You Can't Cheat an Honest Man - James Walsh [12]
He had to borrow extensively to maintain the appearance of a thriving business, though. And his precarious circumstances always pressured him to chase new investors to pay off old ones. All the while, Elliott used investor funds to pay for his personal living expenses— including medical expenses and mortgage payments on his various houses. His sole employment during the lifespan of the scheme was as president of Elliott Enterprises—for which he never received a salary. Instead, he compensated himself by commingling investors’ money with his own.
There was no legal mechanism to prevent him from doing this. Because Elliott Enterprises was an unincorporated business, Elliott could draw upon company bank accounts as though they were his personal funds. He kept a separate personal account on the books of Elliott Enterprises and moved money into this account whenever he needed it. At several points during the scheme, his account had a balance of more than $1 million.
The SEC was first alerted to Elliott in 1986. During the summer of that year, Elliott Realty employee James Gersonde convinced his mother to invest about $400,000 with Elliott. Gersonde’s brother John, who lived in Michigan, felt the deal was too good to be true. John asked questions but didn’t like the answers he heard. His mother and brother claimed that they were earning a guaranteed 10 percent on money placed with Elliott—and that this income was tax-free. John rightly suspected a tax-free investment which paid as much as 10 percent—let alone a “guaranteed” 10 percent. So, he contacted the SEC office in Miami. (Though his mother was later happy she’d been able to get her money out of Elliott Enterprises, John Gersonde said at the time “she was furious with me for ruining her tax-free investment. Livid.”)
The Feds called Elliott to their Miami office for questioning. He showed up at their offices but refused to explain his operations in any detail. Surprised by Elliott’s brashness, the SEC agents let him go. But Elliott Enterprises was in their investigative sights.
In the early part of 1987, which was the peak of its success, Elliott Enterprises owed approximately 940 investors about $60 million in repurchase agreements and other loans. However, word was spreading fast through south Florida that the Feds were after Elliott. And interest checks started coming less reliably. Through this all, Elliott maintained a kind of crazy impetuousness. One worried investor who telephoned the company was told by an Elliott Enterprises employee that Elliott had been called to Washington by President Reagan for emergency financial advice.
There’s no question that personal charisma was one of Elliott’s keenest tools. “He would make decisions that weren’t logical at all,” one former associate said. “You’d wonder. Then you’d look around at the office, and all he had put together, and you’d say ‘This guy must know what he’s doing. Maybe he sees a bigger picture than I do.’”
Like many persuasive Ponzi perps, Elliott was able to convince some investors that the Feds were the villains. “I don’t think the SEC is being very nice to Mr. Elliott,” one investor told a local newspaper. “We honestly feel he hasn’t done anything all that wrong.”
Nice or not, the SEC filed a civil suit against Elliott and his firms in early 1987. The SEC suit was the final blow for Elliott Enterprises. The Ponzi scheme collapsed and interest payments ceased.
In the immediate aftermath of a court-ordered receivership, Elliott’s investors and creditors stood to recover a little more than 10 cents on the dollar. For any more, they would have to sue someone. Within a few months, Elliott and Melhorn were facing a major criminal indictment—which included 22 counts of fraud under the Investment Advisers Act, six counts of securities fraud under the Securities Act, 10 counts of mail fraud, and one count of conspiracy.
“I’m not sure that apart from market forces and unwise investments that he has an explanation for what happened,