by James Walsh
Both the Sentencing Commission’s notes defining “loss” and this court’s cases call for the court to determine the net detriment to the victim rather than the gross amount of money that changes hands. So a fraud that consists in promising 20 ounces of gold but delivering only 10 produces as loss the value of 10 ounces of gold, not 20. Borrowing $20,000 by fraud and pledging $10,000 in stock as security produces a “loss” of $10,000: “the loss is the amount of the loan not repaid at the time the offense is discovered, reduced by the amount the lending institution has recovered, or can expect to recover, from any assets pledged to secure the loan.”
In the Certified case, the full amount invested was not the probable or intended loss because Holuisa did not intend to keep the entire sum. Indeed, return of the money—that is, payment of earlier investors with the funds of later investors—was an integral aspect of Holuisa’s scheme, essential to its continuation. And, in line with his intentions, Holuisa returned over $8 million to investors before the scheme was detected.
The appeals court concluded that Holuisa should not have been sentenced based on amounts that he both intended to and indeed did return to investors. The court vacated his sentence and sent the case back to trial court for resentencing—involving less jail time.
The appellate court’s decision rubbed a lot of people the wrong way. In fact, there was a dissent, arguing Holuisa had rightly been given the maximum sentence.
How he planned to use the money is irrelevant...because each time he took money from investors, he put their money “at risk” and left them without a “ready source of recompense.” ...Holuisa did redistribute $8.6 million to many of his victims before his scheme fell apart; but...the money was stolen the day he received it from his victims. Instead of corralling money from a few investors, then skipping town, Holuisa extended his scheme by giving back some money and taking in more. He literally robbed Peter to pay Paul (whom he had defrauded earlier). ...This case is no different than a series of thefts or embezzlements. An embezzler causes loss for the full amount taken, irrespective of his intention to repay.
While many legal experts agree with this dissent, it remains a minority opinion in most judicial circles. The majority opinion—which seems crook-friendly to many wronged investors—holds that Ponzi perps lessen the severity of their crimes by returning part of the money they steal to other people.
Case Study: Robert Johnson’s Peso Scam
In the span of just a few months in 1988 and 1989, hundreds of people—including Oklahoma teachers, Kansas churchgoers and a Texas motorcycle gang—invested in a Ponzi scheme that was supposed to create huge profits by swapping money from U.S. dollars to Mexican pesos and back into dollars again.
The scheme’s main perp, Australian-born Oklahoma resident Robert Leslie Johnson, told investors that he had extensive political connections in Mexico. Using these connections, he said he could buy pesos below the daily commercial exchange rate. Then, he’d convert the money back into dollars at current market rates.
Johnson told people that his plan was profitable; just how profitable was anyone’s guess. He needed more money than he could raise by himself to test the upper limits.
The whole story was bogus. But Johnson’s worldly attitude—and lilting Aussie accent—convinced people he was telling the truth. Political and financial instability in Mexico helped, too.
Initially, Johnson told investors he could get pesos for 5 percent under official exchange rates and that a complete cycle of currency swaps would take about a week to complete. But an annual profit of more than 250 percent wasn’t enough to attract the volume of money his scheme would need. So, Johnson gradually increased his promised returns—to 22 percent per week. At this rate—more than 1,000 percent a year—the money started to flow in.
It was a good thing for Johnson that he could turn on the charm; he’d had a long history of trouble with the law. He’d come to Oklahoma in 1988 from California, where he’d been paroled from prison. But his arrest record dated back to the 1960s. “He was basically a con man,” says one burned investor. “And always had been. I guess most of us kind of knew this. But who could tell? Maybe this was going to be his big strike.”
While most of his currency-swap scheme was a basic Ponzi, Johnson did buy some black market pesos. He’d purchase the currency secretly from Mexican businessmen who embezzled cash from Mexican corporations owned by U.S. companies. These connections—not quite the political movers Johnson’s investors envisioned—sent the pesos to Johnson at a San Diego address. In southern California, Johnson would convert the currency at various exchange bureaus, careful not to draw attention to any single transaction.
