Business Ethics: It is really about more than avoiding prison! Is there a little Bernie Madoff in each of US? A Guest Blog by Corey Richardson

A “Man of The Age” financier is surrounded by mystery and adoring members of the moneyed elite hungry for some of his wondrous returns. This paragon of the business class with The Midas Touch accepts only a few choice clients who seem to wither in his presence as they deliver their accumulated wealth into his magical hands – no questions asked. The returns are beyond belief, and for very good reasons. Unbeknownst to all, this wizard of the market is juggling fraudulent accounts to pay for his lavish lifestyle. The only trading is from their hands to his. The ruse comes tumbling down and the entire nation is stunned.

The scoundrel portrayed above is Charles Dickens’ character, Mr. Merdle of Little Dorrit, first published in 1857. Dickens foretold the Madoff scandal verbatim in his quintessential corruption tale, but this iniquitous business leader is an age-old archetype, and we, like Dickens, find it easy to vilify him due to the magnitude of his crimes; No stealing a crust of bread for this villain. At its polar opposite, take the “common criminal,” the savage monster seen today in T.V. cop shows, the local news, and innumerable B-movies. This standard is bloodthirsty, drug- crazed, and has a soul as black as night.

Dickens’ work is also replete with such characters.  The beauty of these caricatures is that we cannot find ourselves in either. They conveniently represent “other.” All the while we can sit comfortably in our living rooms with our sense of moral rage because we do not bilk venerable charitable funds and we do not cook meth in our kitchen. Yet, it can be argued that if we truly strive for a better world, then we need to go well beyond the knee-jerk reactions of these scenarios, and find ourselves in the moral conundrums.

Stricter regulations of the financial sector and more accountability, gun control legislation, sensible criminal sentencing laws, affordable drug rehab, etc., are important factors, but are only part of the solution. Even focusing on improvements to education and social services, which have been shown to be extremely important in crime prevention within certain groups, is still only a small part. To thoroughly understand what drives people as different as Kenneth Lay or a Gov. “Blago,” as well as a gun-totting inner-city kid with a pocket full of dope, we must understand root causes of criminal behavior, thus pointing the way for our next generation of leaders- and evaluate ourselves in our own business affairs.

“What causes criminal activity, and. who are these people who commit crimes against our society, such as … ” taking items from work, “fudging” on taxes, paying for non-business activity with a business account, inflating an insurance claim, switching labels at a store, producing unsafe products, “padding” a bill, or any number of violations of legislated standards for personal gain committed by everyday people.

Due to perception, universally known within psychology as the fundamental attribution error, these crimes are given little thought by those who commit them.   Joe Citizen justifies and minimizes these activities as “bending” the rules. And this is where we see the attribution error in effect: we tend to overestimate the role of personal factors and underestimate the “influence of situations in others, and we overestimate the situational factor and underestimate the personal factor in our own circumstances. It is the age-old “We judge others on their actions, and we judge ourselves on our intent.” Or I’m bending the rules, and he is breaking the law.

This phenomenon is not unique to the middle and upper socioeconomic strata, and equally applies to the poor. A drug dealer feels that his activities, though illegal, are still a legitimate means to earn a livable wage within his community.  The same could be said of any accountant or lawyer who “tweak’s” the system to make a little money. So, getting a television set off the back of a truck in the ghetto looks much like another’s decision to not claim income on a second job. It is all about perspective.

As we address the problem of the business class, we can facilitate the much-needed change in perspective with some cold, hard facts. Business leaders do not need to be as extraordinarily crooked as Madoff to affect a, huge societal burden. Study after-study demonstrates that “white collar” or corporate crimes, as well as middle-class crimes, ranging from tax evasion, insurance fraud, price fixing, inventory “shrinkage” (what a euphemism!), etc., weigh much more heavily than the number one Index crime, conventional property crime. Index crimes are known also as “street crimes.” They are highly visible crimes, easy to categorize and count, and are overwhelmingly committed by the poor. White collar crimes, by contrast, are difficult to detect and rarely prosecuted. Still, the economic yearly cost with respect to property crimes of the corporate America are approximately twenty times greater than conventional property crimes of index offenses, or a difference of $200 billion to $10 billion annually.

Having completed a fully accredited MBA program via a distance-based education format, I need to share that – this accomplishment – was done from an 8′ by II’ prison cell.  I was an inmate and like most “on the inside,” I readily justified my criminal acts, which occurred within my professional life, as did the drug dealer or the burglar.  So, as I approached my Business Ethics coursework, I did it with the secure knowledge that I committed a crime. This perspective, and the belief that my professors would judge my answers too with this in mind, gave me a keen eye in studying ethical queries in business.

I believe that when most students answer questions related to ethical foundations or detail their understanding of their own personal values, they do it from a perspective that they themselves could not possibly commit a crime. Such activities, such as smoking pot in the college dorm or not claiming wages from a summer job paid “under the table,” are simply not considered as crimes, which they are. Again the attribution error: “My (illegal) acts are not illegal, and certainly not unethical.

Everybody does it. It is no big deal.” And so forth. To cultivate a true ethical North in business, we must broaden our perspectives, and when an ethical dilemma arises, we can perceive it as such. No different from operations management or strategic planning. An appreciation of multiple perspectives — proffers a grand wealth of insight that will carry our next generation of leaders.

As a convict, my daily life is a direct result of criminal acts related to my work. In my studies, I can clearly see the untold millions that are affected by one unsafe product, but I can also appreciate how one man can justify criminal acts as a bad business decision, rather than a pathological act for profit with no respect for the law. To open the eyes of CEOs early in their training to the easy comparisons between corporate crime and “street” crimes, as well as offer tangible proof of the enormous societal burden of white-collar crime, would be of immeasurable value. In teaching business ethics, we must go well beyond the bland terms and definitions and the prosaic personal litanies of “What I value in the world.” We must make the coursework truly applicable and create managers and business leaders who intuitively understand how ethics within Corporate America are just as important, if not more so, as profit margins and supply chains.

