by Dean Jobb
The swindle that 520 Percent Miller pioneered, Leo Koretz perfected, and Charles Ponzi made famous became the template for countless scams that followed. In today’s world of complex investment vehicles and shareholders obsessed, as always, with maximizing returns, the “Koretz scheme”—to give Leo his due at last—thrives. People are still searching for a financial savior to lead them to the promised land of riches, just as scores of wealthy Chicagoans once looked to a trusted friend to make them even wealthier. Almost eight decades after the Bayano swindle, the Texas financier Allen Stanford was convicted and imprisoned on charges of using his Caribbean-based bank to finance a lavish lifestyle; investors were bilked out of more than $7 billion.
The most reviled swindler of our time, of course, is Bernie Madoff, who ran his gigantic fraud for at least sixteen years and probably longer. When Madoff’s scheme collapsed in 2008, a casualty of that year’s stock market meltdown, an estimated $18 billion in investors’ money vanished. Sentenced to a 150-year prison term as inflated as his promises of easy wealth, he reigns as perpetrator of the most costly and far-reaching stock fraud in history.
Both Leo and Madoff preyed, for the most part, on people who were already rich. “The average person thinks I robbed widows and orphans,” Madoff has complained from his prison cell. “I made wealthy people wealthier.” Leo trotted out a similar rationale when he was exposed, expressing disdain for victims “who had wealth and demanded something for nothing.” Each took money from relatives and close friends and exploited ties to the Jewish community, making them both perpetrators of an “affinity fraud”—a crime in which someone in a close-knit group takes advantage of the friendship and trust of fellow members. Leo and Madoff were obsessed with secrecy and made their victims feel as if they were part of a select group that was set for life. Madoff, his biographer Diana Henriques has noted, “expected his lucky clients to keep quiet about being in his elite club,” and he turned down many others eager to invest, just as Leo did. In terms of the scale of their frauds, staying power, and sheer audacity, Leo Koretz and Bernie Madoff stand apart in the pantheon of pyramid-building swindlers.
Swindlers sell dreams of easy wealth, and that’s a commodity as much in demand today as it was when Leo was inviting Chicagoans to join his Bayano club. John Kenneth Galbraith described the twenties as “a time of madness,” a decade-long frenzy of stock market gambling that raged until the Wall Street collapse of 1929 brought the party to an abrupt end. It was money madness, driven by “an inordinate desire,” as Galbraith put it, “to get rich quickly with a minimum of physical effort.” The dot-com bubble, the stock market meltdown, and Madoff’s spectacular fraud are sobering reminders that the money-mad 1920s was an era not so different from our own. Then, as now, an economic boom, reckless investors, and lax oversight of the financial system led to an inevitable crash. And greed can still trump common sense. Investors and shareholders want the highest possible returns, regardless of whether the product is a blue-chip stock or the risky, mortgage-backed securities that brought the global financial system crashing down in 2008. Plenty of people are as desperate as ever to claw their way into the stratosphere the One Percent inhabit. Con men who promise to get them there can attract followers as eager and devout as the would-be oil executives who went on a wild-goose chase to Panama.
Today, the Bayano River valley remains almost as remote and little known as it was when Leo made it the talk of Chicago. In the mid-1970s an American travel writer described a trip up the river as “a safari into Panama’s most untamed green hell.” The builders of the Pan-American Highway gave up trying to hack their way through the swamps and jungles about one hundred miles to the southeast, leaving a fifty-mile break, known as the Darién Gap, in a route that stretches from Alaska to the tip of South America. The upper section of the river was dammed in the 1970s to provide hydroelectric power to Panama City, creating an artificial lake that attracts anglers hoping to hook the tarpon and other species found in its waters. The region is still a good place to find alligators and, for some, a good place to turn an illegal buck—it is close enough to the Colombian border to earn a reputation as “a perfect gateway for drug trafficking.” So far, though, no one has found oil there.
IT WAS AN HOUR past sunset when three men emerged from the Pony Inn saloon in Cicero, just west of the Chicago city limits, on an April evening in 1926. Machine guns erupted from a line of cars rolling past on Roosevelt Road. The cars sped off, leaving the white brick facade of the saloon peppered with bullet holes and three men dead. Two of the victims, Jim Doherty and Tom Duffy, were gunmen for the O’Donnells, a West Side gang of beer runners. The third, shot twenty times in the back and neck as he tried to escape, was William McSwiggin, one of State’s Attorney Robert Crowe’s most skilled and loyal prosecutors.
