by James Walsh
• Patrick and his brother Michael spent $13 million building the Speculator, a 238-foot gambling showboat which they planned to operate in Mississippi or Louisiana.
• Michael spent more than $60 million buying control of American Gaming Enterprises Ltd., which operated the Gold Shore Casino—a gambling barge in Biloxi, Mississippi.
• Michael also spent about $18 million buying and refurbishing The Hotel Syracuse, an art deco classic in a run-down part of Syracuse.
• Patrick spent several million dollars buying a majority stake in Vernon Downs Racetrack near Syracuse. He spent another $8.5 million to build a Comfort Suites Hotel at the track. All this was a long way from leasing copier machines to bureaucrats. According to people who worked at BFG, Patrick had never been interested in the core business. Other than racetracks and casinos, his focus had been on syndicating lease portfolios to suckers.
By early 1995, BFG was in deep financial trouble. It was selling $10 million to $15 million each month in lease-backed notes; but it owed between $20 million and $25 million each month in distributions. The company started missing payments. And the greedy investors who’d been its biggest supporters turned into vicious enemies.
In early 1996, the SEC and the U.S. Attorney in Manhattan filed criminal charges against Patrick. The Feds accused him of securities fraud and perjury. He was arrested, then released on $500,000 bail pending trial.
The SEC also sued Patrick and BFG in a civil complaint which alleged the company had been run as a Ponzi scheme. The Feds alleged that the Bennetts sold the same leases to more than one investor and sold other leases that did not exist. They then used money from new investors to pay off earlier investors.
The Bennetts had suspected that they’d been under an SEC investigation for several months. They were prepared with their responses. “Mistakes were made, but they weren’t intentional,” said Charles Stillman, Patrick’s attorney. “We’re trying to talk reasonably with the prosecutor to convince him that...there was no criminal intent. Patrick Bennett wasn’t looking to cheat anybody [or] steal anybody’s money.”
Lawyers for Michael, Bud and Kathleen Bennett all said that their clients knew nothing about any wrongdoing. “Our position is that Mr. and Mrs. Bennett didn’t do anything wrong,” said Alan Burstein. “Mr. Bennett turned over financial matters to his son, Patrick.”
In March 1996, BFG and several related operating units filed voluntary Chapter 11 bankruptcy. According to the filing, more than 12,000 investors had invested $674 million with the company.
Patrick, Bud, Kathleen and Michael all resigned their management positions in BFG. Soon after, the bankruptcy court appointed Richard Breeden, a former SEC Chairman, as receiver. “I don’t buy for a moment that Patrick did it alone, that the parents and others didn’t know,” Breeden said. “It was Bud’s company, and the employees say nothing happened that he didn’t know about.”
Their lawyer said the senior Bennetts suffered from multiple ailments that precluded them from traveling to Syracuse to talk to investigators. Breeden remained unsympathetic. He cut off their $15,000-amonth consulting fee, their car and driver and their health benefits.
In June 1996, Breeden filed a $1.65 billion lawsuit to recover the money lost by creditors and punitive damages. $650 million of the damages covered the actual money lost by creditors who invested in equipment leases or loaned money to Bennett companies; $1 billion was to punish the Bennetts. Breeden said:
The company was much more than troubled. It was massively insolvent. Apparently, someone decided it was too dull selling leases once, so quite a few were sold to more than one person. [The scheme] was reminiscent of some of the S&L guys who...had to move money around to pay other debts.
Specifically, Breeden’s lawsuit focused on Patrick’s Comfort Suites project at the Vernon Downs Racetrack. Breeden claimed that Patrick had improperly taken $8.5 million from lease-backed bonds to fund construction of the hotel. In August 1996, Breeden added BFG’s former auditors to the lawsuit—and increased his damage request to $2.2 billion.
Breeden said it had taken 72 accountants and staff members 12,391 hours over four months to piece together the companies’ finances. Lawyers spent another 8,723 hours sorting through the wreckage. “It was an accountant’s nightmare and a lawyer’s nightmare, too,” said Mike Sigal, who led the team of lawyers representing Breeden.
