You Can't Cheat an Honest Man - James Walsh [16]
A final note: Lenders in the second mortgage market often “warehouse” mortgages. In a typical warehouse arrangement, a party lends against a large number of mortgages for a short period of time. Warehousing provides interim funding to the originator of the mortgage until the mortgage can find a permanent investor, and it is used to cover various other delays between origination and ultimate resale on the secondary mortgage market. While warehousing is legal, it makes keeping track of money difficult.
Case Study: Financial Concepts
The biggest factor that makes real estate a rich ground for running Ponzi schemes is the illusion many people have that it’s somehow different from other kinds of business. “People think they understand real estate. They think it’s a safer bet because you can go and see it,” says one California law enforcement official who has prosecuted several Ponzi schemes. “That’s not true. The land and the building may be concrete. But ownership and loans can be hidden and manipulated in a hundred different ways.”
In the mid-1970s, Earl Dean Gordon and Kenneth Boula founded a real estate investment syndicate called Financial Concepts, consisting of dozens of limited and general partnerships, which were in turn comprised of hundreds of individual investors. The operation was headquartered in Barrington, Illinois, a conservative Chicago suburb. The low key environment was a cover for a far-reaching real estate Ponzi scheme.
Billing themselves as investment advisors, Gordon and Boula ran folksy ads on radio and TV offering free “estate planning seminars” with euphemistic names like “Operation Snowbird” and “Life After Work, A New Beginning.” The workshops purportedly offered a “psychological adjustment program, a physical adjustment program, and a financial program for retirees.” Most were clearly directed at older investors with retirement concerns—and money.
The real aim of the seminars had little to do with estate planning; the sharpies used them to sell investments in Financial Concepts. Some 3,000 investors—many of them elderly—bit.
Among other things, Gordon and Boula used investors’ money to buy expensive toys: 22 automobiles, eight motorcycles, four airplanes, and an aircraft hangar. They ran up $10,000 monthly charges on their credit cards, paying the bills with investors’ funds.
Gordon and Boula offered limited income partnerships yielding annual interest of up to 15 percent. They also promised investors that their money would be used to develop a particular property. They didn’t usually do that. Instead, they’d use newly acquired money to finance other partnerships whose properties had not produced promised cash.
And this was a major problem. Few Financial Concepts partnerships generated any income. As one court later noted: “Whether by criminal malice or poor business acumen, properties Gordon and Boula relied on to solicit investors did not yield the promised returns, and the two began to pay earlier partnerships with money garnered from more recent ones.”
The high-risk nature of the partnerships and some of the conflicts of interest were spelled out in the prospectuses for the partnerships, which warned that Gordon and Boula were permitted to enter into “potentially adversarial relationships” with investors regarding construction, financing, management and virtually every other aspect related to the projects.
The problem for many investors, according to one salesman who sold investment programs for Financial Concepts, was that they frequently didn’t have access to prospectuses. He recalled:
We were told to do everything we could to avoid letting them see a prospectus until after we had their money in hand. Sometimes we even would tell people that we had run out of copies and our word processor was down when there would be a pile of 40 or so on a nearby table. Generally, we’d mail them out a month or two after we had the money.
And even if investors did see the paperwork, they wouldn’t have been able to deduce