Clearly, when I understand myself, I can understand Bernie Madoff or Kenneth Lay.  I believe the same could be said of us all. The equation is simple: Unbridled Financial Gain plus Opportunity, then Add the Likelihood of Detection and Fear of Prosecution. Embracing the truth of unlawful acts in our everyday lives, be it business or personal, is much harder to do than to merely vilify in a fanciful Dickensian way the corporate or government leader who betrays our trust, or even the dope dealer of the inner cities. But it will help to create leaders who view all of their work and life through a lens of principled behavior. We must begin to see the situational nature of all criminals acts, and therein lies the beginning of meaningful solutions. It is not enough to alter the number of opportunities to steal or the severity of the requisite penalties, but to go further by changing what stealing looks like by different people, changing the perceptions of illegal gains, and infusing the intrinsic value of ethical behavior.

When we see that all of us have a little of Bernie Madoff in us, only then can we begin to view our world more clearly and begin to make authentically ethical decisions as we lead our companies and organizations. We may even make significant changes in our personal lives.

Business Ethics: It is really is about more than avoiding prison.

Corey Richardson Biography:

Corey John Richardson is a former clinician, who holds a Master’s Degree in PA Studies from the University of Nebraska’s College of Medicine (Omaha) and a Bachelor’s Degree in Health Science/PA Certificate from the University of Florida’s College of Health Related Professions (Gainesville). He holds an MBA from Salve Regina University’s Graduate Business School (Newport, RI) and has completed doctoral health science coursework with a focus on prison healthcare at Spalding University (Louisville, KY). Mr. Richardson’s work has been incorporated into criminology courses at the University of Cincinnati and has been included in CURE’s congressional file on correctional healthcare in support of HR 3710. He has performed medico-legal consulting and has legal experience assisting prisoners in various civil and criminal actions. As a pro se litigant, he won a precedent-setting case on appeal against the Kentucky DOC and its Abuse of Power (published at Richardson v. Rees, 283 S.W. 3d, 257). He has also worked as a facilitator in numerous psychotherapeutic and rehabilitative programs.

Mr. Richardson has written widely about prison issues and sobriety for publications such as Spotlight on Recovery, Cell Door Magazine (the official publication of the National Death Row Assistance Network), T’he Kentuckiana News, Perspectives (the official journal of the Association for Humanistic Psychology), The Grapevine (Alcoholics Anonymous’ international publication), The Long Term View: A journal of informed opinion (Massachusetts School of Law at Andover), OUTlooks (Canada’s GLBT magazine), and others. Several of his essays have been published in the book Voices Through The Wall and he won 1st Prize in the Ford Foundation’s 2OO9 national writing competition Think Outside the Cell, published in Love lives here, too. (2010)

Mr. Richardson maintains his writing at coreyrichardson.blogspot.com and may be reached at coreyjohnrichardson@gmail.com. In 2001, he was convicted of crimes related to practicing medicine without a license and served 122 months in the Kentucky Department of Corrections; his supervising physician was given a probated sentence. Mr. Richardson has 13 years of continuous sobriety on July 14, 2011.

Dan Frishberg – BizRadio: Salem Communications settles Lawsuit with Rehan Siddiqi

It’s been almost a year since the world that Rehan Siddiqi lived in was dramatically changed.  Kicked off a radio station that he was joyfully buying, he found himself embroiled in a meltdown of major proportions created by BizRadio’s leader Dan Frishberg – also known as “The Money Man” – although it would appear that Dan’s money to support BizRadio was nothing more than an elaborate scam.

As a refresher, Rehan Siddiqi had entered into an agreement to lease/purchase the former station that BizRadio was aired on in early January 2010.  Asia Vision took the air the first of January on what Rehan thought was their new home.  Dan Frishberg took BizRadio to another station – one that cost him less and seemed to be a solution for the financial failure he was experiencing.

ONE MONTH…that’s all it lasted.  Frishberg (now well documented) couldn’t meet the financial obligations on the new station (he had no credit) and the result – SIDDIQI WAS KICKED OFF HIS NEW STATION.

The result was a lawsuit filed by Rehan Siddiqi for $18 million in damages against multiple parties including but not limited to:  Dan Frishberg, Elisea Frishberg, and Salem Communications.

Today, now almost a year later, this new year is starting with some good news for Rehan Siddiqi.  From reliable sources, it appears that Salem Communications has settled their issue with Siddiqi and as a result – Salem Communications – is no longer a party to the lawsuit filed by Rehan Siddiqi / Asia Vision.  What are the terms of the settlement – I don’t know.  But, this settlement opens the door for one major step forward with respect Dan Frishberg and his issues with the SEC (which still seem to be unresolved – and a lot of folks are wondering why) that is the sale of the station can now move forward with the Siddiqi lawsuit settled.

To be clear – Siddiqi’s settlement with Salem Communications does not mean he has settled with Dan Frishberg or Elisea.  The lawsuit for tortious interference against them still stands – although collecting from Dan or his wife should Siddiqi win the suit might be difficult at best.

I suspect that, based on Tom Taylor’s efforts (the SEC Receiver) the sale of the station will move forward fairly quickly in early 2010.  Who will buy it?  That remains to be seen.  Salem is an obvious candidate as they expressed interest in the station.  Likewise, Siddiqi, at one time, was interested.  Either way, whom ever buys the station, it would appear that this chapter might soon come to an end.  For the investors, however, I don’t suspect that the money from the sale will come close to making you whole as you look at your losses.

