You Can't Cheat an Honest Man (7 page)

NTC and Incomnet weathered the regulatory storms of 1995. By early 1997, NTC was still in business. But it had turned its focus more sharply on ethnic groups and selling pre-paid phone cards, rather than traditional long-distance service.

“Pre-paid phone cards are the perfect product for a Ponzi scheme trying to pass as legitimate multilevel marketing,” says one former Ponzi perp. “They have the gloss of high tech...but they’re actually inexpensive and need to be replaced constantly.”

Even the most grizzled Ponzi perp can’t predict where the next hightech schemes will emerge. But a number of people who know how the schemes work guess the premise will be genetically-engineered cosmetics and dietary supplements. “You started to see hints of this when the FDA was holding back on approving new AIDS drugs,” says a federal law enforcement official who’s helped prosecute dozens of Ponzi schemes. “The combination of biotech sizzle with the triedand-true appeal of make-up and vitamins is a great pitch for Ponzi scammers.”

Case Study: United Energy Corporation
California-based United Energy Corporation operated at the intersection of technology, tax havens and larceny.

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In the Culture Farms scam, some 28,000 investors lost about $50 million buying kits that would grow milky “cultures” in a glass, supposedly to be processed into cosmetics. Most of the cultures grown were simply recycled into new kits and resold to investors.

UEC President Ernest Lampert, who claimed to have made a fortune in construction and other business ventures in Alaska and Hawaii, had a fairly utopian plan. His company would generate electricity from high-tech solar modules suspended in pools of water—and sell the juice to local utilities. It would then use the hot water produced by solar electricity to raise warm-water fish and produce ethanol and high protein cattle feed as byproducts.

UEC installed a network of 3,000 photovoltaic solar-cell collectors on man-made, acre-sized ponds in the rural California towns of Borrego Springs, Barstow and Davis. From the air, the “solar farms” looked like huge checkerboards. The 20-by-20 foot photovoltaic modules were shallow boxes with concave surfaces that focused sunlight on solar cells. They were mounted on islands about 208 feet in diameter, with aluminum frames packed with Styrofoam. These islands floated in a few feet of water.

Water was piped through the modules to cool them; this would then heat the ponds for fish breeding. The whole process was part of what Lampert called an “integrated life system.”

Better still: Lampert claimed that UEC’s solar energy cash flow would be heavily tax-advantaged. The average module, over its 30-year life span, would produce net cash flow of $243,775, all for an out-ofpocket investment of only about $15,000.

The promised tax benefits proved to be grossly exaggerated. Still, UEC sold 5,323 aluminum and silicon solar energy devices to 4,500 investors for $30,000 to $40,000 each. That was a total take of more than $200 million—though only about $83 million was collected. “Ernie was a consummate salesman,” says Patrick Jordan, a lawyer who bought a solar module from Lampert.

UEC recruited life insurance agents and financial planners to sell modules on a commission basis. The contracts for the modules usually provided for down payments ranging from 36 percent to 43 percent of the purchase price, with the remainder financed by long-term, generally nonrecourse, promissory notes which were payable in semiannual or annual installments and secured by the modules themselves. In a typical United Energy sales agreement, a person bought a $40,000 module with a $14,500 down payment and signed a 30-year promissory note for $25,500 in monthly payments. There was
some
truth to the tax-advantage claims. Federal and state tax credits created in 1982 to spur investment in renewable-energy programs allowed a UEC investor in the 50 percent tax bracket who put down only $14,500 on a module to reap tax benefits of $23,235 in the first year.

So, for UEC’s investors, many of them lawyers, accountants or engineers, the company’s sales pitch offered a chance to invest in a socially beneficial program and a lucrative tax shelter at the same time.

Early investors were paid for power their modules never produced. In typical Ponzi scheme fashion, UEC made it appear that the business venture was a success. It fabricated kilowatt hours of production for each module and paid owners more than $4 million for this phony productivity.

