You Can't Cheat an Honest Man (25 page)

Desperate, and lacking the time or focus to start another Ponzi scheme, Collins tried a bank heist. He took a .22 caliber pistol into a Great Western Bank branch in San Diego and ordered a teller to fill a paper bag with cash. While she was doing this, another employee activated a silent alarm.

With only $840 in his bag, Collins got as far as his car. Then the police arrived. Trapped, he put the barrel of the pistol in his mouth and pulled the trigger.

Case Study: Bill and Marika Runnells
One of the telling questions is why some people who work for years legitimately suddenly snap and start stealing.

Again, they may have always felt like they were only somewhat legit. This insecurity explains why so many Ponzi perps work so hard to impress people. They are—among other things—social climbers, looking for the excitement and recognition of making big money.

In a few cases, the Ponzi perp actually will progress to a level of legitimacy. Anthony Robbins, Amway, Herbalife and a handful of other seemingly mainstream people or outfits come from backgrounds tinged with allegations of Ponzis and pyramids. Perps may hope that they will be one of the lucky handful that can grow fast enough...or move fast enough...that they attain the level of legitimacy. And, after the schemes crash, the investors confuse their fear of being poor with innocence.

Some people thrive on the fear and desperation that fray the nerves of most Ponzi perps. During the mid-1980s, William and Marika Runnells scammed investors and lenders with a sophisticated Ponzi scheme called Landbank Equity Corporation. The Runnellses started Virginia-based Landbank in 1980. The company made second mortgage loans and then sold pools of the mortgages to investors. Typically, the investor would not actually take possession of the promissory notes and collect on them from the borrower; instead, the investor would pay Landbank a servicing fee for processing and servicing collection of the loans. In return, Landbank guaranteed timely “pass-through” of principal and interest.

A high school dropout who’d been buying and selling real estate since he was 18, Bill Runnells had a checkered past—including numerous lawsuits and dodged judgments. He was locally notorious for two things: a shaved head and a weakness for high-stakes gambling.

Starting with not much more than a $50,000 line of credit, he built Landbank into one of the largest second-mortgage companies in the nation, with 33 branches in five states up and down the East Coast.

But even the $50,000 line of credit was a stretch for Runnells. The president of the bank that issued the line admitted, “Runnells had not handled his dealings in the real estate industry in an entirely satisfactory manner.” The only reason the bank did business with Runnells was that Frank Butler, an early partner in Landbank, had a good reputation in local business circles.

Because Virginia did not regulate second-mortgage lenders in the 1980s, Landbank was able to avoid outside audits and charge interest rates averaging 18 percent and fees of up to 40 percent. Its borrowers accepted the steep terms because they were usually bad credit risks who didn’t have many choices. Landbank’s advertising slogan was, “When the bank says no, Mrs. Cash says yes.”

Charging such high rates, Landbank didn’t have much trouble making money. It collected delinquent accounts aggressively. Business was good. So good, in fact, that Landbank was able to secure a seal of approval in 1982 from the Federal National Mortgage Association, a quasi-government agency better know as Fannie Mae.

By meeting the strict requirements of the agency, Landbank gained prestige, and was able to secure insurance on its loans from a California company called Balboa Insurance. The insurance prompted Perpetual American Bank of Washington, D.C., to offer Landbank a $10 million line of credit to make new mortgages. It also allowed Landbank to resell its otherwise risky mortgages to conservative entities like savings and loans, which saw the insurance as a guarantee that any losses would be repaid.

At this point, the scheme had grown large enough that Runnells’s shady personal history wasn’t an issue. But it should have been. Once the big credit line was in place, Landbank started growing its business recklessly. Misrepresentation was routine.

Though it promised investors that its lending and appraisal practices satisfied Fannie Mae standards, Landbank often loaned money on the basis of informal, “drive-by” appraisals. Landbank would inflate the value of collateral property. Its loan processing people would regularly overstate a borrower’s ability to repay. Creditworthiness was—as one court put it—“a welcome but unnecessary trait” in borrowers. Landbank didn’t mind these issues because it made most of its money up front.

This was all more than just aggressive growth. Landbank’s practices violated federal truth-in-lending laws in numerous ways. These violations made its loans vulnerable to legal challenge.

