You Can't Cheat an Honest Man (30 page)

That was probably true. According to the FTC, Robbins Research International sold franchises that granted the right to run self-help seminars featuring Robbins’ videotapes,
Unlimited Power
and
Power to Influence
. The franchises cost between $5,000 and $90,000, depending on the territory they covered.

The FTC alleged that financial information provided by Robbins and his company misled investors, who never made the kind of profits mentioned in Robbins’ recruitment materials. The Feds explained that Robbins and his company told franchisees that in a given month they could make between $6,250 and $25,000 from presenting between 25 to 100 seminars. “Few, if any, franchisees have been able to sell that many seminars or make these earnings,” the FTC said.

Case Study: Sell America Scams a West Virginia Church

In 1990, the United States Corps of Engineers determined that a church building owned by the First Assembly of God in Matewan, West Virginia, was located on an unprotectable flood plain. The Corps wanted to use the Church property to complete a flood-wall project along the Tug Fork of the Big Sandy River. It condemned the building and compensated the Matewan Church with a $375,000 lumpsum payment.

The Matewan Church paid off its existing debts with the proceeds and deposited the remaining $200,000 in the Matewan National Bank pending the construction of a new church building.

The Matewan Church needed a building site for the new church. It enlisted the aid of the Reverend Gordon Shinn, who was a pastor of the Heritage Assembly of God in nearby Dublin, Virginia. Shinn had construction and engineering experience.

While looking for suitable real estate, Shinn visited and “fellowshipped” with the Matewan congregation. About this time, he learned that church leaders were dissatisfied with the interest rate they were earning on the $200,000 at the Matewan National Bank. The leaders asked Shinn to help them find a better return.

At this point, the trouble started. Shinn accepted the assignment to find a better rate of return. He had no financial background, so he turned to acquaintances who did. After talking with several of these contacts, Shinn was referred to a Kentuckian named John Holtzclaw, who—by star-crossed circumstance—was at the time involved in a Ponzi investment scheme operating under the name Sell America.

Sell America was an Alabama corporation involved in various bogus multi-level marketing programs.

Over the course of several weeks, Shinn had many conversations with Holtzclaw and several of his associates. According to Shinn, Holtzclaw spun a convincing tale of the golden opportunities awaiting those who would participate in the Sell America program.

Shinn was dazzled. At a February 14, 1991 meeting with the Board of Trustees of the Matewan Church, he relayed Holtzclaw’s big talk of riches without risk.
Shinn arranged another meeting with the Board for a few nights later to complete the deal. At the second meeting, Holtzclaw and his cronies made a presentation that included an agreement authorizing them to carry away the money for an “investment” in the Sell America program. Shinn did his part to close the deal. He would later testify, shamelessly:

I informed the board of trustees that they dealt with gold-minted coins, not with mines or speculation.... I informed them in my presentation that the investment was risk-free. I told them, in explanation of investments, that it was similar to buying a piece of pie. A restaurant buys a pie for, say, two dollars...and sells each piece for two dollars apiece. And that’s how [Sell America] generated profits. They buy in large volume and then sell the individual pieces.

I also included a river analogy where a stream starts quite small but as tributaries are added to it, it becomes larger and more powerful. And for investors in firms like Sell America, each tributary added to the size of their buying power. In other words, the size of the river would grow as more tributaries joined it.

None of the Board members remembered any discussion of rivers, tributaries or pieces of pie. A few remembered that four professionals and a preacher presented a “risk-free” investment that would yield an 18 percent return—and that one of Holtzclaw’s cronies flashed a few gold coins. (Of course, since the members proceeded to lose Church money in a fool-hearty investment, they had reason to claim sketchy memories.)

Shinn said that Holtzclaw and his crew gave every person attending the second Board meeting a Sell America brochure with gold coins on the front of it. The brochure described the scheme’s “Unitary Marketing Plan” as follows:

You start with an initial down payment of as little as $60. As you sell Gold Eagle coin purchase agreements, you can use the commissions you earn to complete your own purchase agreements. Upon completion of each agreement you can receive the coins or, if you choose, have the value of the coins applied toward the initial payment required for the next higher denomination purchase agreement. Of course, your earnings are based solely upon your own efforts and abilities.