THE NEW YEAR’S QUESTION:

With things now open to move forward with the sale of the station, what action is the SEC going to take with respect to Dan Frishberg?  There seems to be sufficient evidence that he was an active part in the defrauding of numerous investors – most of whom will not come close to getting their principle losses back.  Al Kaleta lost his license as an investment advisor.  Dan Frishberg, on the other hand, has not.  Why?

Frishberg – “The Money Man” brand – is expanding with the conversion of Salem Stations to talk business stations, so it seems that Dan buys his suits with kevlar material…as thus far nothing seems to stick to him when it comes to law enforcement – either his investment license (SEC authority) or criminal – FBI, US Attorney or others.  Perhaps 2011 will bring some resolution to this sad affair.

PRIOR POSTS ARE HERE:

https://chuckgallagher.wordpress.com/2010/02/12/biz-radio-and-rehan-siddiqi-when-the-dust-clears-will-siddiqi-be-a-victim-or-a-victor/

https://chuckgallagher.wordpress.com/2010/03/03/dan-frishberg-and-bizradio-slapped-with-18-million-lawsuit-rehan-siddiqi-and-asia-vision-strike-back/

Meanwhile – YOUR COMMENTS ARE WELCOME!

Bernie Madoff and Mark Madoff’s suicide – the Reality of Prison! Choices and Consequences

Doing presentations on business ethics and fraud prevention, every presentation I begin starts with the statement – “Every choice has a consequence!”  No where is this more painfully obvious then the very public unfolding of the consequences begun many years ago by Bernie Madoff.

Two years to the day – the day Bernie Madoff admitted creating the largest Ponzi scheme in US history, his son, Mark Madoff, committed suicide.  Apparently the pressure of all that was taking place (as the Madoff saga is far from over) was far too much for Mark to bear.

Some might ask, well how would you know?  The answer is simple…I’ve been there.  Having created a Ponzi scheme (not something I am proud of, but it is a fact that I openly share), I know about the emotional pressures that come with the consequences of choices I made.  The magnitude of my crime is dwarfed by that of Bernie Madoff.  Yet, pressure is pressure and likely it is all relative.

I candidly feel for Mark Madoff – knowing that his “dark night of the soul” had to be very light less in order for him to elect to end his life.  Beyond that, the pain that Bernie Madoff must feel is, too, enormous.  Even as I write this I can almost hear readers shaming me for having some compassion for Bernie.  But, honestly, I do.  The pain a father must feel knowing that his actions contributed to a depth of depression that contributed to his son taking his life is great.  I cannot honestly imagine that pain.

According to Ira Sorkin, Bernie Madoff’s attorney, Madoff will not attend the funeral of his son, Mark, out of consideration for his daughter-in-law and grandchildren.

Housed in a medium security prison for the rest of his life, Bernie Madoff has had his life reduced to working for around 12 cents per hour and wearing simple prison clothing day in and day out.  His brilliance will not be remembered.  Rather he has become the butt of jokes – “Charles Ponzi created the scheme, but Bernie Madoff with all the money!”  What a sad legacy.

As I said…I know the feelings of loss, inadequacy, hurt and what I and others have described as a “dark night of the soul.”  My new book describes my experience well.  Perhaps this excerpt will give some insight into that feeling that comes from facing a consequence that seems so great that ending a life is the only option – at least at the time.

SECOND CHANCES – excerpt:

At 7:11 p.m. that evening, I grabbed the Yellow Pages and began calling clinics─anyone who I thought might help me. Frankly, I don’t recall what I was looking up. I do remember that there were no listings under “suicide”─in fact, that wasn’t a category. So I looked up physicians, psychologists, psychiatrists, anything that started with a “P”. Honestly, I don’t remember who I did call─a proctologist, as far as I knew. The only thing that flooded my mind was I needed help.

“You’ve reached the office of Drs . . . Our office hours are from 8:30 a.m. to 5:00 p.m. Our office is closed. But if you’ll leave your name and number, we’ll be happy to call you first thing in the morning. Have a nice day!” Somehow, when you’re thinking of ending your life, “have a nice day” just doesn’t seem appropriate. And unfortunately, that’s the message I got over and over.

Calling became an obsession. It was the one thing I could do, one action that I felt in life I had some control over. “Just one more dial,” I would say to myself as I pressed the buttons on the phone, listening to the ring, hoping for an answer.

“Dr. Benson’s office.” That was the second time that day I was stunned. After getting recording after recording, I was somewhat unprepared for the possibility that someone would answer. Yet someone did.

“I need to talk with someone. I’m from out of town,” I somehow stammered.

“Actually, our office is closed. I was just walking out the door and thought this was my wife. Give us a call in the morni . . . ”  Before he could finish his sentence, I blurted, “I’m thinking of committing suicide!”

Silence─then the voice said, “Let’s talk.”

For the life of me, I can’t recall what was said between us as I lay on that lonely hotel bed. We could have talked for two minutes, twenty minutes, or two hours. I just don’t remember. What I do recall is that this total stranger, a man who I had never met, took the time to help me see past the grand illusion I had created and uncover the real me inside.

That night was the darkest night of my soul. That call that I shared didn’t make it better. It didn’t eliminate the consequences. It didn’t remove the pain. Rather, it gave me hope, hope that if I could make poor choices that would, most certainly, bring painful consequences, I also possessed the power to make positive choices with positive results.

His comment to me still resounds in my heart today. He said, “You have made a terrible mistake, but YOU are not a mistake! The choices you make moving forward will define your life forever and provide the foundation for your children’s lives. Think carefully as you make this choice!”

