You Can't Cheat an Honest Man (15 page)

We’ve considered the most common premises for Ponzi schemes— tax shelters, travel deals, loan networks and commodities investments. But, in a growing number of cases, the premise of the scheme doesn’t matter. These schemes are sold by something other than a Great Idea.

Instead, they rely on another of Carlo Ponzi’s tools: Exploiting the trust of members of tight-knit communities. This often means people who share a racial group or ethnic origin—but it can also apply to people in the same profession, church or extended family.

Law enforcement officials call these “affinity scams.” (And even the law enforcement community isn’t immune...the 1990s saw an explosion of affinity scams directed at police officers.)

Recent immigrants—particularly recent illegal immigrants—are particularly vulnerable to affinity scams because they’re often unfamiliar with the operations of American banks and mainstream investment services. In some cases, the countries from which they’ve come have an unstable official banking structure—so the difference between official and underground investments isn’t very great.

In the United States, this orientation has created informal savings institutions like Korean
kye
and Caribbean
susu
. These can be dynamic lenders—examples of free-market capitalism at its best. But they can also attract crooks who thrive in the shady regions of looselyregulated money.

Another reason that affinity scams focus on immigrants: Securities regulators don’t track foreign-language newspapers, radio or television as closely as they do English-language outlets. As a result, advertisements recruiting investors can make outrageous promises with less accountability.

Beginning in the late 1980s, the North American Securities Administrators Association began issuing a series of warnings about affinity scams, especially those directed at immigrant communities. And with good cause.

Immigrants as an Affinity Target

In five years, between 1987 and 1992, New York-based Oxford Capital Securities Inc. scammed scores of investors out of more than $10 million in a Ponzi scheme that was as crude as it was effective. Once again, the reason it worked was not its sophistication—but the strength of its affinity appeal.

Oxford Capital was started by Samuel Forson, a native of Ghana who’d grown up in Brooklyn idolizing business tycoons like J.P. Morgan. He completed his MBA at St. John’s University in the early 1980s and eventually worked his way up to sales manager at First Investors Corp., a mutual fund marketing company in New York. But selling IRAs wasn’t aggressive enough for Forson.

Oxford Capital focused its sales effort on recent immigrants to the United States, usually from the West Indies, living in the New York area. The company had been founded and was run by immigrants and people of Caribbean heritage. They stressed the importance of community support when convincing potential investors to hand over money.

Forson used company money to support a lavish lifestyle. Like so many Ponzi perps, he seemed most comfortable spending money. Among his purchases: a $730,000 apartment on Riverside Drive in Manhathis purchases: a $730,000 apartment on Riverside Drive in Manhat a-month Jaguar sedan (this was a nontraditional move for a perp— away from the usual Mercedes Benz) and a rack of $1,500 suits from Barneys.

When Forson married Yvonne Thomas, who’d started out as a clerical employee at Oxford Capital, their reception was held at the Plaza Hotel near Central Park. The newlyweds arrived at the hotel in a horse-drawn carriage.
The scheme began to unravel after one experienced investor questioned the statements she’d received from two mutual funds supposedly purchased through Oxford Capital. When the statements didn’t make sense to her, she contacted the funds directly and learned her accounts, which should have contained more than $100,000, had been cashed out two years earlier—in 1989.

The funds then contacted securities regulators, triggering an investigation that began in September, 1991.

The collapse of Oxford Capital was ugly. Many of the people who’d invested money were far from rich swells who could afford the loss. A New York subway conductor who lived in a working-class Queens neighborhood ended up losing almost $47,000. (Worse still, two friends that she convinced to invest with Oxford Capital lost another $35,000.) A secretary and recent immigrant from Jamaica, lost $46,500 which she had been planning to use to complete her college degree.

Forson’s lawyers argued that Oxford Capital intended to make good on its debts—and could have if the company had had more time to work out its bad investments. One of the lawyers pointedly blamed regulatory agencies and prosecutors for frightening investors into demanding their money back. “It was a run on the bank, in simplest terms,” he said.