Holtzclaw stated that there would be very little risk involved because the “money would be in gold coins or be in a federally audited trust fund.” However, he never explained what
federally audited
was supposed to mean. He also said that gold was a solid investment because its price always paralleled the price of bread. (This may sound convincingly biblical, but it isn’t even slightly economic.)

Like a character from a Damon Runyon story, one of Holtzclaw’s cronies then proceeded to hand around a gold coin and say, “This is what you’re investing in and that’s your security right there.”

All of this meant very little. The scheme wasn’t about gold, it was about recruiting other suckers. And it was destined to fail. Recruiting four investors at X dollars each in order to receive a commission of 3X dollars is a rotten deal for the participant—and a capital cost so high that the company isn’t likely to have enough money to do anything but slosh proceeds around.

As one lawyer noted: “The Sell America deal could only appeal to a complete cement-head.” The Board of the Matewan Church may not have had cement heads; but it did have blind trust. The church secretary was dispatched to get a check. The agreement was signed. And the $200,000 left Matewan in the hands of Shinn and Holtzclaw.

Shinn, Holtzclaw and their cronies cashed the check and wired the money to Alabama in payment for the bogus “gold contracts.” They took large fees for landing the big check. As one court dryly noted:

The Church lost all of its money. The congregation was shocked. The trustees felt guilty. The pyramid pharaohs in Alabama were prosecuted...and received light sentences.

Finally aware of its folly, the Matewan Church sued everyone involved in the scam. The suits, filed in stages during February and March 1996, alleged that no gold coins were ever purchased.

Criminal charges followed. Shinn, Holtzclaw and several associates were charged with conspiracy, interstate transportation of money taken by fraud, fraudulent sale of securities and fraudulent purchase of securities. Each faced up to 30 years in prison and a fine of up to $1.5 million if convicted of all charges.

Shinn quickly cooperated with federal prosecutors. Holtzclaw and his three cronies were all convicted at trial. But the January 1997 federal court decision
United States of America v. John Holtzclaw, et al.
overturned those guilty verdicts. It said—in plain language—that greedy investors are not victims.

The critical issue in the decision was whether the pyramid scheme sold by Shinn and Holtzclaw was an “investment contract” and, thus, a security. The prosecutors, arguing that the scheme
was
an investment contract, asked the court to limit its consideration to the statements made by Shinn at a the second Board meeting. They argued that these promises were a “security” under federal law.

The court disagreed. It had to look further and analyze the transaction “on the basis of the content of the instruments in question, the purposes intended to be served, and the factual setting as a whole.”

In fine print, the Sell America brochure stated that what was being purchased by investors was not gold coins at ridiculously inflated prices but the
idea
that investors could make money by doing unto others what had been done unto them.

The court concluded that no reasonable juror could conclude that the substance of the transaction was anything other than a pyramid scheme. So, the case did not involve a security. Accordingly, the court overturned the convictions against Holtzclaw and his cronies.

In the wake of the federal court’s ruling, Cynthia Rife—the secretarytreasurer of the Matewan Church—said the 70-member congregation had lost all of its money and was deeply in debt. “Several members and Pastor Thomas Larinson signed personal notes to pay the vendors. We now have a new building, but it’s not paid for and it will be a while before the notes can be paid,” Rife said.

CHAPTER 16
Chapter 16:
Charities and Not-for-Profit Organizations

Religion and spirituality may be fonts of trust for some; but, in a secular age, other institutions have taken over as the most trustworthy in many people’s lives. For these people, involvement in charities and not-for-profit (NFP) organizations offer the feelings of camaraderie, reflection and renewal that—in earlier times—only religion offered.