When he said to me, “YOU are not a mistake,” it hit me─while the past cannot be changed, the life we are given and the choices we make moving forward are the only things that count. I felt a burden lifted. I could not change the past; all I could do was face the consequences.  It was within my power to make good choices, now and in the future, that would produce a fruitful outcome. That was my destiny!

For information on how to obtain a copy of SECOND CHANCES – visit www.secondchancesbook.com or Amazon.com

Daniel Frishberg and the Importance of Money Management – Irony in Deception!

A day or so ago a scammed investor lamenting his/her plight said that the word is Dan Frishberg is growing tired of the negative publicity he’s receiving on the web.  It has become worry some that the choices that he’s made are producing consequences that tarnish his reputation.

My immediate response is “Every choice has a consequence!”  In fact, I shared that if Dan had taken a different path early on most of what he’s experiencing today would be quite different.  For example – had Dan shared with his followers that he’d made mistakes in his vision of BizRadio, that BizRadio was in financial trouble and that he would open the revenue source from his RIA to provide a steady stream of repayment to those who were defrauded or scammed in one way or another, I suspect the outcome would have been much more positive.

Alas…Dan “The Money Man” did not.  Rather he is desperately trying to continue to put out the message that he is “The Money Man” through a series of NEW blogs touting his expertise.  There is IRONY here.  I call it the IRONY of DECEPTION and the likely outcome is that Dan is digging the hole deeper for his ultimate demise.

I am not going to link my blog to his – as that has the effect of drawing attention to his work.  I will, however, share part of his blog comments and, after some comments, ask YOU for yours.  Perhaps I am off base and I’m man enough to accept that – so if your comments reflect a different opinion of Dan and his choices – PLEASE SHARE.

DAN STATES THE FOLLOWING:

Today I’ll share with you two general systems of money management that will help you how complex you want to take your strategy for managing the money even if you do not all. Good management of working capital is necessary to reach a compromise between liquidity and profitability. It is widely believed that if you can not manage your life, you can not begin to manage your money.

Let me repeat his comment: “It is widely believed that if you can not manage your life, you can not begin to manage your money.”  Time after time from numerous emails and phone calls, I have been told that Dan was challenged in managing his life – at least his financial life.  It is not for me to judge, but one might easily come to the conclusion that money management is an issue for Dan considering that investors money funded BizRadio and BizRadio was the “loss leader” (Dan’s comments not mine) that propelled his RIA and earned him personally a reported $700,000 per quarter.  Financial success on Dan’s part or the trappings of a successful scam – using other people’s money to accomplish his personal objective leaving other people victims?

Dan further states:  “You must understand that leveraging your money with good management can turn a relatively low investment business situation / in a dynamic Moneymaker. Wise money management is essential for a balanced and happy life. gives practical advice for managing money among others for gambling and trading of the shares. money management can mean acquiring more control over expenditure and revenue, both personal and business perspective.”

Dan seemed to practice what he preaches here.  Sure enough he turned a low investment into a good business situation (for himself) at least for a time.  Where did the BizRadio money come from?  I suspect that investors (victims) could now come out of the woodwork and share their stories of how they were suckered into believing that Dan “The Money Man” was wise and all knowing – touting the vision and ILLUSION that BizRadio was a good investment for them.  Reality Check:  BizRadio was only good for Dan.

Financial stress resulting from low skills of money management may affect our ability to make good decisions, harm our relations on the physical and mental health, and ultimately to function well in life. Indeed, deficient money management is one of the main causes of bankruptcy among unseasoned traders. Management of financial assets is an effective way to manage financial assets, one that may take place in various forms. Management services for financial assets generally provide include but not limited to, Control services, credit cards, debit cards, margin loans, automatic transfers from one account to another, and same brokerage services.

LET ME ASK A QUESTION:  How many people in the Houston – Dallas markets are suffering (I mean truly suffering) financial stress due to the representations of Al Kaleta and Daniel Frishberg?  Both are shameful representatives of the financial community.  Dan, through his actions, has caused stress to both physical and mental health of many who have lost their life savings, believing that Dan Frishberg lived up to his self proclaimed status as “The Money Man.”  Now, Dan is desperately trying to save his reputation.  What Dan fails to realize is that his actions destroyed his reputation.  Dan is effectively nothing more than a con man who hasn’t yet realized that feeding his ego off of other people’s money is costing him everything.

The sad part is this could have been different.  But then the same could be said for Bernie Madoff.  Both Dan Frishberg and Bernie Maddoff have two things in common: (1) they are both intelligent and (2) they are both crooks.  The only difference – Bernie is in prison.  Dan hasn’t been charged.  YET…

YOUR COMMENTS ARE WELCOME.

50 Years for a Ponzi Scheme – Thomas “Tom” J. Petters has a lot of time to think ahead! My this sounds like the BizRadio scam…

Every choice has a consequence.  That is my opening sentence as I address groups all around the country on choices and consequences or business ethics.  As a speaker and fraud prevention consultant I seem to get the question asked often, “Are there more bad guys doing this type of thing these days?”

No…believe it or not there aren’t.  Rather, the access to money has dried up and the “bad guys” are starting to surface.

Take the example of Tom Petters of Wayzata, Minnesota, who was sentenced to 50 years in prison for running a $3.65 billion Ponzi-type investment fraud scheme, one of the largest ever. Convicted last December on all 20 criminal counts that he faced, including wire fraud, mail fraud and money laundering, Petters now faces a long time in prison for his choices.

Petters and his co-conspirators bilked investors who thought their investment money was being using to buy consumer electronics for resale to retailers such as BJ’s Wholesale Club and Costco. Several other executives of the company, including Deanna Coleman, Robert White, Michael Catain and Larry Reynolds, who have all previously pleaded guilty in the case.

