peter to Pay Paul is the name of this game and unfortunately it existed before Charles Ponzi (he just got the notoriety for it) and continues to this day…and unfortunately will continue.
People get victimized, in a sense, by their own greed – although many don’t wish to admit that. But, reality is – the investor (victim) wants a better return than he/she can get elsewhere (they fall victim to a false promise). The illusion that the fraudster creates lures the investor victim into believing that what seemingly can’t be real – in fact is. And, most fraudsters prey first on those closest to them – their friends, family and close acquaintances people that trust them.
The fraudster typically uses need, opportunity and rationalization to effect their crime while the victim falls into the PIT – or stated this way, they fall victim to a PROMISE supported by an ILLUSION which has a foundation in TRUST.
Bernie Madoff, Allen Stanford – Tell Tail Signs You’re Being Conned! Comments from Fraud Prevention Expert Chuck GallagherMarch 6, 2009
I saw a great article in Time today entitled: How to Spot a Ponzi Con Artist? Follow the Yachts by Robert Chew. (see article here.) I must admit after talking recently to many of the folks who were scammed by Gordon Grigg, I would hear similar tales of loss and lifestyle – their loss and his lifestyle.
While many of my readers are regulars I am constantly reminded of the new faces who read this blog for the first time. Knowing that, this blog entry will be less about others and more about my past. From the past one can learn much about the future. You see, I, too, was a fraudster. That is not something I am proud of – in fact, it is a fact that I wish were not there. However, I cannot change my past, so over time I have come to embrace it, share it and learn from those mistakes. My openness is designed to bring awareness and hopefully prevent others from falling prey to those who would defraud.
THE TIME MAGAZINE ARTICLE:
The article starts with these paragraphs:
With so many Ponzis and so little time to know if you’ve been hoodwinked, there are some red flags even the most trusting investors can bank on: yachts, mansions, jets and women. If your investment adviser is dabbling in any of the above, there’s a good chance you’ve been Ponzi-ed or are about to be.
Creating the illusion of fantastic success, of course, is Chapter 1 in the Scammer’s Handbook. But many among the most egregious alleged billionaire bamboozlers, like R. Allen Stanford and Bernie Madoff, are taking the art of thievery to the next level. Some don’t even bother opening an investor account when new monies come in; they just go shopping. It’s enough to make Gordon (“Greed is good”) Gecko blush.
Arthur Chew is dead on when he says, “Creating the illusion of fantastic success is Chapter 1 in the Scammer’s Handbook.” Actually there, of course, is NO Scammer’s Handbook. But, Chew is right about the illusion.
As a ethics and fraud prevention speaker, I openly discuss the steps that led up to the choices I made to enter into the world of fraud. At first I stuck my toe into that world when I was behind on my house payment. I stole money from a client – tricking myself into believing I was only “borrowing” money. That was foolish – borrowing is borrowing and theft is theft, and when you take money that isn’t yours without anyone’s knowledge – it is theft.
That said, when I repaid the stolen money I also learned it was easy. I took again, with minor repayment and again and again. But to Chew’s point, the stolen funds were invested into my lifestyle. Now, I didn’t live like Bernie Madoff, but I did live well, especially for the community that I was living in.
The Time article goes on to say:
The charge alleges Walsh and Greenwood gave themselves $8.2 million in employee “advances” and another whopping $160 million for personal expenses. The complaint detailed funds’ being used for buying rare books at auction, purchasing expensive horses, laying down $80,000 for a Steiff teddy bear and providing the ex–Mrs. Walsh with a $3 million residence.
Also last week, North Hills Management, a New York City–based $40 million investment fund run by Mark Evan Bloom, was charged by the same agency with “misappropriating for personal use” more than $13 million from its clients’ fund.
While my lifestyle was nothing like that – everything is relative. I lived in an upscale home. While there I was building another home which would have been in the top 1% in my community. I drove a BMW, then a Jaguar, then a Mercedes, and finally a BMW. I purchased rare “autographs” that I deemed to be collectibles. Our clothes were top of the line and we wanted for nothing. The “illusion” was appropriate for where I lived and the level of my fraud.
As I write this I am saddened by the words. It is difficult to state what I did, knowing that I knew better all the time. I created an amazing illusion and got caught up in it myself. Having talked with many victims of frauds, just like the one I committed, I know that the fraudster, just like the victim, can be caught up in the illusion.
Now I need to be careful with what I say here – for fear that my readers might think I am trying to shift blame – I am not! But, the truth is, my crime – or the crimes of Madoff, Stanford, Grigg and others in the news today – could have been cut short if those closest to them might have been alerted by their lifestyle. In my case, I was tax partner in a CPA firm. It is fairly obvious that my partners knew what I was making from our firm. I knew their income and they knew mine. So a fair and reasonable question is – how could I live a lifestyle far more lavish than they? If we all knew our incomes, unless I had a vast inheritance – which they knew I didn’t – then the question would be where is the money coming from?
