You Can't Cheat an Honest Man - James Walsh [140]
As long as the stock brokerage isn’t dumping worthless stock that it owns or coercing a person to make an investment he’s said he doesn’t want to, the operating rule is “Buyer beware.” It’s really hard to find a broker liable for a client’s losses. Whether or not they should, the rules assume an investor knows what he’s doing.
As a result, some of the most egregious schemes are able to market themselves through legitimate brokerages.
In April 1989, Thomas Mullens started Omni Capital Group in Boca Raton, Florida. He employed commissioned salespeople, secretaries, and receptionists for the corporate office in Boca Raton and sales offices in New Jersey, California and Ohio.
Omni Capital sold loosely-defined “investment opportunities” in the form of shares, contract rights and participation rights in limited partnerships. Mullens told investors the limited partnerships were formed to buy and sell small, privately held companies for a profit. He published promotional materials claiming he’d sold 22 companies and his investors had averaged 24 percent annual returns.
In reality, Omni Capital was a Ponzi scheme. Mullens and his staff were able to convince about 150 greedy people to invest some $27 million in the scheme between 1988 and 1992. The investors, mostly elderly retirees, were promised annual returns of at least 15 percent on their investments. (But Mullens promised some investors returns of up to 15 percent each quarter.) “He customized his deals. If he needed money he’d promise you any interest rate,” said Thomas Tew, a Miami lawyer who worked on the case. This is a familiar theme.
To keep investors involved as long as possible, Mullens spent some of the money on false account statements reflecting annual rates of return of 20 percent to 30 percent. As with the typical Ponzi scheme, he used some of the contributions from later investors to pay off returns promised to earlier investors, thus convincing at least some people that Omni Capital was a successful enterprise.
Mullens spent some of the fraudulently acquired money on symbols of success: a million-dollar home, an airplane, country club memberships, glossy brochures full of empty boasts about Omni Capital, and elegantly detailed offices.
The scheme began to totter in 1991. First, the SEC began an investigation based on promises Mullens was making. In the course of that investigation, a group of Omni Capital employees learned that Mullens was a twice-convicted felon who’d spent three years in prison in the 1970s for operating a pyramid scheme in New Jersey.
Some of these employees had invested money with Omni Capital. They demanded refunds and Mullens paid them about $1 million, buying himself a little more time. But the collapse came quickly in April 1992 when word of the SEC investigation leaked to the local press—and investors rushed to liquidate their holdings. Omni Capital repaid about $4 million and then filed bankruptcy in May.
Using Omni Capital’s books and bank records, the bankruptcy trustee was able to trace all but about $7 million of the funds invested with Mullens. Of course, this didn’t mean the trustee could recover the money. About $15 million was lost.
In October 1992, federal prosecutors charged Mullens with dozens of counts of conducting financial transactions to promote a fraud, conducting monetary transactions with its proceeds and criminal conspiracy. A few months later, Mullens pleaded guilty to 47 criminal counts of defrauding investors and admitted that Omni Capital was a pyramid scheme with no tangible operations. A federal court in Miami sentenced Mullens to 35 years of in prison and ordered him to pay $27 million in restitution.
Many investors suspected that Mullens had diverted several million dollars to foreign bank accounts,