Petters solicited billions of dollars in financing for PCI, telling investors he’d use their funds to buy and re-sell consumer electronics and other goods for a profit. Those transactions never occurred, and Petters used investor money to prop up his other, often legitimate, businesses and for his own personal use.

Now…for those who follow my blog this sounds painfully like, what I am referring to as the BizRadio scam.  Put in perspective, didn’t BizRadio investors put money into various investments thinking that they were either high yield bonds or real estate investments, when in fact, the money was diverted into BizRadio which had no practical purpose other than to grow Dan Frishberg’s investment portfolio.  And, now – stopped by the filing of an involuntary bankruptcy – BizRadio would have been sold back to Salem Communications and Dan Frishberg gained personally in that he got airtime out of the deal.  Let me repeat he got air time.  Not, the investors got the benefit of airtime which is an asset that could be sold, but Dan Frishberg got the airtime.

Something smells Frishy!

But back to Tom Petters…

U.S. Attorney B. Todd Jones said the sentence – the longest ever in Minnesota for financial fraud – demonstrated that authorities would not shirk from vigorously investigating and prosecuting financial crime.

The Business Journal gave a great account of the Birth and Death of a fraud…

Petters’ crimes first came to light last year, but prosecutors presented evidence that he was bilking investors as early as the mid-1990s. He defrauded a Twin Cities investment firm in 1996, lying to Data Sales Co. Inc. officials about his plans to use their funds to buy electronics from 3M Co. and re-sell the goods to retailers.

In 2000, he attempted to defraud GE Capital, which had extended him a line of credit. Petters submitted false purchase orders, fraudulent checks and other documents in an effort to convince the company he was using its capital to buy and sell goods.

To lure investors, Petters often talked of his “special” relationships with Costco and other discount retailers, witnesses testified in the case. When investors asked to talk to the retailers he did business with, or inspect the goods he claimed to be selling, Petters deflected them, saying prying would scare off buyers.

As investor money flowed into PCI’s accounts throughout the early- to mid-2000s, Petters funneled it elsewhere. He used hundreds of millions of dollars to support his other business ventures, such as Polaroid and Sun Country, which operated under the umbrella of his Petters Group Worldwide entity. He used millions more for personal gain.

Early investors in PCI reeled in significant profits, and PCI was at one time receiving more offers from investors than it needed to accept. But the scheme began to unravel amid the credit crisis of late 2007 and early 2008. At that time, it became increasingly difficult for PCI to lure new investors to cover high-interest payments owed to earlier investors, many of which were hedge funds.

Petters, his employees and associates grew increasingly desperate in early fall of 2008. It was then that PCI executive Deanna Coleman went to federal law enforcement officials, presenting them with evidence of the fraud. She agreed to secretly record conversations with Petters, gathering further evidence that was later presented at trial. Petters was arrested in fall of last year and jailed until his trial.

According to the Wall Street Journal: “The U.S. attorney’s office in Minnesota said Mr. Petters continued “to lull investors” even after agents executed search warrants on Sept. 24, 2008, for his home and office, also in suburban Minneapolis. On Oct. 3 of that year, he was arrested. The investigation was conducted by the Federal Bureau of Investigation, the Internal Revenue Service and the U.S. Postal Inspection Service.”

Apply this to the BizRadio – Dan Frishberg case and see the similarities.  The only dramatic difference is that Petters crimes have come to trial and sentencing and the other is still under investigation.  But…EVERY CHOICE HAS A CONSEQUENCE.

YOUR COMMENTS ARE WELCOME…

So you’re guilty of a Ponzi scheme – What About Your Spouse? Just ask Victoria Meisner – The long arm of the law reaches farther!

I am not proud to admit this, but it is a fact and common knowledge for many years.  In the mid-’80’s I perpetrated a Ponzi scheme.  I did it without the knowledge of my wife, my business partners, in fact, no one knew until…

The outcome.  Total financial ruin.  The loss of many of the relationships I held dear.  The loss of my career.  And, yes, a Prison sentence.  But, what about my spouse.  In the early ’90’s when I agreed to plead guilty there was never (to my knowledge) any consideration that anyone would be prosecuted other than ME.  But now some 20 years later with what seems a proliferation of Ponzi scheme perpetrators – well – times they are a changing.

An article in the South Florida Sun Sentinel summarizes it well:

They once could be found at the sides of their charming, wealthy husbands — leading lives of privilege and glamour.

Now those years of comfortably basking in money are gone, replaced by lawyers’ questions and the scorn of former friends. Their posh lives had been built on their husbands’ schemes.

Call them “The Real Housewives of South Florida Ponzi Schemers.” Among them is Boca Raton mother Victoria Meisner, whose husband, Michael, masterminded a $37 million fraud.

Her story, however, is different from that of most of the other wives. For like her husband, she’s a convicted felon. On Friday, she found out she will be going to prison.

Victoria Meisner, 53, was sentenced to 18 months’ imprisonment for filing a false tax return. She pleaded guilty in November to reporting $49,626 of total income in 2003, despite helping rack up more than $430,000 in personal expenses that year on a debit card belonging to her husband’s business, Phoenix Diversified Investment Corp.

Meisner’s case highlights one of the inevitable questions for authorities investigating Ponzi schemers and how they threw around their ill-gotten gains: Should family members whose luxurious lifestyles were funded by dirty money face criminal charges themselves?

Back to reality…  I was convicted of embezzlement and tax evasion.  One I stole money from my clients in a Ponzi scheme fashion and two, I didn’t pay taxes on stolen money.  Yes, the IRS can put you in prison for things like that.  But, the more important question that people often asked of me was – “What did you do with the money?”  My response was – “Look around.”

