You Can't Cheat an Honest Man (16 page)

Of course, none of the money went into 900 numbers or advertising. A large part of the money went back to investors in the form of payouts, but Taylor kept enough for himself to buy a million-dollar home, several expensive cars and trust funds for his children. “In one way, the name of the scheme was true enough,” says a federal investigator who looked into Taylor’s operation. “It just should have made full disclosure. It should have been called the Better Life for Robert Taylor Club.”

In September 1995, the SEC filed suit against the Better Life Club and Robert Taylor. It claimed that his investors had lost at least half of the $50 million they’d invested. Taylor didn’t put up much of a fight. His lawyers helped him reach a plea bargain—and he received a relatively light three-to-five year sentence for wire fraud. A series of civil lawsuits followed, which effectively bankrupted Taylor; but not even this served to faze him.

Considering how many Ponzi perps return to their conniving ways after jail stints, Taylor’s cool approach to his legal problems may not be so surprising after all. Quite a few of the people familiar with Taylor—both as investors and investigators—say he’s charismatic enough to make money promoting a new con when he’s completed his prison term.

Religion Works Well as an Affinity Hook
Next to ethnic or racial groups, the most effective—and most disturbing—affinity hook is religion.

Los Angeles con man Rodney Swanson used Emmanuel Evangelical Free Church, the suburban Burbank enclave to which he belonged, as his network for recruiting investors into a real estate Ponzi scheme.

Swanson looked the part of a successful California real estate mogul. In his late forties, he had the features and physical attitude of a blandly handsome television actor. He lived in posh San Marino and drove a big Mercedes sedan. But what really made Swanson believable was that he didn’t seem very excited about his business.

The thrill of pulling a con comes in pressing the envelop of credibility...putting a twist on the pitch that closes the sale. This can make the perp all the more believable, though it risks collapsing the entire premise.

It’s a fact of life in upper-middle-class Los Angeles—and in most places—that successful people are often ambivalent about their work. Swanson played to this trend. He was, at least initially, more excited talking about his children and his weekends with his family than about real estate. His fellow congregants saw the proof of Swanson’s priorities: He was a regular at church baseball games and in the choir on Sundays.

This was just the soft sell leading up to the hard sell.

Gradually, Swanson talked to friends from church about investment opportunities. He had deals on commercial properties waiting to close. He had trust deeds on prime land looking for investors. He had spots open in limited partnerships.

Swanson actually had a motley collection of minority investor positions and heavily-mortgaged properties. He manipulated and finessed new investments and title transfers so that his investors believed they were getting something for their money. Word spread through church circles that Swanson was making good investments for people.

And he made his early interest payments and distributions on time— with the money he was bringing from new investors.

Swanson kept the scam going for at least two years. It was the perfect Ponzi scheme: It started out with a few investors and less than $100,000; as time went on, people started coming to Swanson—offering money to invest. At the peak, his scheme was circulating $10 million among various investors and accounts.

Like most Ponzi perps, Swanson started to run out of new investors more quickly than he’d figured. By late 1995, he was bouncing distribution checks. Most of his investors were worried; some called the police.

The scam was complex enough that it took investigators months to unravel. In the meantime, Swanson declared bankruptcy and withdrew from the Burbank church. When he was finally arrested on more than 60 counts of fraud, grand theft and money laundering, he was driving a soft drink delivery truck and living in a low-rent neighborhood. (But he maintained his ability to charm people out of their money. Some parishioners at his new church put up their own houses to help bail him out.)

Eventually, the deputy district attorney who tried the case against Swanson explained the scam in religious terms. He called Swanson a “financial Judas—except Judas only betrayed one person, and he did it for less money.”

Swanson’s criminal trial lasted more than eight weeks. The testimony of his conned investors—including a police detective, a fireman, a clinical psychologist and a banker—was full of insights learned painfully. Most concluded that they’d allowed their friendship with Swanson color their investment judgment. “You just wanted to believe that [Swanson] was what he seemed to be,” said an investor— privately, after Swanson’s trial. “It was a difficult moment when I realized that this man...who was so much a part of my church...was a thief.”

