Friday 11 February 2011

Scammers and the stupidity of victims who fell for the scams (Part I)

Unfortunately, there are many scammers in the world who will rip you off if you are not careful with your dealings with them. Here are two of them.

Martin R. ‘Marty’ Frankel

This crook was born in born 1954 and he is an American financial criminal who conducted a series of investment frauds in the late 20th century, causing his victims to lose hundreds of millions of dollars in losses. He was caught in 1999, and in 2004 was sentenced to 16 years and eight months in prison based on over $200 million in proven losses to insurance companies he bought then looted; the sentence was reaffirmed by an appeal court in 2006.

Frankel used astrology to make financial trading decisions. In addition, he usually could not bring himself to actually make trades, causing trouble for him with the brokerage firms he worked for. After being fired by his boss in 1986, Frankel set up his own firm called ‘Winthrop Capital’ using the phony name of James Spencer. He also set up another firm called ‘The Frankel Fund’ and conned a businessman named Douglas Maxwell to join him. He did most of the trading because Frankel remained reluctant to buy or hold his chosen investments since he knew he wasn’t really qualified to do so successfully.

Frankel moved to Florida in 1987, and attracted Palm Beach investors, but the ‘Frankel Fund’ lost money on trades, and Frankel was using shareholder accounts to paying expenses, including rent, stock-quote services, and personal spending money for himself, his sister, and his mother. By mid-1988, he was also raiding some of his investor's accounts to cash out other, worried investors who were pulling out their money. This is similar to a Ponzi scheme. Bernie Madoff did the same thing and got a sentence of 150 years in prison. He transferred the remaining funds to his personal account and told his remaining investors that the fund had collapsed due to Maxwell's bad trades and embezzlement. Frankel gave the funds to an attorney, but the funds were then turned over to the Securities and Exchange Commission.

Frankel moved back to Toledo and started a new firm, ‘Creative Partners’, and while the SEC was investigating him, he was using the name ‘Rothschild International Investments’ and a Swiss bank account to separate Creative Partners from his own name and ongoing investigation. By this time, his former boss's wife, Sonia Schulte, was divorcing her husband. Sonia Schulte set up a brokerage in direct competition with her husband's and directed her clients to Creative Partners; meanwhile, Frankel set up another company, ‘Donar Corporation’, which paid for Sonia Schulte's new house, and paid for Sonia's divorce and custody lawyers for an amount of over $300,000 out of the Swiss bank account.

After paying a fine and agreeing to be barred from trading by the Securities and Exchange Commission in 1992, Frankel used several aliases, including David Rosse and continued ripping off people as before.

In an attempt to use the Roman Catholic Church to discourage questions of legitimacy, Frankel founded the ‘St. Francis of Assisi Foundation in the British Virgin Islands’, with a nominal mission of investing in insurance companies in order to fund hospitals. Among people solicited to join the Foundation board was retired CBS Evening News anchorman Walter Cronkite but when he declined to join, Frankel used his name anyway. An official of the Roman Curia, Monsignor Emilio Colagiovanni, agreed to sign a letter falsely stating that the Foundation received funding from the Vatican. Colagiovanni was arrested in Cleveland, Ohio on August 30th 2001. Colagiovanni, by then an 82-year-old retired Vatican official, pleaded guilty on September 5, 2002 to a federal conspiracy charge of taking part in Frankel’s scheme. On March 3rd 2006, he was fined $15,000 and put on five years probation.

Frankel had earlier fled the United States in May 1999. He went by private plane to Rome and then to Hamburg, Germany, where he was arrested on September 4th. He was first tried and sentenced in Germany to three years in jail for passport fraud. He was then extradited to the U.S. in 2001.

In May 2002, Frankel plead guilty to 24 federal counts of securities fraud, wire fraud, and related racketeering and conspiracy. Fifteen of Frankel's associates, including Colagiovanni and Sonia Schulte, also pled guilty to related crimes. By the time Frankel was first sentenced in December 2004, sixteen of his accomplices had been convicted. Frankel told the judge that most of his behavior was to earn enough money to provide for Sonia Schulte (by then Sonia Howe) and her two children. The judge asked "So, you stole $209 million in order to take care of the children?"

Frankel then explained that he could not end the scheme without it coming apart, and asked the judge to consider that deterrence should not be a factor in his sentencing because "If somebody is mentally ill, you shouldn't punish them because it won't stop other mentally ill people from doing it." The judge didn’t fall for that stupid excuse or reasoning and sentenced Frankel to 200 months (16 years 8 months) in federal prison; a state court in Tennessee also sentenced Frankel to 16 years, which was allowed to run concurrently on the condition that he assist officials in recovering lost assets looted from his Tennessee insurance companies.

