You Can't Cheat an Honest Man (24 page)

Pyramid and Ponzi schemes exploit impulses like trust, greed and secrecy. But these schemes are built on darker foundations. For both Ponzi perps and investors, the impulses which get them involved are pretty bleak—usually wrapped around loneliness, fear and desperation.

These factors fit the circumstances. A Ponzi scheme requires a certain amount of fatalism on the part of the perp. The schemes always collapse. When the perps go in, they know there’s going to be a reckoning. The battle is to delay the reckoning as long as possible.

Many people find the impulses that motivate crooks more interesting than those that motivate their marks. It’s almost a staple of crime novels and magazine stories to portray con men as characters from the psychological and philosophical theories of Friedrich Nietzsche. That is, perverse supermen with a twisted strength for shouldering the weight of their crimes.

The truth is less dramatic. There’s no doubt that Ponzi perps are affected by some dark impulses. But they usually aren’t supermen. They’re more like unexamined people who give in to fairly common weaknesses.

Time and again, in the wake of a collapsed Ponzi scheme, burned investors and participants ask “How could this person sleep at night?” The answer seems to be that, from the perp’s perspective, the fraud is usually impossible or inevitable.
Perps candid enough to speak truthfully about their deeds will admit that they’ve always felt like they don’t belong—in any group. “It’s been like that since I was in school,” says one perp who ran several Ponzi schemes in the Midwest, got in legal trouble for two, and then moved to southern California—where he insists his start-up multilevel marketing company is legitimate. “You know how it is—kids gather in cliques. I could get along with just about every clique, hang out with them. But I didn’t really belong in any. I’m in my fifties now and it’s the same way. I can get along with all kinds of people but I don’t belong with anyone.”

To a psychoanalyst, this probably sounds like impostor syndrome— the disabling feeling that a person doesn’t rightly deserve his place in any circle, system or organization. Asked if he suffers from impostor syndrome, the talkative perp shrugs. “Maybe. But I’m not a big believer in psychology or dwelling on the past. I focus on the future.”

This standard dodge may mark the limit of a criminal’s ability for selfexamination. The most relevant downside of the impostor syndrome— a shifting code of circumstantial ethics necessary to get along with everybody—is beyond most Ponzi perps. It’s too much a part of the charm or charisma that’s often the perp’s strongest personal asset.

Everyone feels some part the impostor syndrome at some point in his or her life. People deal with the feelings of isolation in different ways. Most well-adjusted people realize that the feelings of an impostor’s isolation are a common part of life. Less well-adjusted people are so disturbed by the feelings that they slip down a slope of egocentrism...and even pathology.

This is where the circumstantial ethics exact their price. Dwelling on themselves, these egocentric types can’t get past the idea that they are outsiders—and even frauds—within any social or economic circle. From this place, committing an actual fraud is easier than most people would think.

In August 1996, a Florida woman who’d bilked almost 200 investors out of nearly $8 million—and then plotted the murder of the federal judge who put her out of business—was sentenced to more than 24 years in prison. Jan Weeks-Katona, founder of Premier Benefit Capital Trust, had been convicted in December 1994 of fraud, money laundering and conspiracy to commit murder.
Immediately after her conviction, Weeks-Katona started lobbying for easy treatment. She argued that, if she hadn’t been medicated during her trial, she could have assisted her attorney. “I’m sure the jury would have found me not guilty if I had been able to do so,” she’d later say.

Her sentencing was delayed for more than a year, while she underwent court-ordered psychiatric evaluation and treatment.

In the early 1990s, Weeks-Katona and her son had operated Premier Benefit Capital. Through the company, they sold unregistered securities on the guarantee of a 12 percent return on investments of at least $25,000. Using radio programs and free seminars to attract investors, they quickly amassed millions—mostly from senior citizens.

They spent some of the money buying two gulf-front homes near Tampa, Florida.

But complaints followed as the Ponzi scheme collapsed. The Securities and Exchange Commission sued the company in 1993. U.S. District Judge Steven Merryday promptly ordered a receiver to take over operation of Premier. (The receiver eventually recovered some assets and returned about 40 cents on the dollar to Premier Benefit investors.)