Let me repeat the question: Where is the money coming from?
When that question is asked – then there is a chance that unethical – if not fraudulent – behavior could be uncovered or discovered. So there is no misunderstanding, I am not faulting my partners for my poor choices. I made them. I am responsible and accountable for them. I paid the price for them. That being said, had anyone – my family, my partners, anyone – questioned my income or income source, I would likely have been stopped in my tracks.
Today as I speak to groups nationwide I state: “Every choice has a consequence.” I live that daily. The choice I have made over the years have all had consequences – some good and some bad. In my case, even though I made complete restitution plus interest to those I defrauded, I did spend time in Federal prison for my crimes. Again, I am not proud of that outcome or my past choices. But I am living proof that ILLUSION is a grand part of the fraud scheme.
AS ALWAYS – I AM OPEN TO YOUR COMMENTS:
Moira Souza Shiver, expert on the application of IRC Section 165, has been asked by me to write this guest blog. The benefits of Section 165 can be substantial, yet there are few who are qualified to understand how to effectively navigate the regulatory maze to gain maximum benefit. As a business ethics and fraud prevention speaker, I try, through this blog, to provide a useful forum for discussing issues, and there is none more important at this time than the effective use of legal methods to recover loss.
Facts, Fiction and Future
Victims, taxpayers and citizens, in general, are experiencing an extraordinary chapter in American financial history. Economic challenges, budget deficits and tax implications lead the list of many issues confronting citizens and legislators. Surfacing in the midst of what appears to be mass chaos is yet another disturbing issue – victims of investment theft suffering irrecoverable losses in their life savings. One bright spot, with the uncovering of these massive investment scams, the media is finally bringing attention to the fact that there are hundreds of thousands of people across this great country who are suffering tremendously at no fault of their own.
For the last ten years, I have been fighting for financial recovery for victims of investment theft. There’s been a law on the books since 1954 that helps some victims, but most often it ignores the truly needy in favor of the wealthy. Unfortunately, it also requires a monumental struggle with the IRS to get the deserved relief. The pain and suffering these issues caused demanded I shift my focus and become an advocate for victims in three ways:
Investment Fraud Prevention Through Education
Maximize Recovery Through Legitimate Sources
Changes in the Tax Code to Carry Out the Intention of the Law
PROBLEM – LACK OF CLARITY, COUNTLESS (MIS)INTERPRETATIONS & INEXPERIENCED PROFESSIONALS
The $50 billion dollar Bernard Madoff Ponzi Scheme brought this subject to the public, but sadly, and very importantly, it also surfaced so-called experts that began advising victims on the recovery option under Internal Revenue Code Section 165 (c)(2). Adding to the tragedy of these losses is the fact that those same experts are supplying incorrect information. As an example: Stanford Law School and a former senior tax attorney for the IRS are both normally sources you can depend on for tax law advice. They are both valuable sources of information, but in trying to help victims of investment fraud, they recently published information that could cause more problems than they solve.
An article, Long And Winding Path To Tax Relief For Madoff Victims, appeared on accountingweb.com dated February 19, 2009. Stanford University provided information on the IRC 165 (c)(2) tax deduction, quoting a former IRS official. This article is an example of a long list of experts serving up misconceptions, serious omissions, wrong answers and lost opportunities. Add The Wall Street Journal, MSN, the New York Times and even the IRS to your list of experts providing incorrect information, and you begin to understand the seriousness of the problem.
FACTS – CURRENT TAX LAW HELPING VICTIMS OF INVESTMENT THEFT
Current law includes but is not limited to, the following facts:
IRC 165 (c)(2)
• Law was established in 1954 to help investment fraud victims recover a portion of their losses through tax benefits (much like that of natural disaster loss victims or casualty losses such as a destroyed automobile not covered by insurance). It was readdressed in 1984 by the Tax Reform Act, which did away with the 10% exclusion/$100 per item reduction.
• Deduction allows qualifying victims to take their total net loss against ordinary income in a single year.
• Deduction allows for the taxpayer to go back three years after declaring the loss in the “Year of Discovery” if a Net Operating Loss (NOL) remains, or, they can waive their right to go back, and carry the NOL forward up to 20 years.
• Deduction allows for up to a 20 year carry forward, with the exception of when the 3 year carry back is utilized, which subsequently creates the potential for a 23 year benefit.
• Losses in IRA and Pension Funds Do Not Qualify.
• The taxpayer must prove the investment was made and lost by reasons of theft as defined in the state where the transaction took place.
• Taxpayer must exhaust all reasonable means of recovery.
