The Art of the Steal (24 page)

In another case, a young busboy in Ohio offered what seemed like an enterprising idea. He advertised for investors to pool their money with him so he could buy rock concert tickets in bulk. Then, as he explained it, he would scalp the tickets at substantial markups. Everyone had read about rock concerts selling out in one hour and people camping out in line for days, so why not? He rounded up more than $7 million from almost three thousand people. But he never bought any tickets. His Ponzi bubble burst like all the others, when he ran out of new investors to pay off the earlier ones.

A ONE-WAY TICKET TO MELCHIZEDEK

If there were a country where only scam artists lived, it would have to be the Dominion of Melchizedek. It’s a gorgeous, postcard-perfect tropical island in the South Seas. It’s got a heavenly climate. There are no taxes. There’s little banking legislation. The government is very much hands-off. Dozens of banks operate on the island, and you can open your own for a few thousand dollars. Or that’s how it’s billed.

Only don’t go looking for Melchizedek on a map. It doesn’t exist. It’s a fictitious country created for the purpose of perpetuating investment scams. A convicted con artist apparently thought it up in 1990, naming it after the “righteous king of peace” in the Old Testament, and it’s been at the center of a web of conspiracy for scam artists and their swindles ever since.

Law enforcement authorities have warned of innumerable scams connected to Melchizedek. In one typical scheme, investors were told that they would get a return of more than 300 percent in a matter of months, by investing in financial certificates arranged by a Melchizedek bank. Hundreds of investors in the United States contributed more than $1 million. But it was nothing more than a Ponzi scheme. So were other scams involving Melchizedek government bonds, Melchizedek certificates of deposit, and bonds of St. Charles University, a fictitious college that supposedly existed in the fictitious country. Frauds involving the mythical country have sprouted up in cities throughout the United States, as well as England, Australia, Hong Kong, and China.

The men behind the scams are often ex-convicts, including a guy who went to jail for trying to fix a horse race in Australia by dyeing a horse. After his release from jail, he was appointed “governor” of Melchizedek territories in the Pacific.

PYRAMIDS OF DENIAL

One of the oldest forms of securities fraud is the pyramid scheme, an overture laced with promise that is never fulfilled. It’s been around so long, I would think that everyone is aware of it and no one would dare fall for one. Nonetheless, people do every day. Pyramid schemes are similar to Ponzi schemes, but they are hierarchical and promise profits based on investors recruiting others to join the program, not from any product or investment. The variations are endless, but the principle is identical. They typically start with a chain letter or e-mail inviting you to make a small investment in order to reap immense rewards. Chain letters themselves aren’t illegal, but they’re a nuisance and I wouldn’t advise anyone to bother with one. When a chain letter asks you to send money, it crosses the border of illegality and becomes a pyramid scheme.

Many conventional pyramid scams ask you to send a small amount of money, five dollars or ten dollars, to five other people who have already signed on. You’re provided with a list of participants, and instructed to eliminate the top person and add your name to the bottom. Everyone in between moves up a spot. Then you’re advised to send copies of the letter to everyone you can think of. When new people join, each of them will send you money. Since the chain grows at an exponential rate, the money coming to you should grow to a staggering level.

“Gifting clubs” or “giving” programs seem to be the pyramid scam of choice in recent years. Here, the money you’re asked to send is termed a “gift”. And it’s often strongly pointed out by promoters of these gifting clubs that whatever money you subsequently receive is tax-free, because the Internal Revenue Service (IRS) doesn’t tax gifts under $10,000. In actuality, the IRS defines a gift as something given without expectation of getting anything in return, which is not the hook in these scams.

The way many gifting clubs work, participants, typically women, are invited to join a club of some sort. One club was called “Ya Ya Sisterhood” and another was the “Businesswoman’s Networking Club.” Some of them promote a charitable connection, and they usually claim they have the approval of the state Attorney General. To join, you have to make a cash gift to the highest-ranking members, those at the top of the pyramid.