One question—who killed McSwiggin?—transfixed the city for months. McSwiggin had been a rising star on Crowe’s staff, a police officer’s son hired fresh out of law school in 1924. One of his first assignments had been to travel to Nova Scotia with John Sbarbaro to fetch Leo Koretz. McSwiggin, Doherty, and Duffy had grown up together and had worked on Crowe’s election campaigns; on the day of the killing, McSwiggin’s companions had overseen a recount of primary ballots on behalf of the Crowe-Barrett Republicans. If the state’s attorney’s critics needed proof of the ties between politicians and organized crime, this was it.
Crowe tried to pin McSwiggin’s murder on Chicago’s leading mob boss and the O’Donnell gang’s chief rival, Al Capone. Not only had Capone ordered the hit, Crowe claimed, but he had led the attack and wielded one of the machine guns. Capone went into hiding but surrendered three months later, proclaiming his innocence. “I didn’t kill him. Why should I?” he told newsmen. “I liked the kid.” Capone was released for lack of evidence, and no one was ever charged with the murders.
The allegations swirling after McSwiggin’s death made it impossible for Crowe to run for mayor in 1927—Big Bill Thompson returned from the political wilderness to reclaim that prize. There were 120 underworld killings in 1926 and 1927, but Cook County prosecutors failed to secure a single conviction. Crowe was accused of protecting gangsters, and the Genna crime family, it was said, had hosted a dinner in his honor. He sought a third term as state’s attorney in 1928 but was defeated in the primaries, dashing his dreams of higher office.
Crowe had craved power as much as Leo Koretz had coveted other people’s money. They lived in a world of corruption and excess, where lawmen consorted with the criminals they were supposed to put behind bars, where reaping sky-high returns on a friend’s stock tip seemed as natural as asking a stranger for directions to the nearest illegal bar. They knew how to get what they wanted, whether it was teasing money from the pockets of the gullible or using threats and intimidation to win elections. Leo, who claimed he had never sought a dollar from a single investor, was the slick operator who stole millions and betrayed everyone who trusted or befriended him. Crowe, the prosecutor who brought the Bayano swindler to justice, was the politician who allowed organized crime to thrive in Chicago. Their success was artificial and temporary; their downfall, inevitable.
Crowe had cashed in on Leo’s arrest and imprisonment only to see his political ambitions die, along with his young assistant, in a hail of bullets. He returned to public life in the 1940s, as a judge of the Illinois Superior Court. When challenged on his record as state’s attorney during his campaign for the judgeship, Crowe chose his words carefully: “no one ever by proof,” he said, had “substantiated any charge of dishonest or corrupt official act” on his part. He died in Chicago in 1958, a few days shy of his seventy-ninth birthday. The allegations of corruption and collusion stirred up by the murder of William McSwiggin, his obituary in the Daily Tribune noted, were “a smashing blow” from which Crowe “never rallied.”
IN LEO’S CANADIAN REFUGE, the exploits of the charming American millionaire with the scandalous lifestyle gradually faded from memory.
Mementos of his
summer in Nova Scotia probably found their way into more homes in the province than he ever did. Hundreds of people jammed a showroom in downtown Halifax in January 1925 when the contents of Pinehurst—everything from furniture and firearms to linen and towels—went on the auction block. The deed to Pinehurst itself was folded into Leo’s bankrupt estate, and the lodge was sold in 1926 to Henry Klein for the knocked-down price of $7,600. Klein resold it within a couple of months, helping to offset his massive losses. N. F. Douglas and Company, merchants and lumber dealers in Caledonia, bought the lodge in the 1960s, and it remained in the Douglas family for more than thirty years. After the Douglas family sold the property in 1997, the unoccupied lodge became a magnet for vandals and was torn down.