As the smoke of a burning business cleared, it became clear that the family involvement applied to all sides. An attorney representing some of BFG’s investors admitted, “My whole family was in it, my girl friend was in it for seven figures.” In an attempt to excuse the involvement he added, “They didn’t think it was a scam. The Bennett family had a good reputation.”
CHAPTER 12
Chapter 12: Secrecy and Privacy
The Supreme Court Justice Louis Brandeis once wrote: “The right most prized by civilized man is the right to be left alone.” This is a noble sentiment that Ponzi schemes often twist on its ear.
In the United States, the law goes a long way to protect people’s right to privacy. And that’s a good thing. The commitment to privacy has some strange and unintended results, though. One of these is that it allows some people to be overtaken by their impulses for a baser mutation of privacy—secrecy.
Secrecy and privacy may be similar, but they aren’t the same. Privacy entails sheltering your own thoughts, acts and possessions from public scrutiny. Secrecy entails sheltering the fact you’ve shared thoughts, acts or possesions you’ve shared with someone from public scrutiny.
The social element of sharing private things marks a secret. And, to be sure, money is one of the most common social elements that turns privacy into secrecy. The urge for secrecy gets a strong boost from capitalist systems. There’s no doubt that anonymity offers some level of protection. This is why old-line moneyed families used to repeat the mantra: “Foolish names and foolish faces find themselves in public places.”
The Foundation for New Era Philanthropy1 Ponzi scheme that collapsed loudly in 1994 relied on a group of “anonymous donors” who would match charitable contributions filtered through the scheme. Several dozen of America’s richest and most sophisticated philanthropists gave money to the scheme. They were so familiar with the no
1 For a detailed description of the New Era case, see Chapter 16.
tion of anonymous giving that they didn’t stop to think—and check out the proposition.
The secrecy that money can breed explains many mistakes, eccentricities and moments of bad judgment.
“People are just strange about their money. They delude themselves, so they bullshit everyone else. You know the type—the big-mouth brother-in-law who’s always talking about how he bought Microsoft at three. But he never talks about all the money he’s lost on crap he bought for 30 or 100,” says one federal investigator who has little sympathy for Ponzi investors. “He doesn’t talk about the losses because he doesn’t think about them. The closest comparison is fishing or gambling in Las Vegas. It’s competitive—and very personal.”
Bogus Loans Made Behind the Scenes
One of the best examples of how secrecy about money sets people up to be conned is the second mortgage scam that we considered in Chapter 2. A quick recap of how this works:
The Ponzi perp approaches Investor A and says that Mutual Acquaintance B is in a cash crunch and needs to take out a second mortgage on his house. The perp explains that Acquaintance B will pay a high interest rate, typically 12 percent or 13 percent, and even a bonus on the loan—if it can be arranged quickly and quietly.
Acquaintance B knows nothing about the bogus deal. The perp forges or manipulates information and signatures onto phony documents. These documents are not filed or registered as required by law. The Ponzi perp simply pockets the loan money.
In these deals, the perp will usually tell an investor that the loan will be blind. That means that the mutual acquaintance won’t know who loaned the money. Even if the Ponzi perp
is a little questionable, the legitimacy of the mutual acquaintance is often compelling.
For the Ponzi perp, the blind loan makes it less likely that the investor will ever try to contact the mutual acquaintance directly.
The blind loan also makes it easy for the perp to sell a phony mortgage a second time. In this situation, the perp tells a second investor that the first needs to get his money back and will sell the mortgage at a discounted price. All of the same terms—including the need for secrecy—apply.
“It’s amazing how well this works, even when all the principles know one another. In fact, it usually works even better when they do,” says a northern California lawyer who’s prosecuted several Ponzi cases. “People who have a certain amount of money and not very much sense will be used to the idea of secrecy in money matters. And they’ll put a great deal of unspoken trust in people they consider financial equals. If a crook has the guts to take a chance on this secrecy and trust, he can steal a lot of money.”
