You Can't Cheat an Honest Man - James Walsh [122]
Prosecuting the perp after a Ponzi scheme has crashed is usually tough. Locating the perp can be difficult. And, even if you do manage to find the person, he or she is usually broke—so collecting a judgment is practically impossible. But there are some things a burned investor can do to achieve some degree of either personal satisfaction or financial reimbursement.
A piece of strategic advice: If you’re a burned Ponzi investor, you’ll probably have to go after the perps for personal satisfaction and then set your sights on fellow investors and the lawyers or accountants who advised the perps for monetary satisfaction.
Investors Turn on Each Other
The twenty-three-year litigation resulting from the ill-fated HomeStake Production Co.—discussed earlier in Chapter 5—involved one of the biggest and most protracted Ponzi scheme legal battles in American history.
In the early 1950s, Robert Trippet organized Home-Stake to develop oil and gas properties. He raised capital by selling percentage interests to investors through private placements. From 1964 to 1972, HomeStake organized separate annual programs, units in which were registered as securities with the SEC.
Trippet told investors that each of the programs was organized to develop a particular oil and gas property or properties in the Midwest, California or Venezuela. Like most Ponzi perps, Trippet tailored HomeStake’s pitch to each individual investor’s needs.
At first, the operation seemed successful. Quarterly progress reports indicated that substantial oil was being produced. In fact, very little oil was being produced. Payments to early investors came from money raised from later investors. Still, there were some investors who complained that their returns weren’t what they’d expected. Home-Stake paid substantial sums of money to hush these unhappy investors.
Shortly afterward, the fabric that held Home-Stake together began to fray. Despite the settlements, word began to circulate that Home-Stake was crooked. Disgruntled investors started turning on each other— which didn’t result in much that was good for anyone. “I just remember feeling like I’d been played for a fool,” says one Home-Stake investor. “I was angry. I didn’t like the idea that a few people with connections were getting their money out while I was just some schmuck stuck in a scam that was heading for the toilet.”
In fact, the early settlements had little to do with “connections.” But there was so much brewing discord that the facts hardly mattered.
In March 1973, two investors who were dissatisfied with their returns and one who’d been told that the IRS was going to disallow HomeStake tax deductions filed a lawsuit in California. Six months later, Home-Stake filed for bankruptcy in Oklahoma. A flood of lawsuits from angry investors followed the filing. The various civil cases were combined into one big action.
The Ponzi scheme wasn’t giving rise only to civil liability. In December 1974, a grand jury in Los Angeles returned indictments against thirteen officers and associates of Home-Stake for violations of the securities and income tax laws. So, the legal fallout of the HomeStake collapse followed two separate tracks. Both are worth a look.
In the civil lawsuit, called Anixter v. Home-Stake Production Company, et al., the investors claimed that the funds collected by HomeStake through the annual securities offerings were not segregated for use in developing particular oil properties—as Trippet had said they would be. Instead, the investors said money was commingled with the general funds of Home-Stake and paid out in the form of bogus profits. As is often the case with Ponzi schemes, Home-Stake was running out of money from the beginning. Since there was no real profit from oil operations, each succeeding year generated less bogus profit. That explained the disgruntled investors—and the amount of in-fighting among investors.
Despite internal discord, the various civil complaints were certified as a single class action suit in 1976—three