You Can't Cheat an Honest Man (18 page)

In December, Foos had started cooperating with federal prosecutors. But, at a January 1994 creditors meeting, his attorney read a letter from a therapist saying Foos suffered from “clinical depression” and couldn’t attend. Among the disbelieving moans from the angry crowd was a clearly audible protest, “Save us the bullshit.”

In April 1994, the Illinois Attorney Registration and Disciplinary Commission began disbarment proceedings against Foos. In May, after several delays, Foos finally faced his former clients—as required under federal bankruptcy law. Although he apologized for his actions, he often turned testy under questioning. He talked about living under the “daily strain of perpetrating this fraud.” After 1988, “I didn’t expect to get out of it.... I lived in fear of it being exposed for years.”

In January 1995, the Securities and Exchange Commission sued Foos—to keep him out of the investment business for the rest of his life. The SEC asked that he be permanently barred from future transactions, repay his “ill-gotten gains” with interest and be assessed unspecified civil penalties.

In February, Foos accepted a plea agreement with the government in which he admitted that he “retained and used for his own purposes” between $6.8 million and $7.2 million. Four months later, he was sentenced to five-and-a-half years in prison. Foos opened his presentencing remarks by saying, “When a man loses his honor, he’s a dead man. That’s me, I’m a dead man. I chose the coward’s way out.”

Judge Ruben Castillo also ordered Foos to pay $500,000 in restitution and perform 300 hours of community service. The judge placed him on five years of supervised release after he completed his prison term. Castillo went on to say, “You betrayed the [legal] profession, you betrayed your clients and their trust, you did something incredible in betraying your family and ultimately you betrayed yourself.”

Using a Legitimate Business to Build Trust

Some Ponzi perps will do something which only makes sense to an especially avaricious criminal: They’ll set up legitimate businesses to camouflage their schemes. When the schemes collapse, investigators and burned investors are left wondering why someone who could build a real business resorts to theft.

The answer usually has something to do with bad impulses overwhelming good skills. It’s a psychological variation of Gresham’s Law. In this context, the urge to steal money devalues legitimate efforts—which the perp considers only a means to the thieving end.

Or, as one New York prosecutor says, “It’s really amazing how much work some of these [Ponzi perps] will put into their schemes. They’re smart and make a good impression. You can’t help wondering what they could do if they put the effort into honest work.”

Ponzi perps know they have to build at least a pretense of trust with their investors. Most tell stories or use tricks that, in retrospect, seem plainly dubious. In these cases, the best practice for avoiding a loss is to keep your eye on the traditional tells of a Ponzi scheme—exceptionally high returns combined with anything resembling a
guarantee
or
no risk offer
.

Few perps go to the length that Michael Rosen or Saul Foos did to exploit investors’ trust. But, of course, the ones who do are the most dangerous criminals in this field.

A perp like Foos is probably the hardest to detect. He builds trust legitimately for a long time and then decides, long after a relationship has been established, to exploit it. The same red flags apply in this scenario that work in all Ponzi schemes. But they are harder to see. There’s no doubt Foos’ clients already trusted the man and were—as the one lawyer pointed out—“slow to suspect.”

To discourage people from following the tracks of these perps, investors have to rely on aggressive enforcement by prosecutors and judges. If fear of the lowest rung in Hell won’t stop another Saul Foos, maybe fear of the darkest cell in San Quentin or Marion will.

Case Study: Joseph Taylor

People trusted Joseph Taylor. To everyone who knew him, the Knoxville, Tennessee, financial planner embodied integrity and perseverance. He was a dedicated husband, father and friend. In business, he quoted inspirational speakers like Zig Ziglar. If he gave you his word, he kept it. “He always espoused doing the right thing,” said one investor. “In his dealings with his kids he was like that. He required them to be respectful and the old-culture thing of ‘Yes, sir,’ and ‘No, sir.’”

Taylor was a Tennessee native. Born in 1949, he grew up on a farm in rural Jefferson County. In the late 1960s, he attended the University of Tennessee; he graduated in 1971 with a degree in agricultural science. But Taylor was too ambitious to spend his life plowing fields. He went into insurance, selling policies, investments and financial planning services.