Secrecy and Trust
The relationship between secrecy and trust sometimes leads to a fundamental logic flaw that makes most pyramids and Ponzi schemes possible. The logic flaw can be explained, roughly, like this: Trust sometimes results in exclusion. Exclusion often results in secrecy. Therefore, secrecy is (always) the result of trust.
You don’t have to get out your college philosophy notes to realize a premise that includes sometimes can’t lead to an affirmative conclusion that includes always.
The emphasis that many pyramid marketing schemes put on recruiting friends and family results from the misunderstanding of the link between trust and secrecy. “You’ve got to understand the temptation,” says one pyramid scheme participant. “It’s not only to make money. It’s also to let the people closest to you—many times, people who think you’re a loser—in on a secret for success. That’s what draws in so many families.”
The sadly mistaken idea that redemption comes from sharing secrets fuels the growth of most pyramid marketing schemes. This mistake is built on another notion that’s as old as society: Financial success is a secret kept by a few people; and getting rich is a matter of being let in on the secret.
People who achieve financial success know that it comes from a combination of hard work, some good timing and a little luck. People who haven’t enjoyed financial success are often intimidated by any part of that combination. Their lack of achievement is more easily rationalized by the belief that success is a secret.
Pyramid schemes recognize this weak tendency and play to it. They tell losers that they’re right—the winners have a secret. And, by joining the pyramid, you don’t have to work hard or have good timing to make money.
Secrecy Attracts Ponzi Perps and Politicians
Political power seems to thrive on secrecy. Again, this is a mutation of trust. In democratic systems, political leaders have the explicitly articulated trust of the people. A majority somewhere voted for them sometime. But the day-to-day workings of democratic politics are mired in things most voters don’t see—money and secrecy.
In this way, politics and politicians are drawn to the same combination of money and secrecy that attract Ponzi schemes and their perps.
The blind trust deed scheme works especially well when the mutual acquaintance is a public official who’s prohibited by law from knowing the details of his finances. A variation on this premise is what got the Clinton Administration in trouble for illegal fundraising leading up to the 1996 U.S. federal elections.
And there are other political stories that connect with Ponzi schemes more bluntly.
In the early 1980s, San Diego County Supervisor Roger Hedgecock was laying the foundation of a campaign to become Mayor of San Diego. His prospects looked good, except for one thing: Hedgecock was encountering serious financial difficulties. Concerned about the effect this might have on his political future, he asked several supporters for advice.
One of his supporters suggested that Hedgecock contact Nancy Hoover, an old acquaintance from local politics. Hoover was the girlfriend and business partner of J. David Dominelli2, who was running a massive San Diego-based Ponzi scheme that claimed to be investing in pre
2 For a more detailed discussion of Dominelli’s scheme, see Chapter 20.
cious metals and securities. Dominelli was spending hard to buy support within the San Diego political and social establishments.
Hoover invested $120,000 in the political consulting firm of one of Hedgecock’s main advisers. Hedgecock also received a number of smaller checks—in the $3,000 to $5,000 range—directly from Dominelli. This money allowed Hedgecock to build the foundation of a political machine.
Between early 1982 and the end of 1983, Dominelli gave Hedgecock and his advisers more than $350,000. This paid for everything from a car phone for Hedgecock to blocks of tickets to Hedgecock fundraisers. On May 3, 1983, Hedgecock was elected Mayor of San Diego.
After he was elected mayor, Hedgecock wanted to make improvements on his home in north San Diego County. He explored several options for financing these improvements, finally deciding that Hoover and Dominelli would buy the house, lease it back to him and pay for the improvements. Contractors started on the work. Then Dominelli’s scheme collapsed.
The deal for Hedgecock’s house was never completed. The contractors working on the house were never paid. A series of lawsuits followed, which resulted in the details of Hedgecock’s fundraising coming to light.
In October 1985, a San Diego jury found Hedgecock guilty on a single count of conspiracy and 12 counts of perjury. The offenses involved violations of local election ordinances and the state laws requiring complete and accurate personal and campaign accounting.