In one gifting scam, participants gave cash gifts of $100 in order to move up through levels named freshman, sophomore, junior, and senior. There were ultimately six steps to the program, and the required investment ranged from $100 to $4,000. Once you completed the six levels, you needed to make a gift of $7,850 and you would receive a tax-free payment of $62,800.

Another gifting tree went by the name, “The Dinner Club.” This group was organized according to the four courses of a dinner party. Eight people known as appetizers filled the bottom row of the tree. They had to pay five thousand dollars apiece to the dessert person at the top of the tree, in order to be seated at the dinner party. As new people joined, the bottom rung advanced to the “soup and salad” level and on to the “entrée” rung before themselves becoming a “dessert”. If you became a “dessert”, meaning if enough people were suckered in to elevate you to that level, you were expected to receive $5,000 apiece from the latest crop of eight participants: $40,000. That’s a $35,000 profit on their original gift. Most people, though, never get to the top and lose all their money. The crooks, though, always arrange themselves in the tree so they ensure that they get their gifts.

When you examine the mathematics, a pyramid scheme looks awfully tantalizing. If you’re asked to send $10 to ten people, that’s $100 you’re out. But you add your name to the list of participants and get ten new people to join. They each send you $10, and you’re back to even. If each of those ten recruits ten additional people, then the next level of the pyramid has a hundred people. You collect $1,000. Another round produces a level of a thousand people. You get paid $10,000. The next level grows to ten thousand people. You collect $100,000. One more round brings you $1 million.

The trouble is that in order to perpetuate these pyramids, more and more people must be recruited to feed those at the upper levels. Once the supply runs out, the pyramid collapses and the people at the bottom are out their money.

And that’s why pyramids have to fail. The supply of people is not infinite. By the time one pyramid scheme reaches its eleventh level, assuming each new participant recruits ten new people, it will have exhausted the entire population of the planet. Plus, no new wealth is being created. Any money that one participant earns, another participant loses.

HANDICAPPING DEATH

The way a criminal thinks is, whenever something becomes popular as a legitimate investment is when it becomes a perfect candidate for an illegitimate investment. A case in point is what are known as viatical investments. The word viatical comes from the Latin
viaticum,
referring to the money and supplies given as traveling expenses to a Roman official when he departs on a journey. Viatical investments are, in essence, death futures.

A couple of decades ago, the idea was hatched of allowing terminally ill people a way to get money from their life insurance policies while they were still alive, to pay for needed medical expenses or to take one final vacation with loved ones. The way they work is that brokers arrange for investors to buy a certain percentage of the death benefits of the policies of the terminally ill, always leaving 20 percent or so for the estate. Someone given a year or two to live might have a $200,000 policy. For an investment of $100,000, investors might buy $150,000 of the face value. The ill person would get immediate cash and if he died soon, the investors would get a handsome return. How good a return, of course, depended on how well they managed to handicap death.

Policies that get viaticated are generally those of people diagnosed with AIDS, fatal cancers, and other catastrophic illnesses. It’s something of a ghoulish business, but investors look on it as helping a sick person. And, of course, there’s money to be made.

As recently as 1990, this was a small, arcane business, amounting to less than $100 million of viaticated policies. But it has grown to more than $1 billion. Consequently, criminals have taken notice and moved in, so much so that law enforcement authorities say viatical investment scams have become rampant, and rank among the top-ten investment frauds being perpetuated.

Viatical scams take different forms. Some are as blatant and straightforward as selling policies to investors on fictitious patients, or else selling legitimate policies over and over again. One viatical investment firm collected $115 million in investor money, but only $6 million was used to buy life insurance policies. The promoters found various other uses for the balance of the money. They bought twenty-five homes, thirty-four luxury cars, two helicopters, three motorcycles, and several boats.

