You Can't Cheat an Honest Man - James Walsh [120]
These speeches were designed to convince listeners that world events justified investment in precious metals as a hedge against inflation and political instability. Jules Diamond, a retired executive from a big liquor company, invested after spending three days at an all-expensepaid war college seminar. Kennedy recommended that Diamond put his money in silver to hedge against a collapse of the commercial banking system. “It all seemed so reputable. It didn’t dawn on me to check it out independently,” Diamond said.
When an investor agreed to purchase precious metals from WMC, an employee would quote the investor an approximate price. The employee would then contact the WMC trading department, which would locate the best price for the metal from a network of dealers. The employee would then inform the investor of the exact, or “lockedin,” price. The investor would then transfer funds to WMC. Investors bought the metals with either cash or through cash down-payments coupled with bank loans arranged by WMC.
There was one complication: If WMC did not provide the dealer with the locked-in purchase price within 48 hours of ordering, the dealer usually nullified the contract with WMC. This meant WMC had to reorder at a new price, which could be higher or lower than the investor’s quoted price.
At some point about 1984, WMC began delaying purchases in the hope of making money on the difference between locked-in prices and actual prices paid. Word of WMC’s questionable practices reached the CFTC pretty quickly—certainly by 1986. But the commodities regulators didn’t have enough evidence to take any action.
Once the delays started and no regulators responded, Kennedy seemed to conclude that WMC could collect both buy and sell commissions for metals that were never actually bought or sold. Instead, he diverted much of the investor money to other uses. Among these:
• a 6,000-square-foot Colorado home with an indoor basketball court and other amenities;
• several luxury cars, including the obligatory Mercedes-Benz;
• the purchase of and payment of expenses necessary to run Conservative Digest magazine;
• the purchase, refurbishment and transport of a helicopter for Nicaraguan “Contra” counter-revolutionaries.
Ownership of the magazine and the support of the Contras gave Kennedy access to higher-profile politicians, including Ronald Reagan, George Bush, Oliver North and Jerry Falwell. This increased the star-quality of the speakers at WMC’s seminars. The magazine’s mailing list also provided Kennedy with a ready source of potential investors for his seminars.
Between 1984 and 1987, WMC increased its sales rapidly and began to experience serious cash shortages. Nevertheless, Kennedy continued to promote sales to new investors, without telling them that WMC was between $10 million and $13 million behind in filling orders.
If the precious metals market had been moving downward during the mid-1980s, WMC’s delays would have been profitable. But the market was moving upward during the height of the deception. So, the delays were increasing the obligations WMC owed its investors. Kennedy’s plan for dealing with the chronic problem: Sell more contracts and fulfill old orders with new money. Hello, Ponzi scheme.
In March 1988, Kennedy sent letters to WMC’s clients which blamed the failure to fill client orders on the tremendous growth of the business and the pressures this put on his overworked staff. At this point, the federal regulators were working with the Denver U.S. Attorney’s office and local law enforcement agencies to build the case again Kennedy and WMC.
Later that month, WMC’s cash shortages were so great that it filed for Chapter