Several states put Frankel's insurance companies into receivership when it was discovered the companies' primary assets were investments in Frankel's own shell company; among the states affected were Arkansas, Mississippi, Missouri, Oklahoma, Tennessee, and Virginia

John G. Bennett Jr.

This crook was the founder of the ‘Foundation for New Era Philanthropy’, and was later indicted in what prosecutors call the largest case of charity fraud in U.S. history. Bennett was hit with an 82-count indictment recently on charges that he bilked philanthropists as well as museums, universities and other non-profits out of $132 million in a Ponzi scheme (also known as a pyramid scheme) that began in 1989.

Prosecutors said Bennett promised to double money invested by non-profits within a six-month period through investments and matching funds from anonymous contributions, and collected some $350 million from 1,300 non-profits and individuals. But there were no anonymous donors.

This Philadelphia-area Christian businessman had previously run a variety of different entities, including some Pennsylvania state drug education centers and a corporate training business.

In 1989, Bennett invited several friends to become ‘beneficiary donors’ in a new organization he was founding. They were told that if they contributed at least $5000 for three months, he would double it. He explained that he had identified secret donors who would match charitable contributions raised by his friends. So rather than donating $5000 to charity, a sponsor gave the money to New Era Philanthropy for three months, then he or she could donate $10,000.

His friends obliged by giving him various amounts, which Bennett used to pay his own personal bills. He was able to pay them their doubled funds in January 1990 by tapping a payment made to a consulting business he ran on the side. This was the last ‘real’ income paid to investors. To have funds ready to pay off the climbing number of deposits, he increased the minimum ‘contribution’ to $25,000 and lengthened the minimum waiting period. Different donors were told different things; over time the waiting period grew from six to nine to ten months. The number of anonymous donors, anonymous benefactors, and anonymous philanthropists also varied, though Bennett eventually settled on claiming to have nine of them.

John M. Templeton, Jr., son of John Templeton, Sr., the famous investor and philanthropist, was a friend of Bennett, and people believed that he was one of the anonymous donors. In addition, Prudential Securities was a prominent part of the setup (and became the subject of a $90 million lawsuit accusing them of complicity).
In 1994, Bennett expanded the program to allow "donations" by nonprofit organizations.

The program remained small until 1993, when the Philadelphia Academy of Natural Sciences asked for a quarter-million dollar match. After successfully completing that match, many major organizations such as the Philadelphia Public Library and the University of Pennsylvania joined, along with churches and other Christian organizations.

Like most modern pyramid or Ponzi schemes, Bennett's was an 'affinity' scheme, in which he defrauded people of common interest: in this case, local nonprofit organizations and Christian charities. Using the swelling funds from these churches, Bennett expanded further, establishing offices in Radnor, Pennsylvania. He had glossy brochures and a staff to process all the money coming in.

He expanded his sales force by encouraging organizations to take a ‘finder's fee’ from any money they raised. In other words, if a representative could convince donors to give $10,000,000, the agent could keep $1,000,000 for himself, give the remaining $9,000,000 to New Era and get back $18,000,000 for the nonprofit in six months.

By and large his donors did not ask many questions. When they wanted proof that the money they donated was not being stolen, he provided evidence that the Foundation owned government bonds. However, he was showing the same bonds to everybody, and they had been pledged as collateral on loans anyway. He also had prospective participants speak with supposed representatives of Prudential Bache Securities. One of the conditions of the participation was that various tranches (Tranche is a term often used to describe a specific class of bonds within an offering wherein each tranche offers varying degrees of risk to the investor.) had to be committed to. All the tranches together make up what is referred to as the deal's capital structure or liability structure. They are generally paid sequentially from the most senior to most subordinate (and generally unsecured), although certain tranches with the same security may be paid One of the schemes was to space out the participation over the course of one year in three tranches with one being repaid and two tranches always held by New Era. One of the tip offs of the fraud were the tax returns filed by the Trust, which were publicly available. The accounting for the numerous funds held by New Era were not evident in the financial statements. New Era used a small one-man CPA firm which had erroneous financial opinions on the financial statements which Coopers & Lybrand investigated.

This was one of several red flags noted. Bennett told unsuspecting prospects that his anonymous donors met several times a year, in person or by phone. Former U.S. Treasury Secretary William Simon, who ironically lost a lot of money to the scam, asked to be admitted to the donor panel. Bennett never responded to the request and Simon gave him money anyway.

With the cash flowing though his hands, Bennett made all sorts of private investments. He bought a share of a travel agency and ran all of New Era's travel business through it. He also purchased a publishing house and other businesses.