Other viatical scams are more elaborate and cheat both the insurers and the investors. In these cases, scam artists recruit terminally ill people and help them obtain life insurance by lying on the applications about their condition. This process is known as “clean sheeting.” It doesn’t work with large policies, because medical exams and blood tests are required, but insurance companies skip those details with small policies.

These clean-sheeted policies are then immediately sold to investors. They’re also called “wet ink policies,” because the ink on the contract is barely dry when the policy is sold. Once the policyholders die, these policies are often contested as being fraudulently obtained, then canceled. Crooks in California obtained clean-sheeted policies amounting to more than $11 million before being caught.

Investors have been snapping up these policies. Thieves pitch them as a safe, high-return investment. And they add that the investor is engaging in a humanitarian act, providing desperately-needed funds to the terminally ill.

The truth of the matter is, even legitimate viatical investments are risky. Chronically ill people may live a lot longer than was estimated, cutting down on the yield to investors. New AIDS drugs and other medical breakthroughs work against your investment. In addition, many of these policies are term policies, and if the person outlives the term, there is no death benefit at all. An eighty-four-year-old California woman invested $85,000 in the hope of receiving $139,000 when a policyholder died. The expectation was that he would die within a year. Years later, he was still alive. He might outlive the woman.

WHAT TO CHECK

Given that you can lose money on these investments if they’re legitimate, imagine what it’s like to invest in a scam. There are some telltale signs to be aware of, though none are guarantees. Many legitimate viatical investments are themselves insured, but no viatical scam is, at least not with any real insurer. A legitimate investment will allow you to pay your money to a reputable escrow agent; a scam artist won’t. If it’s on the up and up, the purchase agreement should state that the insurance policy you’re investing in is past the period of contestability, generally two years from when it was issued. The best protection of all, though, is only to deal with a reputable and large viatical broker. And realize that you’re making a speculative investment no matter what.

THE MYTH OF THE INNER CIRCLE

There’s a natural inclination by people who don’t have a lot of money, to think that people who do have a lot are privy to investment opportunities that are closed to them. It wouldn’t surprise them to learn about clandestine securities peddled only to the rich, for suspicions about the government and financial institutions are widespread. Criminals are well aware of such suspicions, and exploit them with appalling consequences for investors.

In the little town of Mattoon, Illinois, population 18,500, a sixty-six-year-old retired electrician started an investment fund called the Omega Trust and Trading, which promised a fifty-to-one return. According to the fund’s literature, its head was an international banker who had worked for Fortune 500 companies (when investigators interviewed him, he couldn’t quite remember their names) and was one of a handful of people in the world who had the know-all and ability to conduct secret multimillion-dollar trades.

It was not an original thought. Many investment schemes tell people there’s a secret banking system in which “prime banks” and the wealthy participate. The returns are well beyond what ordinary people can realize, as much as 70 percent a week. Ordinary people can share in the bounty if they pool their money and allow someone connected to this system to invest it for them.

A common pitch is, you’re asked to put money into a trust account backed by a guarantee (often fake) from a “prime bank,” “top-100 world bank,” or “top-25 European bank.” You’re told that your money will be leveraged to buy prime bank instruments, which can generate enormous returns. In fact, your money goes offshore, never to return. Another pitch: You pay the promoter a fee in return for a promise that you will be “leased” a much larger sum of money to invest in prime bank instruments at great interest rates.

In the Omega trust, investors were told their capital would be invested in foreign bank debentures. Money was invested from all over the country, as well as from Australia and China. The mastermind of the scheme laundered the money by handing out interest-free loans to local residents and by starting businesses.

There is no such thing as bank debentures. No secret banking system exists, at least not on this planet.

One of the giveaways in Mattoon was when residents began buying new trucks and cars and opening businesses, even though some of them had jobs that paid minimum wage. In the fall of 2000, law enforcement authorities charged a group of Mattoon residents and others with perpetrating an investment scheme that duped more than ten thousand people throughout the world of more than $12.5 million.