He wasn’t very successful. The scheme first caught the attention of the Internal Revenue Service in 1987—just after it started. The IRS initially thought Johnson’s operation was laundering money for central American drug smugglers. But, after watching Johnson for several months, the Feds concluded he wasn’t moving enough currency to be connected to drug runners.
Once the Feds checked out Johnson’s background, they guessed— correctly, as it turned out—that he might be running some kind of Ponzi scheme. But Ponzi perps don’t mean as much to the Feds as drug money launderers do. Johnson fell to a lower level of priority.
Beginning in the summer of 1988, Johnson had created enough of a track record for his bogus peso operation that he was able to recruit a network of shady seminar leaders and investment brokers to raise millions of dollars from hundreds of investors in Dallas, Houston, Oklahoma City and other cities throughout the Southwest. At his peak, he was operating in California, Nevada, Tennessee and Florida.
Johnson and his main partner, Dallas native William Wayne Gray, started living flashy lifestyles. In the course of the scheme, Johnson would take in something like $50 million. In January 1989, he bought a new Mercedes for $92,000. A few weeks later, he wrote a check for $112,000 to pay off his mortgage.
But the peso pyramid was about to collapse. According to the IRS, to circumvent tax laws the men had established several phony companies. Income from the Ponzi scheme went to those corporations rather than directly to Johnson, Gray or their brokers. “The network of companies wasn’t especially creative. It was just complicated,” said one investigator who tracked Johnson’s operations. “They figured if they moved the money around enough we wouldn’t be able to find it.”
In February 1989, Johnson and Gray were charged with violating Texas state securities law. Federal agents cooperating with Texas Rangers in Dallas seized about $3.2 million from a bank account one of Johnson’s brokers had set up for the peso operation. The broker’s account, which belonged to a shell corporation called FHL Group Inc. (FHL stood for “Faith, Hope and Love”), funneled money to Gray’s WWG Investments Inc., which in turn passed it to Johnson.
State and federal investigators also confiscated more than $820,000 in cash in a search of Gray’s home. They found 11 promissory notes, ranging from $1 million to $20 million, from Gray to Johnson. Nearly $2.4 million was seized from bank accounts held by Gray’s firm and FHL.
Gray, who’d been arrested, was eventually free on $15,000 bond. Johnson was arrested a month later, during an extended gambling trip to Las Vegas. Federal agents seized more than $250,000 in cash and property from Johnson’s accounts in Tulsa and confiscated more than $1.2 million in cash and gold coins when they arrested him.
Incredibly, Johnson was also allowed to post a bond at his arraignment. He was free on $100,000 bond pending trial on securities charges. Even with all of the money seized during the arrests, millions of dollars channeled through the pyramid scheme had not been located. And, within a few weeks, Johnson and Gray couldn’t be located. Both jumped bail.
Johnson’s flight didn’t last long. In September, he was arrested near Anaheim, California. (Once again showing that Ponzi perps don’t usually flee to exotic locations.)
In October 1989, he was charged in a 63-count indictment with laundering more than $216,000 in
investor funds. The indictment also charged that Johnson engaged in a series of illegal financial transactions with proceeds from the investment scheme.
In a related move, federal officials also filed a civil lawsuit seeking forfeiture of Johnson’s home in Tulsa and a $43,000 certificate of deposit and a $25,000 annuity purchased in his name. They contended that all had been purchased with proceeds from the fraudulent investment scheme.
Eventually, the IRS decided to drop the civil suit against Johnson. But the criminal cases proceeded slowly.
Burned investors were frustrated by delays in the federal investigation. The delays kept seized money...seized. Hundreds of people nationwide contacted the FBI to lay claim to the money. The Feds said investors had little hope of recovering their losses. So, the smartest investors took matters into their own hands.
