by James Walsh
Lampert blamed investigations by the IRS and the California Department of Corporations for the company’s demise. “If I wanted to do an ment of Corporations for the company’s demise. “If I wanted to do an square-foot office on Wilshire Boulevard. We did not have a garage operation.” He also accused the government of purposely delaying trial in its case against him, aware that bankruptcy and tax assessments would leave him hard-pressed to mount a defense.
By the late 1980s, Lampert had gone back into business, selling rooftop solar-power modules through a southern California company called Lampert Energy Co. He even solicited former UEC investors, asking them to invest in his rooftop modules and promising $18,000 in “positive cash flow” during the first five years.
In October 1989, Lampert was named in a 15-count criminal fraud indictment. Lampert faced a maximum of 75 years in prison and a fine of $1.2 million. The indictment ended a four-year investigation by the U.S. Attorney’s Office, the California Attorney General’s Office and the Postal Inspection Service. “They were rolling over money from new investors to old investors, creating a classic Ponzi scheme,” said Michael Baum, a San Francisco postal inspector.
In March 1991, the case went to trial. Lampert’s one remaning attorney, Deputy Federal Public Defender Robert Nelson, argued that his client had perpetrated no fraud but had worked for years for low pay to improve his cutting-edge technology. “This case is about a solar pioneer who tried to live his dream of making clean energy from resources of the sun,” Nelson said.
He said Lampert was on the brink of success when the IRS, upset that the investments had become popular as legal tax shelters, “harassed and blacklisted the company,” leading to its demise.
The argument didn’t work. Lampert was convicted and sentenced to eight years in prison.
CHAPTER 4
Chapter 4: Paying First Class, Traveling Steerage
The travel industry might not seem like an obvious place for Ponzi schemes to flourish—but it is. Travel has all the seductive trappings any seasoned Ponzi scam artist needs to operate:
• Passion. People are passionate about travel; especially, vacation travel. The Ponzi perp is banking on the fact that passion makes people act without thinking.
• Ease. The travel industry is largely unregulated; therefore, it is easy to get away with otherwise questionable activities.
• Privacy. When travel is a personal expense, many people like to keep its financial details to themselves.
• Enthusiasm. People who like to travel usually can be counted on to do it often; thus, it’s a continual source of revenue.
Personal travel has become a ruthlessly price-driven commodity. The deregulation of the airlines, which began in the early 1980s, led the way on this count. Low-cost carriers like Southwest Airlines and ValueJet (and, in another area, Carnival Cruises) keep prices down.
On the other hand, business travel is a market with fat margins, big mark-ups and, as a result, all kinds of special deals. There are advantages to being an industry insider—just ask the travel coordinator for any large company. He or she is usually laden with promotional perks and freebies.
Ponzi perps try to take advantage of the fundamental differences that exist between personal travel and business travel. The smartest perps choose between investment-driven Ponzi schemes and sales-driven pyramid operations as circumstances dictate. Both work in the travel business. And sometimes the scheme combines both elements.
Travel Agent Card Mills
For years, airlines, hotel chains, car rental companies and other companies in the industry have offered professional travel agents promotional discounts and free upgrades in order to earn recommendations to business travel customers. These perks are one of the reasons that people who like to travel become travel agents.
The pyramid perps are drawn by a critical market imbalance created by the perks. Personal travelers accustomed to the low prices created by no-frills carriers see the perks available to travel agents as their best chance of getting even deeper discounts...or regaining some of the nicer treatment that commodity travel has eliminated.
The simplest way to get around the market imbalance is to become a travel agent. But becoming a professional travel agent has traditionally taken years of training, accreditation by groups like the American Society of Travel Agents (ASTA) or International Airlines Travel Agent Network (IATAN), compliance with licensing and registration requirements and obtaining bonding and comprehensive insurance.
That’s a lot of work for a free upgrade on a Newark-to-Chicago flight.
Enter the pyramid perps. They set up what established travel pros— the people in ASTA and IATAN—call “card mills.” For fees ranging from hundreds to thousands of dollars, the perps offer anyone the chance to become a travel agent. The companies produce agent cards, which the newly-appointed travel agents are told can be used to obtain a variety of travel-related discounts.
The card mills can do this because the travel agency industry isn’t regulated by any law or government authority. Its standards have always been self-imposed and self-regulated.
In all, this environment is conducive to pyramid schemes.
Of course, they don’t admit they’re running pyramid schemes. The perps doll up their promotions with high-minded language. They promise to train people to become so-called “outside travel agents,” part of a network of independent operatives who can make commissions and enjoy travel benefits—in exchange for channeling their sales through “inside” agents working for the parent company.
Established travel agents rightly point out that the outside agent programs are simply multilevel marketing operations. There’s nothing wrong with that. But the establishment groups go farther, arguing that the outside agent programs rip off unsuspecting travelers as well as hotels and airlines. They also claim that the outside agent programs pay members more for recruiting other outside agents than for booking airline tickets or hotel rooms.
If true, these charges would mean the outside agent programs are—or come dangerously close to being—illegal pyramid schemes. One High-Profile Company
One of the largest and best-known outside agent travel companies is California-based Nu-Concepts in Travel, Inc. It emerged as a leader in the growing trend in 1994, when it started aggressively recruiting outside agents by means of carefully targeted seminars.