• Taxpayer must be able to prove privity (Private or joint knowledge of a private matter; especially: cognizance implying concurrence (Merriam-Webster) or in practical terms, there was a first hand relationship between the thief and the victim) in order to qualify. Ponzi scheme victims are generally not held to this requirement but that I’m aware, that exception is not written as fact.
• (Some) IRS agents consider any form of pending legal action (individual, class action, federal indictments, bankruptcy or receivership) as potential recovery and will deny a claim until such time as that open pursuit of recovery is resolved.
• IRS requires a victim to provide proof of cost basis (copies of checks, front and back, wire transfer confirmations, disbursements, withdrawals, recovery, etc.).
• Taxes on phantom income are recoverable in full but are only allowed to be carried back 3 years. The balance (NOL) can be carried forward up to 20 years.
FICTION – MISINFORMATION COMMONLY GIVEN TO THE PUBLIC
• Before a taxpayer can claim a deduction, they must first exclude 10% of their Adjusted Gross Income and $100 per item – Wrong. Although originally an aspect of the deduction, this exclusion was eliminated 25 years ago by the Tax Reform Act of 1984.
• 2 Year Net Operating Loss Carry Back – Common misconception. Other than in 2002, when Congress allowed an exception allowing for 5 years, the carry back has always been 3. The 2 year carry back does not apply to investment losses caused by theft.
• Up to 50% recovery of loss – Misleading. In my experience, taxpayers should expect to receive a total benefit between 10 – 20% of their loss. Although there may be an exception out there somewhere, I’ve never seen any victims receive even close to a 50% benefit.
• The deduction is taken in the year victims discover the money is gone – Maybe but not likely. Convincing the IRS of the right year to take the deduction is complicated. The big issue is the taxpayer having “exhausted all reasonable means of recovery”. The “year of discovery” determination will vary from agent to agent.
• The deduction is simple to obtain – Really? It takes a knowledgeable and experienced 165 tax preparer to guide both taxpayers and the IRS agents through this process. I promise you, you should be prepared to be fully prepared. Taxpayers should expect to be reviewed carefully.
FUTURE – NEW PROPOSED LEGISLATION
For some time, I have been trying to get Congress to see the need for changes in the law. The size of the Madoff ponzi scheme helped me with my mission to get congresses attention. In doing so, they are now discovering how prevalent investment theft and ponzi schemes are in America. Congressman Kendrick Meek of Florida’s 17th district moved quickly and proposed new legislation on February 24, 2009. I’m thrilled to see it happen, but it did not go far enough.
• Will allow a 10 year carry back (or length of time in fraudulent investment, whichever is lesser) on cost basis and taxes paid on phantom income verses the current carry back of 3 years. Given the fact that a great deal of injured investors are in the retiree/elder categories and have had little to no income over the last several years, this change will hopefully increase the chance of them reaching a year where significant taxes were paid.
• Proposes to provide assistance to individuals who contributed to charitable organizations. This is a new aspect to the law and it needs to be further examined in order to determine just who gets what benefits? It’s not clear on how this will work and I’ll have to wait for more details before I can comment.
• New legislation uses the word “estimate” verses “ascertained”. This may be a big help in the filing of the claims in a reasonable amount of time, but it is not definitive and more work needs to be done.
FUTURE – CONTINUED – QUESTIONS NOT ADDRESSED
• Will the complicated terms “Year of Discovery, Privity, Scienter, Cost Basis and Complete and Final Transaction” be defined in a way that makes it reasonable for the taxpayer to meet the requirements for filing? Regardless of what legislation is proposed or passed, unless these issues are defined in a way that tax payers, their tax professionals and the IRS alike can understand, little if any of this assistance will reach the intended recipients.
• Why is this limited to just ponzi schemes? Although certainly less publicized, other forms of investment fraud are still investment fraud and all qualifying victims should be given the same consideration,
• Will the new legislation actually limit the amount of time before a victim can claim the deduction and the IRS can take to approve it? The current process often takes so long that victims lose everything, including benefits, their homes and even their lives, before the help arrives.
• Will IRA and pension savings be added to the forms of acceptable losses/victims? A huge constituency of victims falls into this category and although technically they never paid taxes, they still worked hard for their money and would have paid them when the time arose. The money was withdrawn, the perpetrator was enriched and he or she should owe the taxes. Regardless of whether the IRS actually receives them, the victim should be entitled.
• Would a uniform tax rate potentially be the better and fairer way to go? Although the current proposed legislation goes far in trying to help, there are still a group of individuals that will be left helpless. As many of these individuals paid on average 15 – 20 % in taxes when the money was made, it doesn’t seem quite fair that they are penalized for having grown older or now having no income.