The truth: UEC solar farms produced a negligible amount of power. The farms actually sold a total of less than $3,500 of electricity, in part because about 1,200 of the modules bought by investors were either not built or not installed.

Almost half of those that were installed didn’t have a critical element, the solar cells that chemically convert sunlight to electricity. Lampert said that problems with solar-cell suppliers forced him to install many of the modules without cells in order to meet IRS requirements that the devices be “placed in service” to qualify for tax benefits. Because the modules were capable of producing thermal energy—that is, heating the water—they technically functioned.

This kind of slippery logic was typical of Lampert’s business ethic. He was also a virtuoso of self-dealing. Among his transactions:

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Renewable Power Corp., owned by Lampert’s wife Delphine, actually owned the hardware and real estate at the three solar farms. It rented the integrated life systems to UEC.
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United Financial Corp., owned by Lampert himself, and operated as a financing unit whose sole income was a 1 percent interest markup on investors’ money as it flowed from UEC to Renewable Power.

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Lampert executed an agreement with himself, as “exclusive designer” of various renewable-energy equipment, to receive a 4 percent commission on UEC’s gross sales. Besides his $75,000 annual salary, the arrangement brought him about $2.7 million.

By early 1984, word was circulating among UEC investors that the company was being investigated by the IRS and California state regulators. In April 1984, eleven southern California investors who put a total of almost $400,000 in UEC filed a lawsuit claiming fraud.

John Bisnar, an attorney for the group, said that his clients intended to use the investments as a means of lessening tax liabilities. Instead, they learned that the devices were “never purchased and never installed,” Bisnar said. “In the beginning, everything seemed to be all right. Perhaps [UEC] got too successful and got more investors than they could handle.”

Bisnar said the investors would be pleased if they could recover their investments and attorney’s fees. “If Lampert called tomorrow and said ‘I’ll give them their money back,’ I’d be willing to drop the whole thing,” Bisnar said. The call never came. But more trouble did.

In October 1984, UEC and Renewable Power were named in a civil lawsuit filed by the California Corporations Commission, which alleged violations of state securities laws. The state tried to get an injunction to put the companies out of business—but the court refused, insisting the case go to trial.

By early 1985, well before any of the 30-year benefits were seen, UEC filed for protection from creditors under Chapter 11 of the federal Bankruptcy Code. By the bankruptcy trustee’s accounting, more than $40 million of the $83 million received by UEC went to manufacturing and construction of solar modules, the ponds and manufacturing equipment. About $7.3 million was spent on research and development, $12 million for operating and marketing costs, $12 million for sales commissions and $4.7 million in payments to module owners for “purported but fictional power sales” to public utilities. The payments made UEC a Ponzi scheme.

The trustee alleged that $20 million in UEC assets, including three condominiums valued at more than $600,000, four airplanes, two cars and nearly $2.7 million in “royalties” were “fraudulently or otherwise improperly transferred” to Lampert and Lampert-controlled entities.

In March 1987, a federal court ruled that the Lamperts had operated an abusive tax shelter that “perpetrated a massive fraud upon the public and the government.” The ruling, by Magistrate Claudia Wilken, enjoined the Lamperts from selling tax-shelter-related investments without prior Internal Revenue Service approval. Wilken concluded that Lampert had “diverted money from UEC for the purpose of hindering the Internal Revenue Service. He has engaged in extensive deceptive and fraudulent practices and made it clear that he intends to continue these practices.”

Wilken also ruled that Lampert had diverted $4.5 million from UEC into his own bank account. Finally, she wrote:

No buyer with reasonable knowledge of the relevant facts would buy a UEC module at any price....Such a buyer would have realized that UEC’s modules had no chance of producing any significant income and that tax credits would never become available because the modules would never be placed in service and because the...operation was a sham.... The best evidence of the modules’ value is the Trustee’s sale of them for scrap, which will bring at most several hundred dollars.