In its early stages, Nu-Concepts made a number of tactical mistakes that would later support the charges made by groups like ASTA and IATAN. One brochure for a seminar read:
You never need to sell one reservation to enjoy these courtesies, although some may wish to provide that service to family, friends and business associates (and receive part of the travel agency commission...).
The company disavowed this particular brochure as the work of one overly aggressive independent distributor. However, other company spokespeople repeated similar things. Even the company’s own “Passport To Success” training manual said:
You can make a good deal more money by developing your contacts into Independent Distributors of the Nu-Concepts in Travel Independent Distributor Network.... You teach your contacts—a firm foundation of 5-7 people—to follow the simple steps you have followed.... Then, with your help, they each teach 5-7 contacts who teach their contacts...(and so on and so on).
Whatever these statements suggested to long-time travel industry pros, there was no doubt Nu-Concepts was successfully attracting recruits. By 1995, the company had 35,000 outside agents responsible for generating almost $25 million in travel sales. According to Ron Cummings, Nu-Concepts’ marketing director:
What we do is enroll and train independent outside agents and allow them access to our highly experienced travel agents. We provide our agents with the most up-to-date training materials, and they are backed up by a full-service travel agency, so customers get the same level of service they would get with any other travel agency.... We don’t encourage our agents to run to a hotel and say, ‘I’m a tra
vel agent. Give me a discount.’ But, on the other hand, they’re just as entitled to any travel industry benefits as any agent.
The industry critics were persistent, though, finding problems even in Nu-Concept’s success. The company’s own numbers indicated each outside agent was generating only between $800 and $1,200 in sales a year. This, after paying between $495 and $1,000 to enroll in the program.
With those low sales numbers and high entry costs, ASTA said it believed that most of the company’s agents signed up strictly for the travel agent perks and distributor fees.
To these charges, Cummings had a blithe response:
The only reason [ASTA] is screaming about us is because we are so successful. We believe we’ll be the Wal-Mart of the travel industry. We have our critics, but they’d love to have our bottom line.
In January 1995, the Pennsylvania state attorney general announced his office was investigating Nu-Concepts. Joseph Goldberg, a deputy attorney general in the Bureau of Consumer Protection, said the program resembled a pyramid scheme—although he warned that his investigation was “very preliminary.” Goldberg’s office had received complaints from consumers who bought Nu-Concepts cards but couldn’t get discounts.
On the other coast, regulators were still investigating. “[Outside agent programs] are sprouting like mushrooms in California and the rest of the country,” said Jerry Smilowitz, a state deputy attorney general in Los Angeles. “We’re still trying to get a handle on them.”
Later in 1995, Nu-Concepts settled a legal dispute with IATAN by paying some money and agreeing not to use the IATAN logo on its agent ID cards. But the company’s problems reached a new level in November 1995 after an unfavorable judgment in a New York municipal court case, Elizabeth Brown v. James E. Hambric.
Long Island resident Elizabeth Brown wanted to be a travel agent. She asked James Hambric for his advise on how to become one. Hambric, an “independent travel consultant” working for Nu-Concepts, convinced Brown that the Nu-Concepts “fast start plan” would provide her with the kind of training and education necessary to follow her dream.
Hambric gave Brown the Nu-Concepts “Passport To Success” manual, which promised that Nu-Concepts would provide support, education and training.Relying upon the manual and Hambric, Brown purchased the Nu-Concepts travel agent package for $537.75.
Then, everything started going wrong. Neither Nu-Concepts nor Hambric provided the promised training and supervision. Hambric refused to attend scheduled training sessions and didn’t stay current with Nu-Concepts information. As a result, Brown felt it necessary to purchase additional educational programs at a cost of $490.08. But even this didn't get her where she wanted to be.
Brown sued Nu-Concepts and Hambric. The New York court came down hard on Nu-Concepts, finding for Brown on charges of breach of contract and state General Business Law sections prohibiting pyramid schemes and unfair business practices. The court went even further, writing:
There is nothing “new” about Nu-Concepts. It is an old scheme, simply repackaged for a new audience of gullible consumers mesmerized by the glamour of the travel industry and hungry for free or reduced cost travel services. Stripped of its clever disguise as a recruiter and educator of outside travel agents, Nu-Concepts is nothing more than a pyramid scheme.
The court ordered Hambric to pay Brown the maximum damages allowed under state law, which totaled nearly $1,500.
The Brown decision was the first time a judge ruled that a card mill was an illegal pyramid scheme. However, ASTA legal counsel Paul Ruden predicted it wouldn’t be the last.
In May 1996, ASTA sued Nu-Concepts in federal court, alleging unfair competition and trademark infringement. In December 1994, the company had agreed to stop using the ASTA logo on its agent ID cards. In May 1995, a Nu-Concepts attorney had told ASTA that all cards with its logo had been recalled and destroyed. But Ruden said that “recent evidence” had been found proving that Nu-Concepts was still distributing cards with the ASTA logo.