Not all affinity frauds take the form of pyramid or Ponzi schemes. Many crooks use the pretense of ethnicity, national origin or religious affiliation to rip off others in a more basic way. But Ponzi schemes have a kind of resonance with affinity fraud. The familiarity and trust of the one plays off against the familiarity and trust of the other—with the final result being a bigger rip-off than either device could have created by itself.

An investor who lost money in an Asian affinity scheme described the geometric impact well:

It was almost worth the monetary loss because of how good it felt [to believe] that this thing was working.... I’ve never been involved in ethnic pride movements. But they must feel like this felt. I was happy that [immigrants from the same place] were looking out for each other. Making each other rich. I’m not a big financial person, either. I’ve always believed in being conservative with money. Investing conservatively. But this appealed to me emotionally.... When I found out it was a [Ponzi scheme], I didn’t want to believe it. It was like someone in my family had betrayed me.

It’s a tragedy that investors can lose money and feel this level of betrayal. But this kind of self-supporting trust is irresistible to Ponzi perps.
Case Study: Wild Irish Castles

Affinity scams that target ethnic or racial groups don’t always limit themselves to poor, recent immigrants. From 1985 to 1988, a group of New York con men ran one of the most successful affinity Ponzi schemes in recent history. And this monster’s tentacles reached across the Atlantic Ocean to the Emerald Isle. All involved, perps and victims, were of Irish descent. Carlo Ponzi would likely have approved.

William Dowling, Walter J.P. Curley and Adams Nickerson controlled Dowmar Securities, a real estate syndication firm based in New York. Dowmar had showy offices in Rockefeller Center. Its syndication experts were often quoted in the financial pages, talking about the real estate market and specific deals.

The principals had pedigree. Curley was a former U.S. ambassador to Ireland and France. Dowling had been one of the developers behind the late Daniel K. Ludwig’s Princess Hotels chain. Nickerson was a member of a socially prominent Long Island family.

The affluent background of the three players might suggest a blase attitude toward social climbing. But Dowmar made a concerted effort to have its people move in high net worth circles. “Frankly, they were pushy about it,” complained one investor through a rigid Long Island lockjaw. The pushiness could be explained easily enough: Dowmar was on a constant lookout for rich people with even the slightest inclination to invest in its shady real estate deals.

Ashford Castle was an ancient fortress in County Mayo, on Ireland’s west coast. In the late 19th century, it had been rebuilt by Lord Ardilaun, a member of the Guinness brewing family. In the 1940s, Ashford and 11 surrounding acres had been converted into a luxury hotel. By the late 1970s, it was owned by an Irish businessman who couldn’t get it to generate enough revenue to pay the mortgage.

In 1980, Allied Irish Banks (AIB) foreclosed on Ashford. It didn’t want the hotel—but it couldn’t find a buyer. In 1985, it teamed with Dowling, Curley and Nickerson to syndicate the hotel in the U.S.

Dowmar sold rooms, or “units,” to investors. Because investors could spend two weeks each year in their units, the deal had an attractive time-sharing aspect. Technically, though, the deeds were securities because the investors had a right to share in the hotel’s total income.

The syndication raised $7.5 million to buy Ashford from AIB, which financed most of the investments itself at a relatively high interest rate.

For the big bank, it was a great deal, transforming a white elephant into the personal loans to a bunch of wealthy Americans. It was also a great deal for Curley, Nickerson and Dowling, who collected syndication fees. Better yet, through an entity called Ashford Castle Inc. (ACI), they gave themselves a contract to manage the hotel.

Numerous American investors were solicited through personal contacts, a slick direct mail campaign and an appealing private placement memorandum. “It sounded like a great investment,” says Peter McSorley, owner of a New York taxicab company. “We were told that big dividends would pay off the mortgage.”

Among the Ashford group’s members were such notables as Jay Higgins, a former vice chairman of Salomon Brothers; the Rooney family, which owns the Pittsburgh Steelers football team; Prescott Bush, the brother of the former U.S. President; and, Dublin-born Anthony J. O’Reilly, president of H.J. Heinz.