Rainard Scriven, Leo’s “guardian angel,” returned from Chicago as something of a celebrity, his arrival afforded front-page treatment in the Halifax press. The sheriff’s deputy applied for the $10,000 reward for Leo’s capture, on behalf of himself and Malcolm Mitchell, the keeper of the Halifax County Jail. Others had played bigger roles in unmasking Lou Keyte, among them the tailor Francis Hiltz and the Bank of Nova Scotia officials Horace Flemming and William Davies, and it was widely reported that Hiltz and Flemming would split the money. But Scriven and Mitchell, as the arresting officers, cited the wording of the wanted poster, which sought Leo’s “apprehension and return.” Davies, the bank’s top official in Chicago, was the only other person to file a claim. The receivers referred the dispute to a judge, but the bankruptcy file contains no record of who received the reward.
Joseph Connolly, the defense attorney, made a splash upon his return from Chicago as well, showing off a platinum watch he received from Leo’s brothers to thank him for his efforts. Connolly began to dabble in theater and was tapped during the Second World War to mount a musical-comedy show, Meet the Navy, to entertain Canadian servicemen. After the war he wound up in Hollywood for a short time, as an assistant producer when Meet the Navy was made into a movie. He made a brief turn on the political stage, mounting an unsuccessful bid for election to Canada’s House of Commons in 1949, and died in 1955 at age fifty-nine.
Leo’s friend and sometime chauffeur George Banks continued to publish the Gold Hunter in Caledonia until shortly before his death in 1944. Mabelle, the woman Leo called Topsy, left Caledonia and married a doctor in Reno in 1929. The couple settled in Oregon and died together in a house fire in 1958. Laurie Mitchell found a new patron after his falling-out with Leo. He served as Zane Grey’s guide and skipper on several excursions to the South Pacific in the late 1920s, in search of marlin and other big fish off New Zealand and Tahiti. The two parted ways in 1931, and Mitchell died of heart disease in California a few months later; he was sixty-one.
Thomas Raddall, who went on to become one of Canada’s most successful and best-known authors of historical novels and popular history, published his memoirs in 1976 and recalled the dinner-dances and parties hosted by the “jolly millionaire” from the States. When researchers compiled an oral history of the Caledonia area in the late 1970s, one of the old-timers they interviewed was Maurice Scott, the barber who spent many afternoons shooting pool with Leo. “It was quite a big blow up—quite a story,” he told them. “Things never were the same after he left.”
IN MARCH 1925, AFTER months of negotiations between the receiver and Internal Revenue Service officials, the US government withdrew its claim against Leo’s estate for more than $753,000 in unpaid income tax. The underlying legal question—was stolen money taxable as income?—would not be resolved until 1927. That year the US Supreme Court ruled that money earned from bootlegging and other criminal activities must be reported and taxed, giving federal agents the green light to prosecute and imprison Al Capone for tax evasion in 1931.
The truce in the Koretz tax battle cleared the way for a final distribution of $535,000 in cash and assets salvaged from the ruins of the swindle. Members of Leo’s immediate family had returned every cent they received before he fled. Mae’s mother and her sister Etta Speyer held out for a better deal and managed to keep half the $75,000 he left to them. Other relatives and friends Leo had compensated accepted modest settlements from the bankruptcy receiver. The claims of 147 creditors—the losses of those investors who came forward, plus money owed to everyone from tailors and jewelers to the phone company—added up to more than $2.1 million. After lawyers’ fees and other expenses, investors recovered sixteen cents on the dollar. Isaac Wilbraham, the dining car steward who invested $20,000, recovered a paltry $3,190. Alfred Lundborg, the tailor who stitched the Henry Heppner and Company label inside a suit jacket and unwittingly sealed Leo’s fate, got back just $280 of the $1,750 he invested. Charles Cohn, who had been among the seventeen investors who feted their “Ponzi” at the Drake Hotel in 1922, saw his $55,125 investment shrink to $8,800. Leo ruined Anna Auerbach’s reputation and added insult to injury by leaving her—and her theater owner husband—almost $21,500 poorer. Harry Parkin, the referee, filed his final report in June 1927, closing the book on proceedings that had dragged on for three and a half years.
Henry Klein’s claim of $459,645.82, a figure approaching $6 million today, was the largest. He recovered $73,000 and change, plus any profit he made when he sold Pinehurst. He went back into the liquor business after Prohibition ended, and amassed a $1 million fortune before he died in 1947 at seventy-three. He left half of it to charity.