Like so many fraudsters (can’t say I like that term, but it fit at the time), I lived, for my community a lavish lifestyle.  As I look back I have often wondered if people, including my wife and business partners, didn’t know or at least wondered.  It seemed in the late ’80’s that what ever I wanted I got.  BMW – Mercedes – Jaguar – BMW – Airplane, etc.  The “boy toys” were big and for the most part far more expensive and lavish than others I was connected with had.  Likewise, what my wife wanted she got.  Nice home, custom window treatments, fine furniture, and if that weren’t enough – another much finer home under construction.  We had it all (by out community standards)…but it was all an illusion!

FOR THE RECORD:  My now, ex-wife, had no clue.  I was a master illusionist.  I profoundly regret the pain I caused her and am indeed thankful for the grace and dignity she maintained in continuing her life and being the extraordinary mother to our children she has and continues to be.

Now…some 20 years later comes the Meisner case which opens a new and potential frightening door that heretofore seems to have been closed.  SPOUSAL PROSECUTION!

John Gillies, head of South Florida’s FBI office, has called the Meisner case “a cautionary tale to spouses that they cannot claim ignorance about their financial situation when they know better.”

Defense lawyers who specialize in white-collar crime agree that just because a spouse or family member isn’t actively involved in a fraud, it doesn’t mean he or she is safe from criminal prosecution.

“Willful blindness in the criminal system is tantamount to actual knowledge if there are sufficient red flags to alert an individual that criminal activity is afoot,” said Sharon Kegerreis, a Miami-based attorney and former federal prosecutor.

Among those warning signals: a sudden, unexplained influx of wealth into the household or curious patterns of moving money between bank accounts.

Looking back – could my wife explain our sudden increase in wealth?  If you looked at our lifestyle and the lifestyle of my partners, was there a difference and how could that be explained?  And, why was it that when I got a call to deposit money into our account for a purchase that my wife made, I had to consistently transfer money between accounts?  The tell tail signs were there.  But no one (not the least of which ME) wanted to look.  I created a grand illusion and all was comfortable – and who wants to disturb that comfort?

While most wives (this assumes that crimes are committed by men – which is not always true), do not get prosecuted…there is a growing trend to bring a new level of accountability to bear when it comes to protecting the victims of crime and punishing those who perpetrated the crime.

In the Victoria Meisner case – she was not convicted of the actual Ponzi scheme, but rather for filing a false tax return.  (Once again the IRS becomes a successful tool when it comes to busting fraud).

“I knew that my family and I maintained a lavish lifestyle well in excess of the ‘total income’ reported,” she acknowledged in a sworn statement last November.

Somehow I imagine that she regrets ever speaking those words – cause those are the words that put her in federal prison.

But what of her husband – well…his sentence is around the corner.  Michael Meisner pleaded guilty in September to mail fraud, loan application fraud and tax evasion. He is scheduled to be sentenced March 19 in West Palm Beach federal court, and faces up to 30 years in prison under sentencing guidelines.

FOR THE RECORD…I am not in any way proud of my past acts.  I often, as a speaker today, am asked, “If you had it to do over again, would you do it?”  Frankly, I chuckle at that question that arises over and over.  The answer, “NO!”  But, with that said, I cannot change my past, yet I can use the incredible lessons learned and hope that being open, honest and willing to share them might help others in their life journey.

I speak to audiences all over North American and one thing that is a common theme – EVERY CHOICE HAS A CONSEQUENCE!  In this case, perhaps it is now time to consider that consequences can arise from failing to look and be aware just as much as they are from being on the front line of the crime.

YOUR COMMENTS WELCOME!

Robert “Joe” Halderman pleads guilty to David Letterman extortion! Why did he do it?

Well…this story is all over the news so one might ask what can a simple blog add that has not been stated in, almost, every other media outlet reporting today?

Answer: Perhaps motive!

The real question is – how can a person, like Joe Halderman, a former CBS News producer make such a choice that has the possible implication of prison?  But first, let’s see what is being said in the new reports:

CNN states:

Robert “Joe” Halderman, the former CBS News producer accused of trying to blackmail comedian David Letterman, agreed Tuesday to plead guilty to grand larceny in the second degree in exchange for six months in jail, five years probation and 1,000 hours of community service.

In a separate statement, the former “48 Hours” producer admitted that he tried to extort $2 million from Letterman to keep quiet about the “Late Show” host’s sexual affairs.

“On the morning of September 9, 2009, I gave a sealed envelope to Mr. Letterman’s driver as he waited outside of Mr. Letterman’s Manhattan home,” Halderman said in the statement, called an allocution. “I asked the driver to give the envelope marked ‘Privileged and Confidential’ to Mr. Letterman.

“The envelope contained a number of documents, including a document I created entitled ‘Treatment for a Screenplay.’ This so-called treatment was just a thinly veiled threat to ruin Mr. Letterman if he did not pay me a lot of money.

“Later that month, on three different occasions I met with Mr. Letterman’s lawyer, Jim Jackoway, to work out the details of the extortion. On October 1, 2009, I deposited a check for $2 million that Mr. Jackoway gave me.

“I knew throughout this time that I was not engaged in a legitimate business transaction with Mr. Letterman and that what I was doing was against New York law. I understand that my attempt to extort $2 million from Mr. Letterman violated his and his family’s privacy. I promise to respect their privacy in the future.”

Then-District Attorney Morgenthau said Letterman gave Halderman a $2 million check in October and Halderman deposited the money into a Connecticut bank account the day before he was arrested.

So does the above answer the question – WHY?