Runnells never mentioned any of this. Even though they’d been running Landbank for only a few years, he and his Hungarian-born wife Marika started living a lavish lifestyle. As he explained to some employees, they were “taking some of our chips off the table.” They bought a big house, a couple of expensive cars and other symbols of wealth.

Landbank was far from a self-sustaining business, though. There were some major flaws in the scam. The riskiness of privately-backed pools of mortgages forced Landbank to offer high interest rates to investors who could choose less risky government-sponsored mortgage securities. And the company’s default rates started creeping up.

“It’s hard work to keep these low-quality loans from defaulting,” says one Virginia banker familiar with Landbank’s story. “When they were small and regional, they spent the time and effort to keep their loans current. After 1982, they grew so fast they couldn’t keep up the effort. By that time, though, I don’t think they cared.”

Landbank made 10,000 mortgages between 1982 and 1985 in Virginia, Maryland, Alabama, South Carolina and Georgia. Within three years, half of its mortgages were in default. Runnells handled the default problem by leaping headlong into a Ponzi scheme. He paid “principal and interest” payments to investors out of fees for new loans, while falsely telling investors and his insurance carrier that default rates were low.

As in all Ponzi schemes, the pyramid could stand only as long as more new money was coming in. As long as it did, Bill Runnells took chips off of the table. Unfortunately, he put a lot of the chips on other tables—in Atlantic City and Las Vegas. And he wasn’t able to take those chips back.

The pyramid scheme began to unravel in early 1985 when Balboa Insurance alerted Landbank investors that it was considering canceling its mortgage insurance because it suspected Landbank of violating state and federal lending laws.

Balboa Insurance also passed along copies of some of its correspondence with Landbank. In one letter, Balboa complained to Landbank management that appraisals were too high, yielding an artificially low loan-to-equity ratio. In another, Balboa detailed the manner in which Landbank’s up-front fees violated the Truth-in-Lending Act (the fees were not included in calculations of annual percentage rates, as the law required). In a third, Landbank urged Balboa to keep its concerns private and not to notify investors.

Landbank responded by informing investors that Balboa Insurance had been replaced as mortgage insurance carrier by an entity called the Insurance Exchange of the Americas (IEA). While Balboa Insurance didn’t have the highest financial solvency ratings, IEA wasn’t rated at all.

At about the same time, Fannie Mae backed away from Landbank. It cited concerns over the mortgage insurance and rising delinquency and foreclosure numbers. This effectively shut down Landbank’s access to new money from investors.

In the fall of 1985, 43.7 percent of Landbank’s loans were 30 or more days delinquent and 29.2 percent were at least 60 days delinquent. Both numbers were exceptionally high. Within six months of Balboa Insurance’s first letters to investors, Landbank declared bankruptcy. More than $200 million in investments were left hanging. Days after taking over, a court-appointed trustee charged that the Runnellses had made off with up to $20 million. They’d been shifting funds through a maze of dummy corporations and made dozens of illegal “insider loans” to purchase land, houses and cars. The bankruptcy proceedings and a wave of civil lawsuits took up most of the next 18 months.

Even as these civil cases proceeded through the courts, Runnells remained desperately flambouyant. He’d taken hundreds of thousands of dollars in cash out of Landbank before it collapsed; and he used this money to support his flashy lifestyle. On one Caribbean gambling trip in January 1986, he lost $40,000 in a few days. In all, he paid bookies and casinos more than $600,000 over a two-year period.

As is often the case, criminal charges took longer to develop than civil charges. But they did finally follow.

Bill Runnells was indicted in March 1988 on 24 counts of tax fraud, bankruptcy fraud, criminal contempt and obstruction of justice. Runnells spoke with his lawyer by phone after the indictment was handed down; the two made arrangements for Runnells to appear at his April 6 arraignment.

He never showed up at the arraignment. Both he and his wife had disappeared. The same grand jury which had indicted Bill Runnells expanded the charges against him and his wife. The second, 74-count indictment charged the couple with wire fraud, bankruptcy fraud, racketeering and obstruction of justice.