I’d start with definable (and reasonable) guidelines for tax payers and professionals. Next would be setting up fair opportunities for recovery across the board, regardless of tax bracket or age. And finally would be the creation of an organization, or an IRS qualifying exam, that sets the standards for professional services. Setting these guidelines and standards, much the same as what CPAs, doctors, attorneys, etc. must adhere to or lose their standing, would help satisfy the IRS that the claims are legitimate, would provide the relief that so far is nearly impossible to receive and insure that the professionals assisting these victims are qualified and making claims in good faith. By enacting legislation that gives the IRS authority to qualify those who represent taxpayers, they’d not only protect the victims, they’d protect all taxpayers against fraudulent or unworthy claims.
It was a breath of fresh air to finally see someone step up and try to help these people and I applaud Congressman Meek. He’s taken the first step, and with a few additions, he could make this law something to be proud of.
Join my voice and let Congressman Meek know that these other issues are important and will make a big difference.
Congressman Meek can be contacted at:
1039 Longworth House Office Building
Washington, DC 20515
Monday–Friday, 9 AM – 6 PM
Moira Souza Shiver
MSS Advocacy Group
There is nothing fun about fraud – especially if you are on the losing end. Not only do you feel betrayed – your trust destroyed, but most of the time you find that you have also suffered financial loss that in many ways can’t be replaced.
As a busines ethics and fraud prevention speaker, I believe in giving credit where credit is due. Today I received a response to two blog postings I made by Moira Souza Shiver who reminded me about a provision of the Internal Revenue Code that, in many ways, is little known. Her website can be found here and it states the following:
My name is Moira Souza-Shiver and I am the founder and President of MSS Advocacy Group, LLC (MSSAG). I’m extremely proud to have established an organization whose main mission is bringing help to victims by attaining the assistance they deserve and were promised. Working in the investment fraud industry for the past 10 years has created in me a passion to fight for what’s right and even more, has instilled in me a deep respect for victims and the suffering they endure.
My decision to establish MSSAG came from what I describe as a desperate need within the 165 industry. After serving 6 years with JK Harris 165 Services, LLC, it was clear there was little being done in the form of victims’ advocacy and an organization was needed to help alleviate their suffering. Believing that investment fraud victims deserve the same rights allotted to other victims, MSSAG was born.
MSSAG is committed to doing everything it can for this cause, including aligning itself with other organizations and advocates that can provide complimentary assistance through established programs. By combining forces with these types of organizations, we intend to maximize all available sources of assistance and bring hope back to victim’s lives.
Now, before you assume that I have a financial interest in promoting Moira or Section 165, let me clarify that I do not. But like Moira, I do have an interest in making sure that all aspects of ethics and fraud (including prevention and recovery) are explored.
I have talked with several of the victims of Gordon Grigg (who the SEC is actively conducting an investigation on) and I know and feel their pain. So please read the following as it might help you understand the application of IRC Section 165(c)(2).
An excellent article was written in the Journal of Accountancy related to Section 165. A portion of the article is reproduced below:
When a client is the victim of fraud or embezzlement, for example, CPAs can reduce the client’s ordinary income, recoup any previously paid taxes and minimize future tax obligations by using IRC section 165(c)(2).
Be aware that CPAs who prepare and defend an investment loss deduction under IRC section 165(c)(2) must meet numerous technical requirements and make certain determinations based on examining the circumstances. Section 165(c)(2) deductions also frequently prompt IRS oversight, and in many instances, the standard tax preparation software does not adequately address this deduction, since it’s generally geared to the more familiar section 1211 capital loss treatment. But while section 1211 is an appropriate treatment, using it may result in clients’ paying more taxes than are required.
If a client suffers an investment loss as a result of a fraudulent investment or unethical sales practice, probably the most prudent action a CPA can take, even though there is no requirement to do so, is to suggest the client first discuss it with his or her lawyer. Taxpayers are required to take reasonable action to recover a loss and not doing so disqualifies it for section 165(c)(2) treatment. If the lawyer feels there was malfeasance and it is not practical to pursue recovery due to a lack of recoverable assets, the cost of litigation or other reasons, the loss probably is deductible in the current period. Losses from embezzlement, blackmail, kidnapping for ransom, burglary, larceny, extortion and threats also may qualify for section 165 treatment.
While I no long provide tax advice, I do feel that providing information on fraud recovery options is a positive benefit. Below are some links to articles on Section 165. I do advise that that you give Moira a call. Please note the following from her web site:
First and foremost, there is no guarantee you will ever recover any of your lost investment. MSS165 will never be able to make you whole or guarantee a partial recovery of your money. We can however promise to be truthful, try to help in any way we can and be available for questions as the needs arise. With a combination of over 31 years experience in the investment fraud recovery industry, we’re confident that our ability, combined with our passion for helping victims will provide you with the best chance of recovery available.
* MSS165 is compensated for its efforts by means of speaking engagements and donations to the company. There is no charge to victims or their accounting professionals for our time, information or efforts on victim’s behalves.
HOPE THIS HELPS and as always – COMMENTS ARE WELCOME!