The Manhattan D.A. took a harder line. Forson and several of Oxford’s top executives faced criminal charges of larceny and running a corrupt enterprise. Each faced up to 25 years in prison. “Basically, it’s a Ponzi scheme,” said one of the assistant district attorneys prosecuting the case. “It didn’t start that way, but it rapidly became one.”

In the prosecutors’ scenario, Forson ran Oxford Capital as a legitimate but unsuccessful money management firm for about two years. At that point—sometime in 1989—he concluded that he could attract more money if he padded his returns with capital that was supposed to be invested in safe vehicles like CD’s and T-bills and in minority-owned or Caribbean-based companies.

What followed was a series of disastrous investments, which were obscured by the Ponzi payments.
Oxford Capital invested in a modeling agency, a fashion design firm and a sports talent agency. They all lost money. Perhaps the most egregiously bad deal was Forson’s attempt to buy a Nigerian freighter carrying fertilizer which had been stranded in the waters off of South America because of a complicated international trade dispute.

Forson needed $800,000 of Oxford Capital money to spring the freighter full of manure. Part of the money would go to honest bribes back in Nigeria—the rest would go to taking title on the contents of the boat and greasing wheels in the States. Forson told his employees that this was the deal they’d been waiting for—the deal that was going to make them all rich. When his employees asked what they should tell investors, who believed they were investing in conservative things like certificates of deposit and mutual funds, Forson “said to tell them anything.”

In a common tactic, Forson’s defense lawyers argued that Oxford Capital investors were blinded by their own greed—choosing not to notice that the outfit was offering a no-risk 100 percent annual return on invested money. This, they argued, was a deal that anyone could see was too good to be true. One investor responded a little too readily, voicing the fears that drive so many working class people into the arms of Ponzi perps. She admitted that Oxford Capital investors were greedy, “if being greedy means that poor people can do the same thing that people on Wall Street do.”

The defense attorneys also tried another standard argument. They claimed that the real villains of Oxford Capital were out-of-control salespeople who lied to investors in order to boost their commissions.

But the Oxford Capital sales force was given specific directions in its efforts. Salespeople were told to target their own ethnic groups, as well as relatives and friends. “That’s another thing that roped me in,” said one burned investor. “I trusted [Forson] because he was West Indian.”

Misplaced Trust in Ethnic Loyalty

Immigrants are vulnerable to affinity scams because culture shock and language barriers can make their new lives overwhelming. For the same reasons immigrants buy native-language newspapers and rent homeland videos, they feel compelled to put money with former countrymen.
“It’s a familiar tongue...it feels solid,” says one investor who was burned in an affinity scam directed at Eastern European immigrants to the United States during the late 1980s. “But it’s not. If anything, you need to be more careful about fellow [immigrants] who want to invest your money.”

In the summer and fall of 1991, Taiwanese businessman David Tsao advertised in San Francisco’s Chinese-language newspapers for “employees” in each of his three California companies: Pacific Percentage Inc., East Ocean International and Green Tree Investments.

Tsao, who’d come to the United States in 1989, offered salaries and trading commissions totaling $1,600 per month, but only after applicants made initial investments of about $16,000 with the companies.

The pitch was unlikely—but Tsao was charismatic. With a big Mercedes and three houses in the Bay Area, he impressed employees and potential investors as a man of means. He was in his early forties (which seems to be about the median age of Ponzi perps). His businesses supposedly included a travel agency, a real estate firm and several other ventures. And he made efforts to fit the classic—and some might say stereotypical—profile of a rich Asian entrepreneur.

While he boasted about his business ties to Taiwan, Hong Kong and even mainland China, Tsao was vague about specifics. He talked about his passion for high-stakes gambling, at one point telling potential employee/investors that he’d recently lost $3 million at the tables in Las Vegas.

He also claimed that he was an accomplished commodities trader. This was the reason he directed so much of his effort toward speculation in the commodities markets—particularly trades in Standard & Poor’s 500 stock index futures contracts. (If nothing else, this image was consistent with a man who’d show millions of dollars of action in Las Vegas casinos.)