Fort Worth-based H&O Marketing and Landmark Financial Network filed suit against Gray, Johnson and WWG Investments in February 1989 to recoup about $17 million in lost investments and proceeds. Two Fort Worth investors, Richard Sims and Mark Pace, joined in the suit in July 1989. Sims and Pace bought into the scheme shortly before state and federal regulators began to dismantle it.
A judgment in the civil case was handed down during the summer of 1990. It sided with the burned investors, awarding them $4.5 million of their initial investment and about $16 million in returns. “It’s definitely nice to have a big judgment,” said John Proctor, a Fort Worth attorney who represented Sims and Pace. “It would be even nicer to collect. [The investors] would like to get a return of their money first, and secondly, they would like to get a return on their money.”
The judgment was the first major development in the case since federal agents in Dallas had seized millions of dollars in assets from the investment organizers. “We were able to get our initial investment back plus the profit that the money made,” said John Gamboa, an attorney representing dozens of burned investors. “We know where [Johnson] is, and we know where his assets are,” he said. But Gamboa said he expected the judgment would be appealed. “With that sizable a judgment, I’d be surprised if they didn’t appeal,” he said.
While the civil suits mounted, Johnson was awaiting trial on the federal criminal charges in a Tulsa jail.
Gray’s whereabouts were unknown, although he was believed to have fled the state. His former attorney, Don Crowder, said he did not know how to contact Gray. “Even when I was representing him, I just had a phone number that I would call and leave a number and he would call me back,” Crowder said.
Gray was eventually found by federal agents and returned to Texas for trial. He was convicted and sentenced to more than 10 years in federal prison. But he insisted the Feds had seized all of his money. Informed opinion differed on this issue. “Bill Gray’s an idiot...a pathological liar and a thief,” says one of his former defense attorneys. “He has still got $10 million buried somewhere. I believe that with all my heart.”
CHAPTER 8
Chapter 8: Affinity Scams
We’ve considered the most common premises for Ponzi schemes— tax shelters, travel deals, loan networks and commodities investments. But, in a growing number of cases, the premise of the scheme doesn’t matter. These schemes are sold by something other than a Great Idea.
Instead, they rely on another of Carlo Ponzi’s tools: Exploiting the trust of members of tight-knit communities. This often means people who share a racial group or ethnic origin—but it can also apply to people in the same profession, church or extended family.
Law enforcement officials call these “affinity scams.” (And even the law enforcement community isn’t immune...the 1990s saw an explosion of affinity scams directed at police officers.)
Recent immigrants—particularly recent illegal immigrants—are particularly vulnerable to affinity scams because they’re often unfamiliar with the operations of American banks and mainstream investment services. In some cases, the countries from which they’ve come have an unstable official banking structure—so the difference between official and underground investments isn’t very great.
In the United States, this orientation has created informal savings institutions like Korean kye and Caribbean susu. These can be dynamic lenders—examples of free-market capitalism at its best. But they can also attract crooks who thrive in the shady regions of looselyregulated money.
Another reason that affinity scams focus on immigrants: Securities regulators don’t track foreign-language newspapers, radio or television as closely as they do English-language outlets. As a result, advertisements recruiting investors can make outrageous promises with less accountability.
Beginning in the late 1980s, the North American Securities Administrators Association began issuing a series of warnings about affinity scams, especially those directed at immigrant communities. And with good cause.
Immigrants as an Affinity Target
In five years, between 1987 and 1992, New York-based Oxford Capital Securities Inc. scammed scores of investors out of more than $10 million in a Ponzi scheme that was as crude as it was effective. Once again, the reason it worked was not its sophistication—but the strength of its affinity appeal.
Oxford Capital was started by Samuel Forson, a native of Ghana who’d grown up in Brooklyn idolizing business tycoons like J.P. Morgan. He completed his MBA at St. John’s University in the early 1980s and eventually worked his way up to sales manager at First Investors Corp., a mutual fund marketing company in New York. But selling IRAs wasn’t aggressive enough for Forson.