Throughout the solicitation process, AIB made efforts to conceal its ownership of Ashford. The bank did this, primarily, to get higher prices for the property than it would have if the buyers had known the hotel was in foreclosure.

Two years after the Ashford deal, Dowmar was broke. So, it found another old Irish castle to sell to the same American investors. Dromoland Castle, near the town of Shannon, had been home to various lines of Irish royalty since the late 1600s. In 1963, it had been converted into a luxury resort hotel. In 1987, it was acquired by Curley, Nickerson and Dowling. Acting as Dromoland Castle Inc. (DCI), they raised almost $13 million. AIB had no equity in the castle this time; but it did serve as the project’s sole financier and escrow agent.

The Dromoland private placement memorandum contained misrepresentations about the financing and the use of proceeds. Also, the syndication was consummated even though the requisite minimum subscription level stated in the Dromoland PPM was never reached.

The Ashford deal’s financial structure created a hidden drain on shareholders’ equity; the problem was much worse with Dromoland. For one thing, Dromoland needed extensive renovations. For another, the perps were using Dromoland money to keep Ashford investors current.

Andrew Schlafly, a lawyer for some of the investors, said: “If Dromoland Castle’s promoters had to siphon off revenues and capital to pay down Dromoland’s [AIB] financing, they also had to use Dromoland’s funds to continue paying the older Ashford loans.”

So, in the same period of time that the Ashford investors lost onethird of their equity, Dromoland’s investors saw their equity sink to zero under a debt that eventually reached $9 million. “It was a classic Ponzi situation, where later investors lose more than earlier investors,” Schlafly said.

The cash infusion from Dromoland smoothed things over for a little while. But, pretty soon, the Dromoland project needed money to make up for the proceeds it had transferred over to Ashford—which, for its part, was still soaking up development money.

By late 1991, the continued diversion of funds from one project to another had put the various Dowmar projects under great financial strain. In December, it was apparent to most of the people involved that the projects were irrevocably insolvent.

In 1992, about two dozen of the investors filed a lawsuit in New York federal court, accusing Dowmar of running a Ponzi scheme and AIB of aiding and abetting. The charges included: common-law fraud, breach of fiduciary duty, breach of contract and violation of the federal RICO statute. The fraud charges focused on the fact that the Ashford and Dromoland deals were closed even though the minimum subscription levels hadn’t been reached. Instead, they were filled out with bogus stand-in investors backed by illusory loans from AIB.

The repayment of the bogus loans put the real estate syndications into debt from the beginning—and assured the need for future rigged offerings. Also, the stand-ins violated the investment contracts that Dowmar itself had drafted. The Ashford PPM expressly stated:

Investors will be required to represent that they are acquiring Castle Interests for their own account, for investment and not with a view toward resale or distribution thereof.

The Dromoland PPM contained virtually identical language.

After the Ashford and Castle deals closed, Curley, Dowling, Nickerson and AIB directed the companies to “make substantial payments...to themselves and to Dowmar, purportedly for fees in connection with the closing.” Lawyers for Dowmar and AIB said the fees were proper. One of their lawyers sneered:

The Ponzi scheme is baloney. It’s a figment of someone’s imagination.... The reason the Ashford investors are not making money has nothing to The reason the Ashford investors are not making money has nothing to 92 resulting from the Gulf War, I doubt there would ever be litigation. These big hotels had huge operating costs and not enough guests. Once you fall behind, you never really get back on your feet.

In a move that Ponzi perps often make when an affinity scheme collapses, the perps’ lawyer tried to paint the scheme as ethnic intramural bickering. “I’m sorry that Mr. Dowling and they are all of Irish descent, and that there are hard feelings among them,” he said, “but I don’t think anyone was duped.” By late 1996, the lawsuits were still grinding through court.

CHAPTER 9
Chapter 9:
Trust

Affinity scams aren’t the only rip-offs that rely on trust. All pyramid and Ponzi schemes do. Of the key factors that allow Ponzi schemes to flourish, misplaced trust is most important. It’s the point on which burned investors—once they learn they’ve lost money—most often blame themselves. Invariably, the person will offer some version of “I can’t believe I trusted that crook....”