Tsao told employee/investors that his dream was to buy a vast tract of land in China, where he would build new homes for his friends. This was the sharp point of his affinity hook—an appeal to the ethnic Chinese impulse toward the homeland. It worked well. Almost 300 employee/investors, most of them recent immigrants, signed up in San Francisco. Another 120 or so were recruited in Tsao’s southern California offices.
The homeland scenario also made Tsao’s employee-investors feel better about calling friends and relatives for investments.

For several months, Tsao kept his promises to pay lucrative commissions. But the money he paid out was coming directly from money the friends and relatives were investing. By early 1992, Tsao was already having trouble paying commissions. His Ponzi scheme was beginning to collapse—after less than a year.

In early March, Tsao disappeared. His employee-investors were left with the harsh realization that Tsao’s companies were nearly broke...and his personal assets were encumbered with loans and liens. They called the authorities.

As it turned out, the San Francisco District Attorney’s Office, the Commodity Futures Trading Commission and the FBI had already been looking into Tsao and his companies. They’d been tipped off by a few employee-investors months before.

With Tsao missing and almost $25 million hanging in the balance, the Feds moved more quickly. The CFTC got a court order freezing Tsao’s assets and those of his three companies. One investigator who examined Tsao’s trading accounts said, “I’ll admit, [he] had one good day.... But his accounts show that at each month’s end, he was clearly losing money.”

The employee-investors, some 400 in all, decided to take their case public. They appointed new leaders, who held a press conference at which they pleaded with Tsao to come out of hiding and explain the disappearance of the money. They said they still had confidence in his ability to turn their losses into profits. “Everything will clear up if [Tsao] shows up in public,” said one employee-investor, speaking through an interpreter. “It’s not like this is a robbery. We gave our money to David to invest.”

The spokesman said that Tsao—who didn’t speak English—didn’t know much about U.S. law. “He is afraid of rumors that people will kill him.”

As was the case when Carlo Ponzi was arrested, many of Tsao’s investors insisted that he would come out of hiding and make their investments whole. “He said that if he lost any money he will play the market and return the money to us,” an employee-investor told a local newspaper. It was the same old reaction. If the Feds would just leave their guy alone, the investors believed they’d get their money back.

The Psychology Means More than the Details

Often, the details of the scheme underlying an affinity rip-off are suprisingly crude. The perps get away with this because their pitches rely on psychology far more than finance.

The Better Life Club—which targeted middle-class black families in the Washington, D.C. area—serves a good illustration of an affinity scam’s psychological draw. As is the case in many American cities, a large number of black families in the nation’s capital choose to live and socialize in essentially all-black communities.

Robert Taylor set up a system to exploit the separateness. Taylor— who is black—traveled the African-American social, business and religious circuits in and around Washington. Like Carlo Ponzi before him, Taylor claimed to have developed a method that would allow average working people to enjoy the profits usually hoarded by fatcat capitalists.

Following the cynical steps of Washington’s scandal-plagued mayor, Marion Barry, Taylor filled his talks with insinuations about racism...in his case, in the financial world. He played on long-held fears in the black community that minority entrepreneurs are kept down by establishment banks and commercial lenders. And he twisted legitimate calls for commercial self-reliance into support for his scheme.

Taylor’s Great Idea was pretty simple—and basically, pretty absurd. He claimed to be building an advertising and 900 number telephone marketing company. He’d set up over-the-telephone personal and financial advice lines that would generate big money. He claimed that he could double an investor’s money in 90 days. He made the promise well enough that few people questioned its validity.

“He said it was all a numbers game,” recalls one person who heard several Taylor pitches. “As much money as he could raise, he could put into phone lines and advertising. Of course, the market would eventually top out at some point. But he was just scratching the tip of the iceberg.”
An iceberg is an apt image for the scam. In a little more than a year, Taylor attracted about 6,000 investors who handed him more than $50 million. That’s an average of more than $8,300 each. At its peak, the Better Life Club was taking in something like $2 million a week. And Taylor was traveling to cities all across North America, conducting what he called “wealth-building seminars.”