Weeks-Katona, her son and others involved in the company fled to Mexico, where they plotted to kill Merryday and other officials. The group was eventually arrested by Mexican law enforcement officials working with the FBI.

At her sentencing hearing, Weeks-Katona appeared calm and relaxed. But her doctors and her attorney said she still suffered from a combination of mental disorders, which produced “delusions of grandeur and extreme paranoia” that led her to commit her crimes. So, her court-appointed lawyer argued for an unusually light 10-year sentence.

Federal Judge Susan Bucklew agreed that Weeks-Katona was mentally ill but said she had to consider protection of the public. (Bucklew had sentenced Weeks-Katona’s son, Jason Spencer Weeks, to 30 years in prison from the same case.) “She feels no responsibility for any of this,” Bucklew said. And the judge cited other problematic testimony. Weeks-Katona had said that she hadn’t taken medication for her condition in two-and-a-half months. “That’s sort of scary,” Bucklew concluded, as she rejected the pleas for leniency and sent the perp to jail for a long time.

Stealing Becomes More Natural than Earning

Another question that burned investors often ask is: “Why did they commit this crime? They could have worked straight and gotten as much money.”

This is a natural but flawed assumption. Yes, many Ponzi perps hang around the rich and famous...and seem to work close to legitimate business. But, in most cases, it’s their fraud that got them even that close.

With a very loose sense of loyalty or obligation, the Ponzi perp is always susceptible to thieving temptations. That’s why so many are repeat offenders. They don’t feel the constraints that most people do. Ponzi perps are usually loners by preference, inevitably drawn toward the action or situation that leads to their break with people around them.

This impulse away from others may be connected with the fact that Ponzi schemes have a certain element of class envy to them. Repeatedly, the perp is someone with notably less education or a weaker financial background than the people with whom he or she lives and works.

In this sense, the scheme may be a slightly-thought-out insult to the relatively rich and mighty.

This is the biggest refutation of the hack screenwriters, magazine journalists and commentators who argue that Ponzi perps are Nieztschean supermen. A Ponzi scheme is the tool of a relatively weak criminal. It’s indirect, takes a while to collapse and is non-violent. And—in the ultimate affront to Nietzsche’s machismo—many Ponzi perps offer whining rationalizations for their crimes, when they come to light.

The weakness and feeling of isolation are two reasons that so many Ponzi perps are comfortable going on the lam when their schemes collapse. The huge 1980s Ponzi scheme Lake States Investment Corp. illustrates the full range of a perp’s loneliness, fear and desperation. Beginning in 1984, Lake States founder Thomas Collins began soliciting customers to invest money into a pool which would be used to trade commodity futures.

One problem: Collins was not registered with the CFTC or any other securities regulator and—consequently—could not legally solicit, accept or pool customer funds. He also couldn’t trade funds on the commodities market. And Lake States never did any legitimate business as a futures commodity merchant—nor did it operate as a legitimate trading pool. Nevertheless, Collins attracted money like a pro.

The scheme went something like this: Lake States maintained an office in Rolling Meadows, Illinois. Inside the office, most of the commodity pool sellers and other employees could watch electronic commodities tickers and call investors. Collins convinced investors to put their money in his commodity pools by showing them the substantial returns early investors were making—without any reported losses. He showed them account statements that seemed to confirm the promises. Existing investors reported no difficulty in withdrawing money from their pool accounts.

To seal the deal, Lake States salespeople would offer investors “Promissory Notes.” They said the notes were a “legitimate way to structure investments to save on commissions.”

Most Lake States investors came into the situation inclined to believe the sales pitch. They were often steered there by friends and relatives. “Investors would get great reports every month and would tell their friends,” said Art Aufmann, a lawyer who represented about 250 investors in a federal lawsuit against Lake States employees. “People would say, ‘Geez, I’m nuts if I don’t get into this.’”

Lake States operated as an individual investor, trading commodities in several accounts at Geldermann Inc., a legitimate trading company. Geldermann received commissions on every trade Collins conducted, and thus had an incentive to assist the Lake States fraud.