The Runnellses eluded authorities for two years. They fled to Southern California where they became hypnotherapists, running clinics to help people lose weight and stop smoking. Runnells called himself Dr. William Austin and operated a company called The Pinnacle Method of America Inc. out of an office in working-class Santa Ana. The couple left California in September 1989, when they learned they were about to be profiled on the television true-crime program
Unsolved Mysteries
. After keeping a low profile for several weeks, they decided to settle down in a suburb of Dallas, Texas.

Runnells answered a classified ad for a job as a hypnotherapist at the Phoenix Centers for Addiction Control in Dallas. He applied for the position under a new alias—Dr. William Allen. He claimed to have a Ph.D. in psychology from...somewhere...in Georgia.

Since a person doesn’t have to have a doctorate—or any other degree—to perform hypnosis in Texas, the managers at Phoenix Centers didn’t check his background. They hired him part-time. “He was a very good hypnotist, one of our best,” said one co-worker. “He was able to hypnotize [customers] and they quit smoking. They were happy and we were happy. He was just a charmer.”

He was charming enough to open his own hypnotherapy clinic a few months later, taking many of the Phoenix Centers’ clients with him. But he wasn’t charming enough to elude the FBI. The Feds tracked him to southern California and—using leads gathered there—eventually tracked Runnells to Dallas.

Runnells answered the door when FBI agents rang the bell at his luxury high-rise apartment in March 1990. He and Marika were arrested.

Prosecutors said the Runnellses “robbed Peter to pay Paul,” creating a pyramid scheme that could not survive. “Landbank was nothing but a pyramid of debt... a complex and elaborate scheme to defraud,” said assistant U.S. attorney Joseph Fisher.

The Runnellses’ son testified that his father instructed him to hide $200,000 in cash taken from the family home after a federal judge had frozen assets of Landbank. “I was to take it to Farmville, [Virginia,] where my great aunts lived, and put it in a family safe,” Steven Runnells testified. He said he found another $200,000 in the safe when he deposited the money.

At first, Bill Runnells claimed he had a drinking problem that clouded his memory of Landbank’s financial details. When that didn’t seem to diminish any of the charges, he tried to raise an insanity defense— claiming that he couldn’t control his actions because he was a compulsive gambler. “He says he has no control over anything,” said his lawyer, Richard Brydges. “He’s taking a position that he didn’t do anything wrong because he was out to lunch.”
The judge hearing the case rejected the insanity claims. So, Bill and Marika Runnells gradually turned against one another.

He said that, during the worst of the fraud, he’d been semi-retired with the rank of president. Instead, Marika had actually run the business. “Mrs. Runnells is a smart woman, she’s a lot smarter than her husband,” Brydges argued.

She said it had been Bill who’d launched Landbank and Bill who’d approved all the shaky loans. She’d worked night and day, without pay, to keep the company afloat. The reason Landbank went bankrupt was “not fraud, but poor business decisions, dumb decisions,” according to David Bouchard, Marika’s attorney.

In two days of testimony, Marika portrayed herself as a competent manager and hard worker who was not able to control the actions of other Landbank officials—including her husband. At one point she broke down, sobbing that his sexual infidelities added to their problems at Landbank. “In early 1983 it was brought to my attention that Bill was seeing someone else and I became very upset,” she said.

Bill did not take the stand.

In November 1990, after a nine-week trial, Bill and Marika Runnells were found guilty of 87 and 59 felonies, respectively—including conspiracy, racketeering, tax fraud and obstruction of justice.

In January 1991, they were each sentenced to more than 30 years in prison and fined $500,000.

“I always think about [Runnells] on the lam, in some God-awful place in southern California trying to get housewives to stop smoking,” says one Landbank investor...with some satisfaction. “After he’d been a big player in the banking world. It’s not romantic. It’s pathetic.”

CHAPTER 14
Chapter 14:
Multi-level Marketing

Multi-level marketing—also called
network marketing
or the shorthand
MLM
—takes an almost evangelistic approach to selling. It’s been around for a long time. But, for most of the last fifty years, it’s been frowned upon as a sleazy way to do business. This reputation is due, in part, to how much MLM resembles a Ponzi scheme.