The Bayano swindle added a refinement to the law—ironically, not to the law of fraud. Lewy Brothers, the Loop jewelers who allowed Leo to walk away with diamond bracelets worth almost $15,000 shortly before he disappeared, sued to recover the pieces from Chicago Title and Trust. The bracelets had been not sold but supplied on approval, lawyers argued, and the receiver could not sell them to compensate creditors. Lewy Brothers fought the case to the circuit court of appeals, which ordered the gems returned in June 1925. Leo had never intended to ask Mae to pick out the one he would buy, the court ruled, voiding the sale. Decades later, the case was still being used as a precedent when allegations arose that individuals or companies had improperly obtained goods before declaring bankruptcy.
FERDINAND AND JULIUS KORETZ each lost about $37,000 in the swindle, a figure approaching $500,000 today. Emil was out $31,000, while Ludwig took an $11,500 hit. Adolph and his wife, Rachel, claimed a combined loss of more than $16,000. Leo’s mother, Marie, saw $32,000 vanish. In all, his crimes cost members of his immediate family almost $170,000; these days that would be in excess of $2 million. The financial losses, staggering as they were, paled against the emotional toll the swindle took on every member of the Koretz family. Someone they loved and admired had betrayed their trust.
Julius’s family had barely recovered financially when the Depression dealt a second blow. “What a devastating thing this must have been to the family,” says his grandson Andrew Goodman, a lawyer who practices in Minneapolis. Leo “did this to people he knew, people who loved him—and ripped them off.” Andrew’s twin brother, Bill Goodman, who also lives in Minnesota, once asked his grandfather about Leo. It was in the 1970s, almost a half century after the Koretz family’s world came crashing down. He instantly regretted having broached the subject. Julius “had this look on his face that I’d never seen before, and he just said, ‘We don’t talk about that,’” Bill recalls. “It still pained him.”
Mae continued to sell coal, and eventually fuel oil, to make ends meet. “It was a terrible thing for her,” recalls a grandniece, Jane Siegel of Chicago, who was born the year Leo was captured and remembers visits with her aunt Mae. “She had everything and then suddenly she had nothing.” The disgrace, Siegel adds, “was probably worse than anything.” Mae never remarried and died in November 1941 at age fifty-eight. She left a modest estate: an estimated $4,700 in stocks, bonds, and mortgages; deeds to three vacant suburban lots; and $79.46 in cash. Her daughter, Mari, trained as a stenographer, married a salesman, and raised two children. She died in 1975.
Mentor Koretz had learned to pla
y the piano as a child, and performing at nightclubs became his ticket out of Chicago and away from the stigma of being the son of Leo Koretz. He took the stage name Red Kearns (his trademark was an oversize red handlebar mustache), played speakeasies and nightclubs, and proved to be as much of an entertainer as his father. “He was a personality,” recalls Andrew Goodman. “You wouldn’t forget him if you met him.” In the 1960s, Red Kearns and His Rinky Tink Piano was a featured act at Dixieland clubs in the United States and Canada. A promotional photograph from those years shows a round-faced, balding man wearing a smile as broad as his mustache and a derby like the ones his father favored.
Mentor married a nightclub singer and dancer, raised four children, and was known to flash a business card claiming he had launched his career playing in Al Capone’s speakeasies. He also made no secret of the fact that he had gotten to know another former Chicagoan who wound up in Texas: Jack Ruby, the Dallas nightclub owner who gunned down Lee Harvey Oswald, President John F. Kennedy’s assassin. Mentor died in Texas in 1971 and appears to have legally changed his name to escape his past; the death certificate identified him as Mentor Henry Kearns.
When Julius died in 1973, a few weeks before his ninety-second birthday, he was the last of Leo’s surviving siblings. Like Julius, members of his generation—the ones who bore the brunt of the embarrassment and financial ruin—spoke rarely, if at all, about the man many descendants knew only as their mysterious uncle Leo. Henry Beck, a nephew, was barely in his teens when Leo went to prison and knew few details of his crimes, says his daughter, Carol Stelzer, who lives in the Chicago suburb of Arlington Heights. She first heard about Leo in the 1960s, when her father mentioned in passing that her great-uncle had been sent to prison for selling bogus stocks. Almost forty years later, while researching her family tree, she recalls, “I discovered the whole story of Leo’s scam and the impact it had on all of my family members.”