You Can't Cheat an Honest Man - James Walsh [14]
As many Ponzi perps do, Murphy persuaded investors to roll their supposed profits into new funds rather than cashing out. Those who demanded their money were paid with funds from later investors. Unfortunately, only a few investors demanded their money back. Of more than $18 million that Murphy collected from investors, he returned less than $5 million.
About the time that the SEC was opening its investigation into Murphy’s limited partnership Ponzi, it was closing the lid on another.
In September 1993, the SEC filed a lawsuit against Atlanta real estate developer H. Ellis Ragland. The Feds asked U.S. District Court Judge J. Owen Forrester to make Ragland return $670,042 in “ill-gotten gains” derived from a Ponzi scheme.
Between July 1985 and December 1987, Ragland’s company, Guaranty Financial Corp., raised more than $4 million from 165 investors in three limited partnerships and two blind pools. (Blind pools are investment vehicles in which investors don’t know exactly how or where their money will be used.)
In each limited partnership, Ragland was the general partner or manager, in charge of scouting out real estate in metropolitan Atlanta. Investors who assumed they were putting their money in shopping centers, auto malls and undeveloped commercial land were instead supporting Ragland’s social-climbing lifestyle, including a taste for fine wines, payments on his house, country club dues and a MercedesBenz, according to the SEC.
The SEC lawsuit had come too late to save Ragland’s investors. A few weeks earlier, a group of investors who’d asked repeatedly to withdraw their money form Ragland’s limited partnerships had forced him and Guaranty Financial into involuntary bankruptcy.
A court-appointed trustee investigating the assets of both Ragland and his wife didn’t find much. He finally agreed to a settlement of only $10,000. This might seem like a surprisingly small settlement— considering the large sums of money Ragland collected from his investors—but very little is ever recovered in the wake of a Ponzi scheme.
The “Zero-Down” Ponzi
Beginning in the recession of the late 1980s, a number of real estate Ponzi specialists moved from the commercial market to the so-called “zero-down” residential market. They filled the deregulated television airwaves with infomercials promising big profits from investments in distressed properties.
Zero-down Ponzi schemes can be complicated. The perp will offer information and support that helps investors find residential real estate owned by people who are late in paying property taxes, mortgage payments or both. (Some schemes focus, instead, on real estate tied up in probate or other estate disputes. But the ultimate point is the same.)
Just before a bank repossession or tax sale, the zero-down investor steps in and offers to take over the payments on the property—sometimes on an accelerated schedule—in exchange for taking the title. Usually, some heated negotiating follows. If the existing owner and lender or tax assessor are desperate enough, they will agree to easy terms.
Anyone with decent credit and strong nerves can do this. Where does the Ponzi perp come in? He’s been “coaching” the zero-down investor through the process. If it goes well for the investor, she can end up owning a piece of real estate with some—though usually not much—positive equity value. That’s what the Ponzi perp wants. Saddled with the right kind of second mortgage, it becomes cash in his hand.
Part of the Ponzi perp’s coaching will be to convince the successful zero-down investor to borrow against equity in the newly acquired property and join the perp in other real estate deals. “It’s a neat trick,” says a veteran real estate Ponzi perp from the New York area. “You use other people’s good credit, stupidity and greed to squeeze the last few drops of cash