Oxford Capital focused its sales effort on recent immigrants to the United States, usually from the West Indies, living in the New York area. The company had been founded and was run by immigrants and people of Caribbean heritage. They stressed the importance of community support when convincing potential investors to hand over money.
Forson used company money to support a lavish lifestyle. Like so many Ponzi perps, he seemed most comfortable spending money. Among his purchases: a $730,000 apartment on Riverside Drive in Manhathis purchases: a $730,000 apartment on Riverside Drive in Manhat a-month Jaguar sedan (this was a nontraditional move for a perp— away from the usual Mercedes Benz) and a rack of $1,500 suits from Barneys.
When Forson married Yvonne Thomas, who’d started out as a clerical employee at Oxford Capital, their reception was held at the Plaza Hotel near Central Park. The newlyweds arrived at the hotel in a horse-drawn carriage.
The scheme began to unravel after one experienced investor questioned the statements she’d received from two mutual funds supposedly purchased through Oxford Capital. When the statements didn’t make sense to her, she contacted the funds directly and learned her accounts, which should have contained more than $100,000, had been cashed out two years earlier—in 1989.
The funds then contacted securities regulators, triggering an investigation that began in September, 1991.
The collapse of Oxford Capital was ugly. Many of the people who’d invested money were far from rich swells who could afford the loss. A New York subway conductor who lived in a working-class Queens neighborhood ended up losing almost $47,000. (Worse still, two friends that she convinced to invest with Oxford Capital lost another $35,000.) A secretary and recent immigrant from Jamaica, lost $46,500 which she had been planning to use to complete her college degree.
Forson’s lawyers argued that Oxford Capital intended to make good on its debts—and could have if the company had had more time to work out its bad investments. One of the lawyers pointedly blamed regulatory agencies and prosecutors for frightening investors into demanding their money back. “It was a run on the bank, in simplest terms,” he said.
The Manhattan D.A. took a harder line. Forson and several of Oxford’s top executives faced criminal charges of larceny and running a corrupt enterprise. Each faced up to 25 years in prison. “Basically, it’s a Ponzi scheme,” said one of the assistant district attorneys prosecuting the case. “It didn’t start that way, but it rapidly became one.�
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In the prosecutors’ scenario, Forson ran Oxford Capital as a legitimate but unsuccessful money management firm for about two years. At that point—sometime in 1989—he concluded that he could attract more money if he padded his returns with capital that was supposed to be invested in safe vehicles like CD’s and T-bills and in minority-owned or Caribbean-based companies.
What followed was a series of disastrous investments, which were obscured by the Ponzi payments.
Oxford Capital invested in a modeling agency, a fashion design firm and a sports talent agency. They all lost money. Perhaps the most egregiously bad deal was Forson’s attempt to buy a Nigerian freighter carrying fertilizer which had been stranded in the waters off of South America because of a complicated international trade dispute.
Forson needed $800,000 of Oxford Capital money to spring the freighter full of manure. Part of the money would go to honest bribes back in Nigeria—the rest would go to taking title on the contents of the boat and greasing wheels in the States. Forson told his employees that this was the deal they’d been waiting for—the deal that was going to make them all rich. When his employees asked what they should tell investors, who believed they were investing in conservative things like certificates of deposit and mutual funds, Forson “said to tell them anything.”
In a common tactic, Forson’s defense lawyers argued that Oxford Capital investors were blinded by their own greed—choosing not to notice that the outfit was offering a no-risk 100 percent annual return on invested money. This, they argued, was a deal that anyone could see was too good to be true. One investor responded a little too readily, voicing the fears that drive so many working class people into the arms of Ponzi perps. She admitted that Oxford Capital investors were greedy, “if being greedy means that poor people can do the same thing that people on Wall Street do.”
The defense attorneys also tried another standard argument. They claimed that the real villains of Oxford Capital were out-of-control salespeople who lied to investors in order to boost their commissions.