During the 1970s, Taylor built a business based in the Knoxville area, but growing out over most of eastern Tennessee. He concentrated on small towns and suburban communities. Methodically working through the ranks of professionals and successful business people, he always based his deals on a foundation of trust.

“He would sit down with [investors] and talk about his family. They loved him,” says one person familiar with Taylor’s operation. “He was a likable guy. But—and I don’t want to be unkind—he was not a handsome guy.”

The homeliness only seemed to add to Taylor’s credibility. Besides securities, he was authorized to sell insurance for 25 companies. He was a top performer in a down-home state. And he was clean. Tennessee’s Department of Commerce and Insurance recorded no complaints against him.

By the time the roaring 1980s were under way, Taylor was selling mutual funds, life insurance policies and even real estate limited partnerships. His client list continued to swell in size and significance.

Taylor began attracting a wide circle of friends and acquaintances. He was making a six-figure income. He and his wife started to socialize with Knoxville’s elite. “You couldn’t have a better bunch [than this group] to vouch for you if you were selling something,” said one investor.

Flush with success, Taylor began to describe his work in more “visionary” terms. He talked in New Age jargon about using financial planning as a means to achieve less specific life goals.

Then things took a darker turn. Taylor’s clients had typically received official paperwork confirming their accounts through a wholesale brokerage. In the early 1990s, Taylor started pitching his own securities deals, like private debt offerings and limited partnerships. These deals didn’t produce a detailed paper trail. This change should have tipped investors off that something was wrong. But the returns were so high— as much as 10 percent in few weeks—that they went along with his slightly eccentric ways.

“I think he was a charming gentleman, obviously,” said one local attorney who knew Taylor. “I think he had to be. He came across to people very honestly. Even if they thought that it was irregular that they could not get paperwork, that they all attributed it more to Joe’s disorganization than to his dishonesty.”

Besides, rumors swirled about Taylor’s platinum connections. People in Knoxville talked about his contacts in the J. Peter Grace family, his friends at the state capitol who’d tip him off to hot muni bond deals and his ability to extract prime real estate at rock-bottom prices from probate and divorce court. “I used to say, ‘Joe, you’re one of the most well-connected people I’ve ever met,’” one investor marveled.

In fact, Taylor had started operating a Ponzi scheme with investors’ money some time in the late 1980s or early 1990s. By most reckoning, Taylor had stolen a six-figure sum from investors’ accounts in late 1992 or early 1993 and started the Ponzi scheme to cover his tracks.

Like many Ponzi perps, Taylor had a considerable ability to keep a complex web of detailed lies in his head. In another common move, he controlled what his clients knew about each other’s investments. He’d often tell investors to keep the details of their deals private because he wasn’t making them available to anyone else.

Jim Rogers was the president of Ben Rogers Insurance Agency, Inc. in LaFollette, Tennessee. Rogers met Taylor in the late 1970s and made a series of investments through Taylor & Associates. The investments went conservatively and successfully until the spring of 1994, when Rogers told Taylor that he was interested in some more aggressive investments.

A pattern emerged. Taylor would contact Rogers and ask for a cashier’s check in exchange for several post-dated checks from Taylor & Associates in the amount of the investment plus a hefty return. In a short time—often between seven and 30 days—Rogers could cash the checks.

However, Taylor would usually offer Rogers the chance to roll over his investment in another short-term deal. In these cases, Rogers would cash the interest check but hold on to the principal check. At the end of the next investment cycle, Rogers could make the same choice again.

Rogers thought that he was a limited partner of Taylor & Associates, L.P., because he received investment income tax reports from the limited partnership and was issued individual partnership checks at the time he delivered cashier’s checks to Taylor. He assumed each of his investments, regardless of whether the check was made payable to
Taylor & Associates
or
Joe Taylor
, was being made with Taylor & Associates.

In a little more than a year, Rogers gave Taylor about ten cashier’s checks and cashed about eighteen Taylor checks. All but two of the cashier’s checks went into Taylor’s accounts; the two that didn’t were endorsed over to third parties—other investors anxious to get their money back.
This was the surest sign that Taylor was running a Ponzi scheme. But Rogers never noticed the third-party endorsements.

