You Can't Cheat an Honest Man - James Walsh [119]
2) a set of motivational tapes.
As a court would later note, “The value of these products was insignificant in comparison to the value of the $1,500 entry fee.” In the Topeka area, some 250 passengers joined the TFSS scheme. As the program was originally structured, PMC maintained investor charts and kept track of the placement of passengers’ names and their movement on the various charts. However, as the scheme grew, these arrangements broke down. Individual participants kept track of the charts; checks were endorsed over for direct payment to the pilots.
But TFSS had the same fatal problem all Ponzi schemes share. As it operated, its demand for passengers increased exponentially. During the summer of 1988, the scheme collapsed. That October, Ridenhour pleaded nolo contendere to selling unregistered securities, was placed on probation and ordered to pay $10,000.
In late 1988, the Kansas Securities Commissioner’s office sued Ridenhour’s colleagues for operating an illegal pyramid scheme. The Commission sought a mandatory injunction, the disgorgement of profits, the appointment of a receiver, and the production of records to allow an accounting.
The court ruled for the Commissioner and ordered TFSS and PMC to cease operations. The companies filed an appeal, which resulted in the 1991 Kansas Supreme Court decision Mays v. Ridenhour, et al.
The state’s high court considered several issues, including whether the TFSS investments were securities, the status of Ridenhour and her colleagues within the scheme, and whether intent to defraud must be established in order to determine liability. The court concluded:
[T]hese defendants have unjustly enriched themselves at the expense of others through the acceptance of proceeds from the unlawful sale of securities. Even though defendants did not actively solicit or recruit, they relied upon others to do this and accepted the benefits of these unlawful acts. The Commissioner argues that it is ironic that defendants could receive and retain sale proceeds but bear no responsibility or accountability for the unlawfulness of the sales. We adopt the “but for” or proximate cause test. Thus, for an individual to be liable for the injury, all that must be established is that the injury flowed directly and proximately from the actions of the person sought to be held viable.
The court upheld the trial court decision’s requiring 10 people who participated in the scheme to pay back about $60,000 to other investors. “This allows us the ability to require the repayment of profits,” said Securities Commissioner Jim Parrish. “We needed an opinion like this.... It’s going to strengthen the law in that regard.”
Case Study: The Feds Versus William Kennedy Several regulatory agencies cooperated to bring a big Ponzi scheme known as Western Monetary Consultants, Inc. (WMC) to justice.
WMC was founded in 1979 by William R. Kennedy, a Colorado businessman (no relation to the Massachusetts Kennedys) who used a variety of pitches—including supposed political affiliations—to sell WMC investments.
Kennedy was “quite an intelligent guy, very aggressive, always,” said Willard Walker, a Colorado stockbroker. “He was a by-God, sort of a bull-like guy who did get a lot done.” But Kennedy’s ego and sense of urgency were his undoing. Walker recalled advising him not to run for Congress against a popular incumbent in the late 1970s.
Kennedy ran, anyway. But his bid for the congressional seat didn’t get as far as the party primary. “He has an ego like the Graf Zeppelin,” Walker said. And a destiny like the Hindenburg.
WMC promoted itself as a wholesale distributor of precious metals and coins. In fact, it wasn’t anything like what most merchants would call a wholesaler. It sold precious metals to the public over the phone and, beginning in about 1984, at what it called “investment seminars” or “war colleges.”
The seminars were Kennedy’s forte. He