In early 1995, The Foundation for New Era Philanthropy was receiving praise in the press for giving money to religious organizations and involving high school students in charitable events. However, the end came swiftly.

On May 15, 1995, a skeptical article about the Foundation appeared on the front page of the Wall Street Journal. The same day, the Foundation capitulated in the face of a lawsuit demanding repayment of a $44,000,000 loan and filed for chapter 11 bankruptcy protection. In filing, the foundation stated that its assets were worth $80 million with liabilities of $551 million.

A close examination of the documents filed in the subsequent lawsuits reveals that more than $354 million passed through New Era's hands and that Bennett took $8 million of that for himself.

In the end, by liquidating all of Bennett's personal assets and reclaiming funds that had been paid to earlier participants, the court was able to bring the total loss down to $135,000,000, spread among all participants in the scheme. In other words, participants who got out early and suffered no losses were required to give the money back, to be shared with others who were less careful (or less lucky.

I should add that the same thing is happening with respect to the Bernie Madoff scheme.

Bennett faced 82 federal counts of money laundering and wire, mail and bank fraud. He planned to claim in his defense that he had been possessed by "religious fervor", but the judge did not allow this. In the end Bennett pleaded no contest to all the charges in March 1997. Though federal sentencing guidelines indicated a sentence of 22 to 27 years, the judge gave him 12.

All Ponzi schemes die sooner or later, as they are inherently unsustainable. Bennett's particular scam collapsed because of an investigation headed by Mary Beth Osborn, head of the Charitable Trust Section of the Pennsylvania attorney general's office. She had received a letter in 1993 from a suspicious whistle blower within New Era. Her inquiry eventually resulted in New Era's registry with the IRS.

As Bennett started to disclose greater financial details, New Era caught the wary eye of Albert Meyer, a Spring Arbor College accounting professor, whose institution in Michigan had been drawn into the matching scheme. Meyer's research indicated that the Foundation was a scam, but Spring Arbor College successfully collected on its early investment. College officials told Meyer that he was going to endanger their ability to get matching grants if he kept asking so many questions. They went so far as to wave a check from New Era in Meyer's face before investing more money. Meyer however was sure he was right and alerted federal investigators and The Wall Street Journal that New Era had all the features of a pyramid scam. After New Era collapsed, the president of Spring Arbor College called Meyer to apologize. "You were right all along. We should have listened to you," he admitted. The scandal touched 1,100 individuals and charities, including more than 180 evangelical groups, colleges, and seminaries.

Partial list of his investors

Charities According to the PA Attorney General's complaint, prominent victimized charities (listed without dollar amounts) included the Boy Scouts of America, the Environmental Defense Fund, Haverford College, Harvard University, Princeton University, The Nature Conservancy, One to One Partnership Inc., Planned Parenthood, the Philadelphia Orchestra, Stanford University Medical School, the United Way and Yale Law School. Some of the organizations with known involvement amounts included (in alphabetical order):

Academy of Natural Sciences, Philadelphia, Pennsylvania, $2.7 million Biblical Theological Seminary, Hatfield, Pennsylvania, $5.8 million
CB International, Wheaton, Illinois, $4.6 million Covenant College, Lookout Mountain, Georgia, $5 million
Detroit Institute of Arts, Detroit, Michigan, $4 million
Houghton College, Houghton, New York, $4 million
John Brown University, Siloam Springs, Arkansas, $4 million International Missions, Reading, Pennsylvania., $5 million International Teams, Prospects Heights, Illinois., $5 million King College, Bristol, Tennessee., $5 million million University of Pennsylvania, 2.1 million Pennsylvania,$2.1 Wheaton College, Wheaton, Illinois, $4.6 million


George F. Bennett Jr., Boston, $3.3 million million Peter Ochs, ( address unknown ), $3.2 million
Buford Television Inc., Dallas, $3 million million Henry F. Harris, Wyndmoor, Pa., $3 million million Westwood Endowment, Indianapolis, $2.8 million $280,000 Don Soderquist, Rogers, Ark., $2.8 million million William Kanaga, Orleans, Mass., $2.4 million million Henry W. Longacre, Souderton, Pa., $2 million million Whitehead Foundation, New York, $2 million (about $1 million) Amelior Foundation, Morristown, N.J., $1.9 million

What I find most interesting is that both these scammers tried to hoodwink their judges into believing that they were suffering from some form of mental illness.

But what I find really incredulous is that these organizations and people who were the victims of these scammers fell for their scams. One thing you can be sure of —no insurance company will ever insure these people and organizations for their losses because of their own stupidity.

In my next article, I will tell you how to avoid being scammed by people like these two con artists I have just written about.

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