You Can't Cheat an Honest Man (17 page)

Law enforcement officials, who don’t usually feel much sympathy for Ponzi investors, often turn unexpectedly sociological when they are asked about the high level of misplaced trust. “It’s the age we live in,” says an East Coast assistant D.A. “Even smart people have no idea who to trust.”

Essentially, the theory holds that information overload has made people confused and vulnerable. Telephones, television, computers and the Internet have shattered the traditional sense of social proportion. People don’t trust their neighbors but believe they have a personal relationship with Oprah Winfrey or Hillary Clinton. This is an encouraging environment for Ponzi perps.

G.W. McDonald, the enforcement head of the California Department of Corporations, deals with the fallout of Ponzi schemes almost daily. He looks at Ponzi investors as the interesting phenomenon— and the perps as something more like a natural response.

McDonald says that most Ponzi perps dismiss their investors harshly— as nothing more than willing suckers, destined to lose their money. This is a rationalization for crime as old as mankind. The fact that so many people are willing to believe these crooks is the news. McDonald describes the basic telephone scammer:

They’re courteous, sound concerned about your well-being, listen to your complaints, flatter, try to be the surrogate son or friend you seldom see, tout their financial successes, offer some financial advice, tell you they can get a better return on your money. [Then] they take every penny.

Another West Coast law enforcement specialist makes a more mediasavvy observation:

The perfect Ponzi investor is a person who buys a lot of stuff from QVC. [QVC] isn’t a con, but it requires an abstract level of trust that most people didn’t have twenty years ago. That person is conditioned to invest money in [a] scheme with a person he doesn’t know. He’ll put bars on his windows and lock all the doors in his house, but he’ll let [a Ponzi perp] waltz right in, over the phone.

The same lack of perspective applies even more dramatically to distinguishing among people that we actually meet. Ponzi perps thrive on the inability of some investors to tell the difference between a friend and an acquaintance. This is particularly true in business circles, where the networking mentality of the late 1980s and early 1990s often confuses business cards in a Rolodex with time-tested relationships.

Strivers of all sorts—not just Ponzi perps—are attracted to real estate and insurance. In most states, you don’t need much education to apply for a realtor’s or insurance agent’s license; and getting one puts you on an even professional footing with some of the smartest people in business. This is part of the reason that so many Ponzi perps use broker or agent licenses as fulcrums for their frauds. A license often suggests more legitimacy that it actually means.

How Misdirected Trust Works

In the classic nineteenth century crime novel
Lombard Street
, Walter Bagehot summed up the role that misplaced trust plays in many thieving schemes. The novelist described it this way:

...people are most credulous when they are most happy. And when much money has just been made...when some people are really making it, when most people think they are making it...there is a happy opportunity for ingenious mendacity.

Michael Rosen knew something about ingenious mendacity. He got started in business in the late 1970s as a real estate agent in the San Francisco Bay area. He didn’t have much formal education, but few people who met him would have guessed that. Rosen could talk with authority—and a certain level of self-educated accuracy—on a wide range of topics.

In a relatively short period of time, Rosen was able to schmooze his way into the Bay Area’s local business and political scenes. He was particularly good at collecting contributions for Republican candidates and politicians. “The guy had radar,” said one acquaintance who said he’d always been intrigued by Rosen—but never trusted him. “He’d sense who’s the most important person in the room and he’d be over working the guy.”

Rosen lived and worked in Rohnert Park, a relatively conservative enclave of San Francisco County. He eventually was named to the Rohnert Park Chamber of Commerce—which gave him access to politicians like Governor Pete Wilson and various state legislators.

Rosen’s problem was simple. While he seemed to be doing well financially, he was usually spending more time chatting up rich people and politicos than actually selling real estate. So, sometime in the mid1980s, he started building an elaborate Ponzi scheme.