The Ponzi perps haven’t missed this trend. As a result, charities and NFP’s have been the scenes of some dramatic Ponzi schemes in the 1980s and 1990s.

In many NFP’s, management is granted considerable autonomy. These managers often act as the de facto owners of their organizations, accountable to no one or to a board of trustees or directors appointed by management in the first place. This loophole of accountability can come into tight focus when economic realities force an NFP to act entrepreneurially.

Most NFP’s derive their revenues from a combination of endowments and current fundraising. As the segment has become more professional, fundraising has become more scientific—even small, local charities are usually pretty sophisticated about building donor lists and scheduling fundraising drives.

With the fundraising done well, the remaining issue is how the endowment is managed. This is where the Ponzi perp will try to enter the equation.

At a time of dwindling resources and pressure to provide more programs, organizations often become more aggressive with their investment strategies. They become vulnerable to promises of higher returns and the willingness to assume more risk.

How a Ponzi Perp Played on NFP Trust

California-based United Grocer’s Clearinghouse was a Ponzi scheme that marketed itself to naive investors by affiliating itself with charities and NFP’s. In the end, the investors, charities and NFPs were all in the same boat; they’d been fleeced in a not-so-creative Ponzi scam.

The pitch was pretty simple. UGC printed coupon books that provided deep discounts and free samples of consumer dry goods. Consumers could purchase family-size packages of things like breakfast cereal and coffee by mail from UGC for less than a dollar per item.

The company claimed it made its money from advertisements that other companies paid to have mailed along with the cereal and coffee. To market the coupon books, UGC enlisted charities and NFP’s like church groups or Scout troops. The NFP’s would buy the coupon books for between $10 and $15 each and then sell them to supporters for $30 each. Each book had 30 coupons, so consumers could save between $30 and $60 with each book they used.

At least that was how it was
supposed
to work.

UGC opened its doors during the summer of 1995. In less than a year, it had sold more 200,000 coupon books and taken in about $3 million. However, while UGC was growing through word-of-mouth in charitable organization circles, complaints from consumers slowly started trickling into the offices of consumer protection advocates throughout the western U.S.

Initially, consumers were able to redeem coupons for the merchandise. UGC claimed that it would send the cereal or coffee within one day of receiving coupons, but it actually took up to eight weeks. “The reason was simple,” recalls one investigator who looked into UGC’s operations. “[They] staked a little cash up front to buy some cereal and coffee. Then, they only spent a little of their cash flow to buy more. They couldn’t ever catch up because they were running behind from the beginning.”
The delays caused bigger problems. In order to redeem UGC coupons, consumers were supposed to contact the company at its Costa Mesa, California, headquarters. But, if consumers contacted the manufacturers whose products were included in the UGC coupon books, those companies denied any connection to—or even knowledge of— UGC.

In early 1996, the California Attorney General’s office began an investigation of UGC. In March, Attorney General Dan Lungren announced a lawsuit against UGC. Lungren’s office based its charges on simple math: UGC had sold more than 210,00 books of 30 coupons each; this meant more than 6.3 million coupons were in circulation. UGC executives disputed the number as too high—but were unable to say how many had actually been sold.

UGC earned 40 cents per coupon from advertising sales but spent $7 to buy and ship each box of cereal. This meant that, if even one in four of the circulated coupons were returned at once, UGC would need more than $10 million to ship product to consumers.

Since the company had almost no financial resources to cover this kind of cost, the lawsuit concluded that UGC was a Ponzi scheme that would leave “hundreds of thousands of consumers with worthless coupons and many coupon book distributors with a supply of worthless coupons.”

The lawsuit asked for $2 million in civil penalties and restitution for consumers affected by the scheme. In addition, it asked for an injunction prohibiting the company from further violations of the California Consumer Protection Law.

UGC president Steven Lee started out defending his company’s practices vigorously...maybe a little
too
vigorously: “All of this talk of Ponzi schemes, a house of cards, fraud... is completely incorrect. This is not a fraud and nobody’s being ripped off.”