Geldermann provided Collins with a desk and a phone at the Geldermann booth on the floor of the MidAmerica Commodity Exchange. Geldermann also permitted Collins to write orders on its forms—a task which only its employees should have been allowed to perform. The effect was convincing. It was close enough to legitimacy that hundreds of investors—many of them sophisticated people—believed that Collins was a mover and shaker in his field.

In August 1988, Geldermann’s parent company, ConAgra, hired James Fuller as an audit supervisor. Fuller was aware that Collins had skirted various rules of the CFTC and other agencies. He investigated the Lake States accounts and discovered that Geldermann was allowing Collins to transfer funds between accounts improperly and to open joint accounts with investors without proper documentation.

When Fuller informed them about these problems, Geldermann’s officers told him to stop investigating Collins.

In October 1989, the CFTC began an investigation of Collins. It subpoenaed Geldermann’s records regarding his trading accounts. The Feds asked Geldermann officials to provide copies of account statements and other records associated with Collins and Lake States.

The records showed large deposits into and withdrawals from Lake States accounts. For example, an account held solely in Collins’ name showed more than $3,148,000 in deposits and $3,574,000 in withdrawals during the period from January to September of 1989. This wasn’t, by itself, illegal. But the big volume of big transactions suggested the growth pattern of a Ponzi scheme.

Collins dealt with the CFTC investigations surprisingly well. Most Ponzi perps fold their operations or start making incriminating mistakes as soon as they know the Feds are watching. Lake States kept its interest payments going—and continued recruiting new investors— for more than four years. Collins made legitimate investments often enough to extend his scheme’s life expectancy. “He had quite a few hits,” recalls one investor. “It’s really too bad he was so desperate that he had to steal. If he’d played it straight, he might have really accomplished something.”

But Collins was a thief from the beginning. There was no chance that he could have played it straight. Whatever investment success he had was a happy accident that just borrowed more time.

Lake States reached its breaking point in late 1993. The ill-timed combination of several bad investments and the steady scrutiny of the CFTC put the company in a cash crunch. New investors were getting hard to find.
In early 1994, Lake States investors were complaining that the company wasn’t sending out interest checks. Worse still, it was being evasive about withdrawals of
any
kind. Some investors formed a group that filed a series of involuntary bankruptcy petitions against Collins and Lake States.

In June, Collins had his chauffeur drive him to a business meeting in suburban Chicago. He went into the meeting...and didn’t come out. A few investors wondered whether he’d been kidnapped or killed. But most guessed—rightly—that he’d simply fled.

For most of Collins’ investors, his disappearance meant the loss of a small part of their net worth. But a handful of big investors were wiped out. About a week after Collins was declared missing, a Washington D.C. man who’d invested several million dollars of family money in Lake States hanged himself.

Because it had lasted so long, Lake States had grown to an epic size. In the 10 years between 1984 and 1993, Collins had taken in more than $100 million from almost 500 investors. He returned about $70 million to investors in the form of bogus profits. He lost about $10 million making commodities investments. The rest went to Lake States overhead—and Collins’ pockets.

After his disappearance, Collins took his mistress—Kathleen Chambers—to Costa Rica for several months. Collins had met Chambers when she was waiting tables a restaurant outside of Chicago that he liked. The couple rented an ocean-view villa while the collapse of Lake States played out back in the States.

Collins had been planning his escape for months. He had detailed aliases for Chambers and himself. By late 1994, they’d moved to La Jolla, California—a posh suburb north of San Diego. Collins had become Bill O’Mara, a stockbroker from the Midwest who’d gotten rich during the 1980s and then developed a heart condition. On the advice of his doctor, he’d cashed out and moved to the west coast with his girlfriend, Meg.

The couple rented a luxury condo and spent most of their time together. Their most notable outside interest was going to San Diego Padres baseball games. Collins, sporting a graying ponytail, blended in easily with the wealthy refugees from cold climates who live in La Jolla.
The ruse lasted more than two years. But, by the summer of 1996, Collins and Chambers were broke (though she didn’t know it). Most of the people involved in the case thought that Collins had disappeared with about $10 million. In fact, he may have only had a few hundred thousand.