Not really.  Rather, the next to the last paragraph in the CNN news report gives us the clue.

Halderman closed his statement by expressing “great remorse” and apologizing to Letterman and his family and to the family of Stephanie Birkitt, one of the women Halderman said had engaged in a sexual relationship with Letterman. Birkitt was an assistant to the talk show host and a former live-in girlfriend of Halderman.

SO TO THE QUESTION OF WHY?

First, when a crime like this is committed, typically there are three components that come together to create the “perfect storm.”  NEED – OPPORTUNITY and  RATIONALIZATION.   Let’s explore these and see if we can find out where Joe came from when he concocted this hairbrained idea.

First, OPPORTUNITY is easy.  Few people have the connectivity to David Letterman to pull this off.  Frankly, I can’t imagine many who read this thinking that they would even know how to get close enough to Letterman to pull of such a stunt.  So the OPPORTUNITY portion was primarily effected because Halderman was a “former” CBS News producer.

Second, NEED.  That might be a bit more complicated.  It was reported that one of the ladies that Halderman accused Letterman of having sexual relations with was Stephanie Birkett who happened to be a live-in girlfriend of Halderman in the past.  Perhaps (just speculation) Halderman held some ill intent toward Birkett and Letterman – a man’s scorn?  Maybe…  Or, as reported here, Halderman was debt ridden and desperate.    The report states in part:

“I also tried very hard to convince my ex-wife to not go, or to at least not go so far.”

Halderman complained his ex, Patty Montet, “was not interested in my opinion and is determined to make this move.”

Halderman’s daughter decided to stay with him in Norwalk, Conn. But his romance with Stephanie Birkitt, one of Letterman’s sidekicks on the “Late Show,” soured, sources said.

“It was devastating for him having his son move away with his ex-wife. … He loved his kid like I’ve never seen a father love his child,” said Jeff Dyment, 43, who used to coach a youth soccer team with Halderman.

It was in the midst of that emotional maelstrom that Halderman – perhaps inspired by the true crime stories he produced for a living – tried to shake down Letterman by threatening to reveal the comedian’s numerous affairs with female staffers, prosecutors charged Friday.

Emotion is a strong driver for NEED.  Bernie Madoff illustrated that when he effected the largest Ponzi scheme in history.  His need:  the need to be right!

Lastly, RATIONALIZATION.  If you were to ask anyone who effected a crime (long before they did it), would it be right to extort or blackmail someone?  Well, you and I both know that the answer that Mr. Halderman would have given would be a resounding – NO.  Yet, in the midst of emotional turmoil with high NEED and OPPORTUNITY – anyone (an I mean ANYONE) can rationalize bad behavior.

The RATIONALIZATION key is the part that allows a good person to make bad choices and, as I say to every group I speak to, EVERY CHOICE HAS A CONSEQUENCE.

Perhaps Mr. Halderman can learn from his past misjudgements and focus on a more effective way to be a father, person and business associate.

YOUR COMMENTS ARE WELCOME.

Canadian Financial Advisor Earl Jones sentenced to 11 years in Prison for massive Ponzi scheme!

“He can rot in hell,” said Bevan Jones of his brother Earl Jones who today was sentenced to 11 years in prison for his $50 million Ponzi scheme.  And his brother’s emotional remarks were the only ones heard today as the verdict was handed down.

Jones never invested a cent of the money he collected from his former clients, the Quebec court heard during the criminal proceedings against him.  Rather, in classic Ponzi form, Jones used some of the proceeds to continue the illusion that he created so well and in which many people their life savings.  None of the money has been recovered.

Today, I received a call from a reporter with the CBC regarding Jones sentencing.  Her questions centered around what Jones might have been thinking and if he ever saw an end game other than prison.  She posed those questions of me because, I, like Jones, (not proud of what I’m writing next) too created a Ponzi scheme which left a trail of victims. (Today, some 24 years later I am a business ethics and fraud prevention expert – helping businesses and individuals connect the dots between choices and their consequences).

While what I did in the mid-eighties pails in comparison to Jones and Madoff, the reality is fraud is fraud and theft is theft.  One cannot justify victimizing someone else.  Yet, as evidenced over the past two years…this fraud has come to the forefront almost daily now.  So, her questions were appropriate – like, what was Jones thinking?

Three things come into place for a fraud to occur:  NEED, OPPORTUNITY and RATIONALIZATION.

Now, I can’t begin to predict what Jone’s NEED was, but I suspect that somehow his NEED was beyond the simple NEED for money.  Rather, I suspect that his need was emotionally based.  Madoff, for example, didn’t need the money…he legitimately could earn a handsome income from his legitimate investment advice.  Rather, Madoff seemed to have the need to be RIGHT.  He could not admit that he was fallible.  To Madoff admitting that his investment didn’t always “pay off” would be too difficult to swallow.  Hence his need was emotionally based.  Take to the bank, Jones was likely feeling something that triggered an emotional need when his fraud began.

A report today states:

Some of the victims included Jones’s own relatives, who are no longer speaking to him.

“None of us will ever be the same,” said Bevan Jones who, along with his wife Frances Gordon, was fleeced out of $1 million by his brother. Jones said he would never forgive him for what he’d done.

Both Jones and his financial-services company have been declared bankrupt. He’s been shunned not only by his friends and relatives, but his wife Maxine has also filed for divorce.

Jones saw OPPORTUNITY by taking advantage of his close friends and family.  In my earlier discussion the reporter asked about how or who typically was defrauded.  My answer, those closest to the fraudster.  Most of the time OPPORTUNITY is found in those closest to you – those who trust you!  Now, as a word of caution, if you’re considering investing your retirement…don’t do it with those whom you know best.  Rather, invest with those with whom you have a professional relationship and healthy skepticism.

