You Can't Cheat an Honest Man - James Walsh [138]
Fitzpatrick also met with the other general partners of Great Rings. He agreed that, if the general partners would refer potential investors to CNB, the bank would loan money to those investors that it deemed even minimally qualified. “The bank was dying to get money out there working,” recalls one of the general partners. “The minimal qualifications were that the leads could fog a mirror.
Fitzpatrick contacted two other regional managers of CNB— in Hartford and in Waterbury—who also agreed to go along. The bankers reached a detailed agreement with Zak that each investor’s loan was to be in the amount of $50,000 (the purchase price of a Great Rings limited partnership share) with an informal maturity date two years later and with interest set at 1 percent over prime.
The terms were tailored to fit the needs of the Great Rings partners exactly. CNB presented the same terms to every potential investor, with no negotiation on the investor’s part. CNB’s willingness to make these loans was an enormous selling point for Zak.
Great Rings filed the appropriate paperwork to exempt its limited partnership shares from the registration requirements of the Securities Act of 1933. Its argument was that the limited partnerships didn’t qualify as a public offering under Rule 506 of the Act.
Rule 506 exempts transactions involving no more than 35 purchasers of securities. In calculating the number of purchasers under the Rule, “accredited investors” are not counted. An “accredited investor” is a person with a net worth—together with his or her spouse—over $1 million or an income over $200,000 a year in each of the two previous years.
Rule 506 also requires that each purchaser who is not an accredited investor have “such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment.” Great Rings marketing materials stated:
Units will be sold only to persons that the General Partners reasonably believe to satisfy the definition of an “accredited investor” under...the Securities Act.
So, Great Rings was supposed to be a rich person’s deal. Sometimes Warnings Tease Greater Interest
The various disclaimers included in the marketing materials acted like catnip to greedy strivers of middle-class means. With the marketing pieces circulating around central Connecticut, many people would know that anyone involved in Great Rings had to be rich by the SEC’s reckoning. So, investing in the deal was something like leasing a Mercedes. It was a sign you had made it.
Of course, Zak didn’t actually follow the disclaimers. He sold Great Rings limited partnership units to accredited and nonaccredited investors alike. And, with CNB rubber-stamping loan applications, a lot of people who wouldn’t normally have $50,000 in cash to invest were able to get involved. As one court later noted:
The evidence is overwhelming that [he] solved this problem by ...wholesale forgery. When an investor signed his subscription agreement, he was told what to fill in and not fill in. It would not be completed in full. [Zak] would then fill in some cooked up figures on the balance sheet so that the investor’s income and net worth would be sufficiently inflated to make him accredited.
The Great Rings promoters focused their efforts in Waterbury on the city’s Republican Party establishment. This was a middle-class crowd...with aspirations for bigger things.
More than 40 investors ultimately joined Great Rings, contributing more than $2 million. Monthly payments to cover the interest payments on the CNB loans started in September 1988. They continued for about a year until the fall of 1989. At that point, the money stopped coming—and explanations were in exceedingly short supply. Only one thing was certain: CNB still expected to be paid.
By this time, Zak had left Great Rings. The money that the company had raised was gone. The partnership had acquired two relatively small parcels of land, totaling 10 lots;