Hedgecock appealed the conviction, which was eventually overturned on a technicality having to do with testimony of several prosecution witnesses. By that time, in the late 1980s, he had gone on to become a popular radio talk-show host in San Diego.
Secrecy Turns Critics into Supporters
Investors who are burned in Ponzi schemes should be the most vocal critics—eager to have some vengeance, if not their money back. They rarely are. As often as not, they defend the Ponzi perps who’ve taken their money. And smart Ponzi perps complete the illogical circuit their investors begin. They imply—though they’ll rarely say—that because their schemes involve the secrets of wealth, they must be built on trust. An investor who is inclined to believe this will be receptive to the pitch, however loopy it may be.
When the SEC first investigated AYM Financial, the New Jerseybased precious metals Ponzi scheme, it met resistance from the trader/ investors in the company—exactly the people the investigation would have helped. One of the investors said that AYM traders had bought in to more than just the company; they imagined themselves aggressive capitalists—the kind of people that small-minded government bureaucrats disliked by nature. “We were the guys out there doing business. They were regulators trying to stop us,” the would-be trader recalls. “Traders live in a black-and-white world. Business is good, regulators are bad. When they call or come around, it’s hide-the-ball with your most aggressive work.”
The trader/investors at AYM would have been better off talking to the Feds. Their secrecy may have made them feel like princes of commerce, but all it did was prolong and enlarge the scheme—and their losses.
In affinity schemes, reluctance to speak with investigators will often be attributed to cultural issues. In family schemes, it will be chalked up to protection. What it should be chalked up to is embarassment.
The embarassment Ponzi investors feel and the reticence that follows are the main reasons perps rarely go to jail. One west coast law enforcement agent estimates that his office hears from fewer than one in 10 pyramid or Ponzi investors who get burned. “People are embarassed because they know they should have known better. They’re worried that they’ll seem greedy and stupid—which, to some degree, they will,” he says. “They shouldn’t feel this way. Ponzi schemes are illegal fo
r a reason.”
Because prosecutors have such a hard time getting the cooperation they need to build Ponzi cases, their bosses will usually argue criminal charges aren’t a good use of the state’s resources. That’s why in these situations civil lawsuits often come first, followed later by criminal charges—the opposite of how most legal issues proceed. The nature of most Ponzi schemes—participants taking advantage of their friends and family members—makes it more difficult to acquire witnesses. “They’re not exactly jumping up and down to turn each other in,” a Nevada police officer said in the wake of one Ponzi collapse.
But the reluctance occurs in more than just a few specific situations. And it happens too often to be dismissed as the deserved embarassment of greedy investors with enough money to lose in the first place. The reluctance comes from a deeper impulse. It comes from the desire that most people in a capitalist system have for secrecy. Ponzi perps understand this desire—and the smart ones exploit it.
The impulse toward secrecy serves as a contrast to several good human instincts. It can be a side-effect of privacy. It can also be an extreme—and twisted—product of trust. Finally, it supports greed by hiding the ugliness that usually marks that impulse.
To an experienced and balanced investor, the urge for secrecy is a logical application of a general sense of caution. It can also be seen as a by-product of trust: To believe in one person or idea is, in practice, to believe less...or not at all...in another.
But Ponzi investors aren’t always experienced and balanced. They’re often inexperienced and excitable—about money in general or the premise of the particular scheme. Excitable people tend toward extreme responses in all things; inexperienced investors will often take secrecy to an extreme.
“The sure sign of a thief, a sucker or an idiot child is that they think everything has to be a big secret,” says a world-weary New York money manager. “The first thing they’ll do is call me and say they’ve got a hot piece of information on a stock. Then they’ll tell me something that was in the Wall Street Journal last Tuesday. The second thing they’ll do is call me with another hot tip—multilevel marketing for long-distance [phone service] or some Ponzi scheme to sell ostrich eggs or Lithuanian gold pieces.”