His first step was selling bogus second mortgages. (As we’ve already seen, this is a disturbingly easy thing to do.) Rosen would approach one acquaintance and explain that a mutual friend—usually someone with a higher public profile—was having money problems and needed a quick, discrete loan. The loan would take the form of a second mortgage. Rosen would say that, in order to make things go smoothly and quietly, the borrower would be willing to pay a bonus and a high interest rate.

If the first acquaintance was willing to make the loan, Rosen would draw up paperwork. He would even, on occasion, show the potential lender things like personal financial statements. The whole deal would usually take less than a week to complete. And it would be completely fraudulent. The first acquaintance would never know that any loan had been made. The personal financial information was almost all made up. The lender was simply adding money to Rosen’s Ponzi scheme.

Rosen did this dozens of times. He exploited the trust of friends, partners and political allies. If any of the lenders had contacted any of the supposed borrowers, the scheme would have collapsed. But people never made the connections. They trusted Rosen.

The bogus second mortgage business in Rohnert Park could only support a limited amount of fraudulent activity. As the 1980s turned into the 1990s, Rosen needed more room to keep his scheme growing. After listening and watching other real estate bigshots operate, he moved on to selling limited partnerships in real estate development projects—a relatively unregulated part of the market. Although the deals were different and the dollars larger, Rosen’s modus operandi was the same: He’d sell many times the value of the deals.

His centerpiece was a project called Sky Hawk. It was supposed to be a large development like Blackhawk, a successful subdivision of $1 million homes about an hour north of San Francisco. “I went out with Michael and his brother Chuck,” said one investor. “We physically looked at this property. We were walking around trails.”

But Rosen didn’t own the land. All he had—and even this would become a matter of dispute—was an option to buy the land. Most importantly, development agencies in the area never received plans for building Sky Hawk.

Rosen sold limited partnerships, anyway. And he even paid some distributions. He claimed these were from the early sale of Sky Hawk lots; in fact, they were from later investments. He planned his scheme carefully...and grew it slowly. But the most careful management only allowed Rosen to borrow more time. The inevitable outcome was the same.

There were some hints of trouble in early 1996. Several of Rosen’s interest checks bounced. He blamed the problems on a jam-up with his bank and made good on the payments.

His scheme finally collapsed at the end of August 1996. Despite the walking tours of the area, Sky Hawk wasn’t drawing enough new money to support the list of people who expected interest checks every month. Between 60 and 100 people had invested $6 million with Rosen. That meant monthly interest expenses of almost $100,000. And Rosen hadn’t made investments which could generate that kind of cash flow.

He filed for bankruptcy protection in September 1996. His company listed almost 200 creditors—and a negative net worth of several million dollars. Because Rosen had used the banking system to perpetuate his scheme, the FBI was called in by local law enforcement authorities to investigate. Rosen cooperated with the Feds from the beginning, providing what paperwork he had and explaining the details of his con. As a result, a month after his scheme collapsed, he still hadn’t been arrested.

“He should be in custody,” said William Duplissea, a former state assemblyman who lost several thousand dollars with Rosen. “There are a lot of records and things like that he could do away with.”

Duplissea had first met Rosen at a state Republican convention in the late 1980s. The two men turned out to have similar backgrounds, growing up in families that owned dry cleaning businesses in northern California. Soon they were attending baseball games at Candlestick Park, vacationing together in the Napa Valley, socializing with fellow Republicans. Rosen eventually invited Duplissea to join his real estate ventures. “I’d been in and out of them,” he said. “They’d mature and I’d be paid, and we’d go into another one.”

Another investor said, “[Rosen]’s smart. Since he declared bankruptcy voluntarily, he could argue he’d surrendered. Since he cooperated with the FBI all along, he could say he was making amends. He can’t say his investments were legitimate, but I won’t be surprised if he doesn’t spend too much time in jail.”

