by James Walsh
The weakness and feeling of isolation are two reasons that so many Ponzi perps are comfortable going on the lam when their schemes collapse. The huge 1980s Ponzi scheme Lake States Investment Corp. illustrates the full range of a perp’s loneliness, fear and desperation. Beginning in 1984, Lake States founder Thomas Collins began soliciting customers to invest money into a pool which would be used to trade commodity futures.
One problem: Collins was not registered with the CFTC or any other securities regulator and—consequently—could not legally solicit, accept or pool customer funds. He also couldn’t trade funds on the commodities market. And Lake States never did any legitimate business as a futures commodity merchant—nor did it operate as a legitimate trading pool. Nevertheless, Collins attracted money like a pro.
The scheme went something like this: Lake States maintained an office in Rolling Meadows, Illinois. Inside the office, most of the commodity pool sellers and other employees could watch electronic commodities tickers and call investors. Collins convinced investors to put their money in his commodity pools by showing them the substantial returns early investors were making—without any reported losses. He showed them account statements that seemed to confirm the promises. Existing investors reported no difficulty in withdrawing money from their pool accounts.
To seal the deal, Lake States salespeople would offer investors “Promissory Notes.” They said the notes were a “legitimate way to structure investments to save on commissions.”
Most Lake States investors came into the situation inclined to believe the sales pitch. They were often steered there by friends and relatives. “Investors would get great reports every month and would tell their friends,” said Art Aufmann, a lawyer who represented about 250 investors in a federal lawsuit against Lake States employees. “People would say, ‘Geez, I’m nuts if I don’t get into this.’”
Lake States operated as an individual investor, trading commodities in several accounts at Geldermann Inc., a legitimate trading company. Geldermann received commissions on every trade Collins conducted, and thus had an incentive to assist the Lake States fraud.
Geldermann provided Collins with a desk and a phone at the Geldermann booth on the floor of the MidAmerica Commodity Exchange. Geldermann also permitted Collins to write orders on its forms—a task which only its employees should have been allowed to perform. The effect was convincing. It was close enough to legitimacy that hundreds of investors—many of them sophisticated people—believed that Collins was a mover and shaker in his field.
In August 1988, Geldermann’s parent company, ConAgra, hired James Fuller as an audit supervisor. Fuller was aware that Collins had skirted various rules of the CFTC and other agencies. He investigated the Lake States accounts and discovered that Geldermann was allowing Collins to transfer funds between accounts improperly and to open joint accounts with investors without proper documentation.
When Fuller informed them about these problems, Geldermann’s officers told him to stop investigating Collins.
In October 1989, the CFTC began an investigation of Collins. It subpoenaed Geldermann’s records regarding his trading accounts. The Feds asked Geldermann officials to provide copies of account statements and other records associated with Collins and Lake States.
The records showed large deposits into and withdrawals from Lake States accounts. For example, an account held solely in Collins’ name showed more than $3,148,000 in deposits and $3,574,000 in withdrawals during the period from January to September of 1989. This wasn’t, by itself, illegal. But the big volume of big transactions suggested the growth pattern of a Ponzi scheme.
Collins dealt with the CFTC investigations surprisingly well. Most Ponzi perps fold their operations or start making incriminating mistakes as soon as they know the Feds are watching. Lake States kept its interest payments going—and continued recruiting new investors— for more than four years. Collins made legitimate investments often enough to extend his scheme’s life expectancy. “He had quite a few hits,” recalls one investor. “It’s really too bad he was so desperate that he had to steal. If he’d played it straight, he might have really accomplished something.”
But Collins was a thief from the beginning. There was no chance that he could have played it straight. Whatever investment success he had was a happy accident that just borrowed more time.
Lake States reached its breaking point in late 1993. The ill-timed combination of several bad investments and the steady scrutiny of the CFTC put the company in a cash crunch. New investors were getting hard to find.
In early 1994, Lake States investors were complaining that the company wasn’t sending out interest checks. Worse still, it was being evasive about withdrawals of any kind. Some investors formed a group that filed a series of involuntary bankruptcy petitions against Collins and Lake States.
In June, Collins had his chauffeur drive him to a business meeting in suburban Chicago. He went into the meeting...and didn’t come out. A few investors wondered whether he’d been kidnapped or killed. But most guessed—rightly—that he’d simply fled.
For most of Collins’ investors, his disappearance meant the loss of a small part of their net worth. But a handful of big investors were wiped out. About a week after Collins was declared missing, a Washington D.C. man who’d invested several million dollars of family money in Lake States hanged himself.
Because it had lasted so long, Lake States had grown to an epic size. In the 10 years between 1984 and 1993, Collins had taken in more than $100 million from almost 500 investors. He returned about $70 million to investors in the form of bogus profits. He lost about $10 million making commodities investments. The rest went to Lake States overhead—and Collins’ pockets.
After his disappearance, Collins took his mistress—Kathleen Chambers—to Costa Rica for several months. Collins had met Chambers when she was waiting tables a restaurant outside of Chicago that he liked. The couple rented an ocean-view villa while the collapse of Lake States played out back in the States.
Collins had been planning his escape for months. He had detailed aliases for Chambers and himself. By late 1994, they’d moved to La Jolla, California—a posh suburb north of San Diego. Collins had become Bill O’Mara, a stockbroker from the Midwest who’d gotten rich during the 1980s and then developed a heart condition. On the advice of his doctor, he’d cashed out and moved to the west coast with his girlfriend, Meg.
The couple rented a luxury condo and spent most of their time together. Their most notable outside interest was going to San Diego Padres baseball games. Collins, sporting a graying ponytail, blended in easily with the wealthy refugees from cold climates who live in La Jolla.
The ruse lasted more than two years. But, by the summer of 1996, Collins and Chambers were broke (though she didn’t know it). Most of the people involved in the case thought that Collins had disappeared with about $10 million. In fact, he may have only had a few hundred thousand.
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 allega
tions 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 wi
fe 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.