In September 1995, Rogers gave Taylor a cashier’s check in the amount of $62,000. The money was supposed to be used to buy short-term municipal bonds that would be liquidated in 30 to 60 days. Taylor gave Rogers four checks for $16,759.78, $11,173.18, $22,346.37, and $18,994.41—for a total of $69,273.74.

If all went as planned, Rogers would make a 12 percent profit in less than seven weeks. But he was never able to cash any of the four checks.

Taylor became noticeably erratic in the fall of 1995. He seemed in a constant hurry and—for the first time in his working life—could be tough to reach. He confessed to at least one investor that he was getting psychological counseling for stress. “He probably had psychological problems,” said one person close to Taylor’s operation and who added, “Some people have said he was a manic depressive.”

September and October proved a particularly frantic time for Taylor during which he called on dozens of investors, pitching an array of weird deals. He called one of his richest investors with a big one. Taylor said he had an exclusive option on a Memphis muni bond deal. If the high roller could raise $2 million immediately, he could make about $200,000 profit in about a week.

Taylor’s deals had always worked before, so the high roller agreed. He wired the money the next day. A week later, Taylor said it was going to take a couple of extra days to liquidate the bonds.

Two weeks later, the high roller told Taylor he wanted to cash out his account. Taylor agreed, promising to hand over the money within five days. On the fifth day, Taylor showed up at the high roller’s office and gave him a stack of 18 cashier’s checks totaling $2.5 million. It was a 25 percent return in less than a month.

The high roller noticed that many of the checks bore the names of third-party remitters—other Taylor investors. This seemed suspicious. But the bank had no problems with the checks.
A few days later, Taylor stopped in at the Rose Mortuary in suburban Knoxville and made burial plans for himself and his wife. He picked his casket and named his pall bearers—all investors. As soon as he was finished, he drove his black 1995 Mercedes into the mortuary’s rear lot, parked the car and shot himself in the head.

At his funeral, Taylor was carried by people whose money he’d stolen. A rumor circulated around Knoxville that, right before he killed himself, Taylor had called his wife and asked her to join him at the mortuary. But investigators who checked Taylor’s phone records said this didn’t actually happen.

In the last three months of his life, Taylor had made 174 deposits totaling more than $52.3 million into his limited partnership account; in the same period, he made 322 withdrawals totaling $53.2 million. Once again, frenzied banking marked the end of a Ponzi scheme. “It’s on the same scale as some of the largest [Ponzi schemes] in the country,” said Assistant U.S. Bankruptcy Trustee William Sonnenberg.

Taylor’s investors moved quickly when word of his suicide got out. Within three days, several restraining orders had been issued freezing assets and records related to Taylor & Associates, Joseph C. Taylor L.P. and Taylor’s estate.

Within two weeks, retired FBI Agent William Hendon had been appointed trustee for most of Taylor’s operations.

Hendon didn’t find much at first: $36,814.52 from the limited partnership’s NationsBank account and $25,000 from the settlement of a lawsuit. He said that he expected to exercise his right under federal bankruptcy law to force those who’d received money within 90 days of the bankruptcy filing to give it back.

This proved easier than Hendon expected. In an unusual move, some clients who received money from Taylor before he died volunteered to pay it back. Knoxville was still a small town, in many ways, and trust was important. They didn’t want to be linked to dirty money.

CHAPTER 10
Chapter 10:
Greed

Ponzi perps are moved by greed. In most cases, they’d rather steal money quickly than earn it gradually. (It’s the exceptional perp who has the discipline to move slowly; typically, they are more crude) But they also count on the greed of their investors to make the schemes work.

No exploration of pyramid and Ponzi schemes would be complete without a consideration of what
greed
means in this context—and how it works.

The greed that leads an investor to make a foolish investment in a Ponzi scheme may not be an obvious thing. In an age when 25-yearold computer software designers can become millionaires overnight and even conservative investments like stock mutual funds have given investors returns of 30 percent or more in a year, many people lose perspective on how hard it is to make money.