You Can't Cheat an Honest Man - James Walsh [13]
But one former Elliott employee offered a more likely explanation: “His ego told him he could stay ahead of the game and it would all pay off. I don’t think he had any criminal intent. He really thought he could give them what he promised.”
The legal proceedings didn’t go well for Elliott. In August 1988, a federal judge ordered him to “disgorge” $1 million for the receiver’s benefit. Elliott was not able to comply because he didn’t have any money. In January 1989, he was ordered in a civil suit to turn over his personal jewelry and household effects to the SEC. In March 1990, a federal trial jury returned a verdict of guilty on all but two of the criminal charges Elliott and Melhorne faced. Elliott was sentenced to three consecutive five-year prison terms. Melhorn received three consecutive four-year prison terms.
In April 1994, a federal appeals court considered Elliott’s last gasp at arguing his innocence. Elliott claimed that the trial court should have listened to testimony from his satisfied customers when considering his intent to defraud. The appeals court didn’t agree:
No amount of testimony from satisfied customers could “average out” Elliott and Melhorn’s intent to defraud when they continued to solicit new investments and reassure old investors while concealing millions of dollars in losses per year with fictitious audits and phantom collateral....
But Elliott remained free on bail while he filed other appeals. “Last time I heard, he was living up in Tallahassee,” one burned investor said. “They just keep appealing and appealing. He’s never served a day. I hope he winds up in jail, though. He should serve some time.”
CHAPTER 2
Chapter 2: Location, Location, Location...Then the Money’s Gone
Real estate seems to beg Ponzi schemes.
Historically, Ponzi perpetrators have focused on commercial real estate development programs. They’d often use the so-called “four-fromthree” formula—which is often used by legitimate developers.
In this kind of deal, the developer finds a good property, lines up potential tenants and may even arrange partial financing. To find the money he needs to complete the project, he looks for three investors (the number can, of course, vary) who will each put in a set amount of money in exchange for an equal ownership interest. In the case of three investors, each one gets a 25 percent interest and the developer gets an equal 25 percent interest for the time and effort that went into setting up the project.
Since many legitimate developers use this formula, it provides credibility for Ponzi perps who either collect the investments and don’t actually develop anything or sell dozens of 25 percent shares in a single project.
project.
count indictment charging him with mail fraud and money laundering related to a Ponzi scheme that bilked more than 200 southern California investors out of more than $13 million between 1990 and 1993. The indictment resulted from a cooperative investigation performed by the FBI and the IRS Criminal Investigation Division.
Murphy promised phenomenal returns to investors from across the United States if they invested their money in one of several commercial real estate projects being developed by his company, American Capital Investments Inc. (ACI). He invited people to invest in dozens of limited partnerships managed by ACI. The self-proclaimed real estate investment expert had advertised heavily on television and in magazines. He’d also co-written a book called One Up on Trump.
According to the U.S. Attorney’s office in Los Angeles, Murphy commingled money from various limited partnerships and improperly diverted a large portion of that money to pay ACI’s operating expenses and his own personal expenses. Murphy also used funds from later investors to pay supposed profits to earlier investors. The indictment charged that Murphy lied to obtain his investors’ money and continued to hide the truth to avoid having