Building Confidence...and then Exploiting It

A question—which may be impossible to answer—shows how trust shapes criminal schemes. Does the Ponzi perp create trust in order to exploit it...or does the perp pervert genuine trust to disingenuous ends? This isn’t just a philosophical abstraction. Courts consider the same issues. One federal appeals court dealing with the fallout of a collapsed Ponzi scheme noted:

Often there is a component of misplaced trust inherent in the concept of fraud. One must hold a position of trust before it can be abused, however. Fraudulently inducing trust in an investor is not the same as abusing a bona fide relationship of trust with that investor.

The most effective Ponzi perps—the ones who can keep their schemes going for the longest time—are usually people who have built a track record of trust with the people from whom they’re stealing. This level of trust also gives the Ponzi perp the option of skimming a little money at a time from the scheme, rather than stealing a big piece right away.

Saul Foos was a Chicago-based talent agent who specialized in working with radio disk jockeys and local TV newscasters. Like most agents, he had to deal with fragile egos, temper tantrums and complicated personal lives. He also dealt with his share of dirty laundry and hardnosed negotiating. For almost 30 years, he maintained the appearance of calm resolve. Sitting by the swimming pool at his weekend home in Michigan, Foos would tell friends that his strength came from the fact that he had no debts. “I can sleep like a baby because I don’t owe anything to anybody.”

He was conspicuously generous. “You could never pick up a bill within a 100-yard radius of him,” one longtime friend said.

Foos had come from a humble background in New York. He’d moved to Chicago in the early 1960s to go to law school at De Paul University. As a young lawyer, he’d done some high-profile personal injury work; but, by the early 1970s, he’d moved into the entertainment market. The move suited Foos well. “People sometimes forget that [he] spent years building a career as an agent,” says one former client. “He was good at it. And his reputation was that he was fiercely loyal. He wouldn’t screw you like many people in the business will.” Or so it seemed.

Beginning in the mid 1980s, Foos began to take a more active role in investing his clients’ money. Rather than simply placing it with professional money managers, he told his clients he was arranging commodities investments, purchases of radio stations, renovation projects and purchases of tax-delinquent real estate.

Some investors said Foos told them he owned a seat on the Chicago Mercantile Exchange. (He didn’t.) These investors received periodic letters on Foos’ stationery stating the amounts of capital invested and profits earned. Some claimed that he “guaranteed” them against any loses.

He told other investors that their partner in a series of radio station deals was former Texas Governor Mark White, whose political connections allowed them to buy stations that had received regulatory approval to move their broadcast towers closer to major cities and resell the stations for a quick profit. (White later said that he and Foos had “talked of doing deals” but never made investments together.)

All of the scenarios—the commodities and the radio stations—were bogus. Foos simply paid older clients with newer clients’ money. “He was able to entice these investors because of who they were,” namely clients, said one of the federal lawyers who’d later prosecute Foos. “Because they trusted him, they were a little slow to ask questions.”

While there was some question of exactly when Foos began his Ponzi scheme, there was little doubt that it was in full form by 1987. He grew the operation slowly, skimming off just enough to supplement his legitimate income. Because he was cautious, Foos kept his scheme going for at least six years—by any standard, a long time for a Ponzi scheme.

The trouble started in the fall of 1993. By this point, Foos had already made over $13 million in bogus interest payments and had more than $7 million circulating through his scheme. It had grown big enough that he was having a hard time fending off questions. A handful of his clients had put enough money into Foos’ deals that his letterhead reports weren’t telling them everything they wanted to know. They asked for specific information about the investments. Foos offered only evasive answers.
Two or three of the clients asked for their money back. Foos continued to behave suspiciously, taking several weeks to cut the checks. Which promptly bounced.

By early November, the collapse had begun. First a few—and, within days, dozens—of Foos’ clients took their complaints to federal prosecutors. Foos turned his assets over to a bankruptcy specialist on the day before Thanksgiving. A week later, he was forced into bankruptcy court when four investors filed an involuntary bankruptcy petition.

When the scheme collapsed, more than 100 investors lost $7.2 million. In a telling twist, the ones who pressed Foos the hardest weren’t his traditional entertainment people; they were a group wealthy professionals who’d been attracted late in the game by promises of 100 percent annual returns.