So, she asked me, “Who did you victimize?”  Unfortunately, my response was typical of those who have defrauded others – “I victimized those clients who were closest to me and trusted me the most.”  As I spoke those words I still feel pain today for what they endured at my hand.  Now…to set the record straight, I did make complete restitution plus interest, but that does not justify what I did and will never erase the memory and feeling that those friend and clients felt when I had to tell them that I, their trusted advisor, was nothing more than a liar and a thief.

Jones once lived in the lap of luxury, with several high-end homes in trendy locales. He was a pillar of the community, active in the church, local charities and amateur sports.

The most difficult part for most people to comprehend is the question, “what did you think would happen?”  To rational individuals who clearly see the difference between right and wong…it is clear that Jones choices could lead to no where but prison.  Yet, when one begins to RATIONALIZE one’s behavior, the very act of RATIONALIZATION creates and illusion and the longer the deviant behavior goes undetected the stronger the illusion becomes until eventually the ILLUSION becomes REALITY.

The reporter asked, “What did you think would be the outcome?”  Fair question.  As I thought back for a moment, the answer became crystal clear.  At first I convinced myself that I was borrowing money, not stealing it.  (We all know that money taken from someone without their consent and knowledge isn’t borrowing!)  What I did was theft…!  Yet, at the time, I went to great lengths to create the illusion that it was a loan.  When I put the stolen money back – gave it back to its rightful owner, I solidified the illusion by RATIONALIZING that my actions were consistent with that of borrowing money – a loan.  The illusion was set and RATIONALIZATION established.  Therefore, as time passed and I stole more, I could more easily convince myself that I was “only borrowing”.  A lie, but one that I believed till…

One of her last questions, “So when did you know?”  Each of us…Madoff, Jones and yes, Gallagher, had to face the day when the illusion burst and reality came blindly into view.  In most every case, it is when someone (or perhaps a group) want their funds and you come to realize – you don’t have the funds…in fact, you never did.  That’s reality…

Today…Jones faced what I faced now some 16 years ago.  I now what it’s like to spend time in federal prison.  Jones is now experiencing the consequences of his choices.  And, while the Canadian legal system would have Jones eligible for Parole in 2011, his life has changed forever…although I doubt enough for those he victimized to feel any comfort.

Crown prosecutors and Jones’s lawyer jointly recommended a sentence of 11 years, which Judge Hélène Morin handed down.

“The accused not only robbed the victims of their money, he robbed them of their freedom and self-esteem and of a decent life they expected in their retirement,” Morin said in her comments before delivering the sentence.

YOUR COMMENTS ARE WELCOME

Sujata “Sue” Sachdeva pleads not guilty by reason of a “Spending Disorder?”

With her attorney again signaling that he will mount a mental-illness defense, a former Koss Corp. executive pleaded not guilty Friday to accusations that she embezzled $31 million from her longtime employer.

Sujata “Sue” Sachdeva, 46, of Mequon, Wisconsin, pleaded not guilty yesterday to charges she embezzled as much as $31 million from Koss Corporation, a publicly traded head phone manufacturer where she had been employed as Vice President of Finance, Secretary, and Principal Accounting Officer. According to the indictment, Sachdeva authorized numerous massive wire transfers of funds from company bank accounts to pay for her American Express credit card bills and obtained cashier’s checks to pay for personal expenses, among other things. The scheme dates back to at least 2004, according to reports.

Michael F. Hart, her Attorney, said in a brief interview, “As this case proceeds . . . we intend to show that Ms. Sachdeva’s mental and emotional health played a significant role in her conduct.”

Asked whether that was the basis for Friday’s not guilty plea, Hart declined additional comment. Later, he issued a statement reiterating his remarks in the interview and added, “This is the beginning of an ongoing process, and our focus will be on the arguments we make in court. However, the issues of Ms. Sachdeva’s mental and emotional health are essential to this case.”

In court, Hart agreed to a new condition of release requested by prosecutors that prevents Sachdeva from disposing of assets that might be confiscated if she is convicted. According to the indictment, the government will attempt to seize her $800,000 Mequon home, her 2007 Mercedes Benz E350, a Hawaiian vacation timeshare and other assets if she is convicted.

The U.S. Marshals Service also is working to inventory approximately 22,000 items FBI agents gathered at the Sachdeva home and from local luxury stores and resale shops.

Several stores kept paid-for clothing in their storerooms for Sachdeva. She also sold thousands of dollars’ worth of merchandise through local resale shops, according to several retailers.  The government expects to sell the items, probably in an online auction, and return the proceeds to Koss.

Sachdeva also was ordered Friday to refrain from using alcohol and to submit to drug and alcohol testing.

If Sachdeva is convicted, she faces up to 120 years in prison plus fines, restitution and forfeiture of merchandise.

Her trial is scheduled for April 19th.

COMMENTARY:

I know there is a vast difference, but Sachdeva’s defense is a bit like the fellow who killed the abortion doctor – there is a justifiable reason?  Clearly stated…I am unaware that using a spending disorder as a defense has been successful in achieving a verdict of “not guilty”.   Certainly this case will be watched closely, as there are many white collar criminals who have either embezzled or created Ponzi schemes and lived lavish lifestyles who would welcome the opportunity to be found not guilty by reason of a “spending disorder.”  If this defense wins…I would suspect that Bernie Madoff would be regretting his guilty plea.

IF I were a betting man, I’d bet she’ll face time in prison…but?

YOUR COMMENTS WELCOME!

The Anatomy of a Ponzi Scheme – Commentary by Fraud Prevention Expert Chuck Gallagher

“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.

HISTORY:

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.