Nu-Concepts insisted it was abiding by the agreement and that any ID cards with the ASTA logo had been destroyed more than a year before. Still, the tide of opinion seemed to be turning against NuConcepts. In October 1996, Hertz Car Rentals announced it would not pay commissions to travel agencies that booked a disproportionate amount of business in agent rates. “We will not only cut them off, we will refuse to pay commissions on any business,” said William Maloney, Hertz’s division vice president of travel industry sales. Maloney made a point to add that Hertz would not work with Nu-Concepts.
The Lure of Travel Remains Strong
When the court ruling on Elizabeth Brown’s lawsuit mentioned the “glamour of the travel industry,” it was talking about a very strong draw. Travel is something that people—especially people of modest means—dream about. Those dreams are a great tool for pushing a Ponzi scheme.
One scheme based in Alaska took advantage of people’s passion for travel—and mania for airline frequent-flier miles. In 1996, the SEC filed a complaint against Raejean S. Bonham, who operated a program called World Plus out of her home near Anchorage.
World Plus was supposed to make its money by reselling blocks of frequent-flier miles. The pitch was that, if you invested money with Bonham, she would repay in either cash or frequent-flier certificates worth 10 times what you put in. (For the record, frequent flier miles are only transferable under certain conditions and never redeemable— legitimately—for cash.)
The SEC said that World Plus was simply a Ponzi scheme that took in more than $50 million from 1,192 investors over more than five years, making it one of the largest scams in Alaska’s rough-and-tumble history.
Case Study: LPM Enterprises
The standard against which all travel-related Ponzi schemes must be compared is Louisianan Lynn Paul Martin’s LPM Enterprises. Like some character from a Damon Runyon story, Martin was equal parts villain and clown. He recruited investors to provide his company with capital to purchase huge blocks of airline tickets for Las Vegas gambling junkets. He claimed to have made arrangements with various hotel/casinos in Las Vegas to reimburse LPM Enterprises for the cost of the tickets plus about 10 percent as a “finder’s fee.”
According to the pitch, LPM Enterprises could make this 10 percent as often as it could send planeloads of players to the desert. Martin told investors that the ticket purchase/reimbursement cycle took about six weeks. Therefore, money invested with LPM Enterprises could generate about 80 percent each year in profits.
The mechanics of the deal were complicated enough that they should have sounded warning bells for experienced investors. Martin asked investors to make funds available in cashier’s checks. In return, each investor received two post-dated company checks: One for the principal and another for a share—normally 75 percent—of the finder’s fees generated by the principal. If an investor wanted to reinvest at the end of a month or quarter, he would simply swap checks with Martin, delivering another cashier’s check to cover any increase in the principal.
In many cases, Martin’s investors rolled over their principal investment, which meant they only cashed the interest checks. “If somebody asked to see [contracts or financial documents], he’d refuse, saying, ‘If you don’t like the way I’m handling it, here’s your money, you’re out.’ But nobody had the guts to do that,” one lawyer would later explain.
Martin insinuated that everything about LPM Enterprises—including details about other investors—had to be kept secret because most of the customers were sensitive to any publicity. “Most of those people going to Vegas weren’t going with their wives, if you know what I mean,” said one investor. “So they traveled under other names. They didn’t want people to know what they were doing.”
The way Martin approached potential investors was well thought out. He usually only approached people he’d already met in some earlier business context. And he usually invited the potential investor to bring along a friend or associate. The friend or associate w
as invited along to make the potential investor feel more comfortable—in theory, to provide a voice of skepticism. As often as not, though, the friend ended up investing, too.
In a one-on-two meeting over drinks or a meal, Martin would explain the LMP Enterprises deal and drop a few names of local big-wigs who were either investors or customers. One investor—the CEO of a local shipping company—believed Martin’s promises that only a handful of big-wigs were in the deal. “I wouldn’t have put a nickel in the son of a bitch if I knew there were so many people involved.”
Investors believed Martin’s pitch for several reasons. First, he was known in the New Orleans area as a legitimate travel agent who specialized in organizing packaged tours. Second, Louisiana was full of rich gamblers who preferred to travel incognito—like former Governor Edwin Edwards, who was famous for staying in Las Vegas under the name “T. Wong.” Third, Martin’s numbers weren’t outrageous for the travel industry. Fourth, in many cases, friends had invested money with Martin and could vouch for the details of his pitch, the secretive nature of his deals and—most importantly—the reliability of his interest checks.
The scam attracted doctors, lawyers, accountants, bankers, corporate executives and, in one case, a state judge. “No one seems to have made any real thorough investigation of the deal,” said David Loeb, an attorney for several investors. “No one asked the hotel people if they had heard of Lynn Paul Martin, if they had set up this travel deal, if they were reimbursing him for flights between the two cities. It’s just incredible.”
In late 1984, Martin was investigated by the FBI because of suspicious activity between accounts he kept at St. James Bank & Trust Co. and the Bank of LaPlace. The investigation could have broken the LPM Enterprises Ponzi scheme at an early stage. But the FBI agents and the U.S. Attorney’s Office agreed that the check-kiting case—while triable—wasn’t very strong. They decided not to prosecute.