One of Lamperts attorneys said the findings “[weren]’t supported by the evidence” and he intended to appeal the ruling. He said that Lampert already had been assessed more than $9.5 million in abusivetax-shelter fines by the IRS even though the judge who had presided over the state actions had “found absolutely no evidence of any type of Ponzi scheme.”
Lampert blamed investigations by the IRS and the California Department of Corporations for the company’s demise. “If I wanted to do an ment of Corporations for the company’s demise. “If I wanted to do an square-foot office on Wilshire Boulevard. We did not have a garage operation.” He also accused the government of purposely delaying trial in its case against him, aware that bankruptcy and tax assessments would leave him hard-pressed to mount a defense.

By the late 1980s, Lampert had gone back into business, selling rooftop solar-power modules through a southern California company called Lampert Energy Co. He even solicited former UEC investors, asking them to invest in his rooftop modules and promising $18,000 in “positive cash flow” during the first five years.

In October 1989, Lampert was named in a 15-count criminal fraud indictment. Lampert faced a maximum of 75 years in prison and a fine of $1.2 million. The indictment ended a four-year investigation by the U.S. Attorney’s Office, the California Attorney General’s Office and the Postal Inspection Service. “They were rolling over money from new investors to old investors, creating a classic Ponzi scheme,” said Michael Baum, a San Francisco postal inspector.

In March 1991, the case went to trial. Lampert’s one remaning attorney, Deputy Federal Public Defender Robert Nelson, argued that his client had perpetrated no fraud but had worked for years for low pay to improve his cutting-edge technology. “This case is about a solar pioneer who tried to live his dream of making clean energy from resources of the sun,” Nelson said.

He said Lampert was on the brink of success when the IRS, upset that the investments had become popular as legal tax shelters, “harassed and blacklisted the company,” leading to its demise.

The argument didn’t work. Lampert was convicted and sentenced to eight years in prison.

CHAPTER 4
Chapter 4:
Paying First Class, Traveling Steerage

The travel industry might not seem like an obvious place for Ponzi schemes to flourish—but it is. Travel has all the seductive trappings any seasoned Ponzi scam artist needs to operate:

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Passion. People are passionate about travel; especially, vacation travel. The Ponzi perp is banking on the fact that passion makes people act without thinking.

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Ease. The travel industry is largely unregulated; therefore, it is easy to get away with otherwise questionable activities.

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Privacy. When travel is a personal expense, many people like to keep its financial details to themselves.

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Enthusiasm. People who like to travel usually can be counted on to do it often; thus, it’s a continual source of revenue.

Personal travel has become a ruthlessly price-driven commodity. The deregulation of the airlines, which began in the early 1980s, led the way on this count. Low-cost carriers like Southwest Airlines and ValueJet (and, in another area, Carnival Cruises) keep prices down.

On the other hand, business travel is a market with fat margins, big mark-ups and, as a result, all kinds of special deals. There are advantages to being an industry insider—just ask the travel coordinator for any large company. He or she is usually laden with promotional perks and freebies.

Ponzi perps try to take advantage of the fundamental differences that exist between personal travel and business travel. The smartest perps choose between investment-driven Ponzi schemes and sales-driven pyramid operations as circumstances dictate. Both work in the travel business. And sometimes the scheme combines both elements.

Travel Agent Card Mills

For years, airlines, hotel chains, car rental companies and other companies in the industry have offered professional travel agents promotional discounts and free upgrades in order to earn recommendations to business travel customers. These perks are one of the reasons that people who like to travel become travel agents.

The pyramid perps are drawn by a critical market imbalance created by the perks. Personal travelers accustomed to the low prices created by no-frills carriers see the perks available to travel agents as their best chance of getting even deeper discounts...or regaining some of the nicer treatment that commodity travel has eliminated.

The simplest way to get around the market imbalance is to become a travel agent. But becoming a professional travel agent has traditionally taken years of training, accreditation by groups like the American Society of Travel Agents (ASTA) or International Airlines Travel Agent Network (IATAN), compliance with licensing and registration requirements and obtaining bonding and comprehensive insurance.