You Can't Cheat an Honest Man - James Walsh [141]
Mullens said that believed the people who sold partnerhsip units had known that he’d run pyramid schemes in the past. That testimony set the stage for suits against the salesmen, including stockbrokers who referred clients to Omni Capital—in exchange for cash payments.
In April 1993, three Miami-area Prudential Securities stockbrokers were accused of taking money from Mullens to steer their clients into Omni Capital. Two separate suits filed in federal court claimed that the Prudential stockbrokers helped Mullens raise at least $15 million. (Both suits named Prudential—with its deep pockets—as a co-defendant.) Burned investors said they were told that Omni Capital was a conservative investment that Prudential employees bought for their own families.
One of the brokers had boasted that he’d raised $8 million for Omni Capital—for which he received more than $500,000 in commissions— during the 18 months prior to the scheme’s collapse.
To connect Prudential to the misdeeds, the suits claimed that Prudential supervisors were aware the brokers were selling Omni Capital to clients and that neither Prudential nor its brokers did any due diligence to verify claims Mullens made in a prospectus. One lawyer for the burned investors said Prudential should be held responsible for allowing brokers to recommend investments that were not screened by management and to accept money from an outside source.
Prudential Securities spokesman William Ahearn insisted his firm never had a relationship with Omni Capital. “Anyone who invested with Omni did so directly with that company,” he said. “They made the check out to Omni, there was no solicitation by us formally.”
Ahearn said that the stockbrokers who took money from Omni Capital did so only after leaving Prudential. Still, Prudential settled with the shareholders for a small amount.
“The main lesson in the [Omni Capital] case is that some deals are just so sleazy the bankers and brokers will pay money so that they aren’t associated with them,” says one lawyer familiar with the Prudential case. “And you might think that these deals are rare. But every office of every brokerage in the country has at least one that it’s peddling right now.”
Financial institutions get involved in Ponzi schemes because of two weaknesses which they share with many investors. First, they are drawn to strong profit-and-loss statements, which—in the early stages and with some manipulation—Ponzi schemes can have. Second, they operate in competitive arenas, so their decision-makers are often nervous about missing opportunities.
Together, these traits lead many insitutions to reach what one banker calls “false positives.” Sometimes these miscues are foreign countries; sometimes they’re local Ponzi schemes. All financial institutions have their share.
Case Study: Towers Financial Uses Duff & Phelps
Steven Hoffenberg’s Towers Financial was a false positive. Hoffenberg dropped out of the City College of New York in the late 1960s to go into business. While he had no particular passion for any one line of work, he was a good negotiator. In a few years, he was buying small businesses in the New York area and reselling them to bigger competitors at decent profits.
In the early 1980s, Hoffenberg stumbled onto the business that suited him best: debt collection. He started a company that specialized in collections, receivables purchasing and factoring. These are activities that make most people—even most business people—flinch. They’re the hardest, ugliest part of commerce.
Hoffenberg, with his facile knowledge of financial terms and aggressive, Brooklyn-bred personality seemed like the perfect person to handle the ugly work. Within a few years, Towers Financial operated through a number of subsidiaries, the largest of which were:
• Towers Credit Corporation, which purchased commercial accounts receivable and tried to collect them for its own account;
• Towers Collection Services, which collected past-due accounts receivable