You Can't Cheat an Honest Man - James Walsh [17]
These fees were often steep. Up to 25 percent of investors’ money was taken off the top by Financial Concepts as a commission. Investors were also charged an “acquisition fee” of 10 percent on purchased property, various accounting and management fees and a 15 percent “termination” fee if they elected to sell early. In one two-year period, Financial Concepts took $121,000 in “fees and commissions” and another $37,000 in “legal and accounting fees.”
In late 1987 and early 1988, Illinois securities regulators started investigating Financial Concepts to find out whether money from new investors was—in fact—being used to pay off previous investors.
During the early stages of the investigations, Gordon agreed to address a meeting of nearly 1,000 Financial Concepts investors. He called the state inquiry “a total rehash of two-year-old news.” He said the charges stemmed from a technical violation of securities regulations the company had committed several years before by failing to file a form and pay a $30 filing fee. “The day we learned of that, we voluntarily suspended doing that,” he said. “We haven’t done what we’ve been accused of for two years.” And then he made his pitch:
I’m not asking for your sympathy... but evaluate in your hearts the relationship we’ve had to this day, outside of having the hell scared out of you. I’m asking for your strength, for the same friendship we’ve always enjoyed and for your prayers, to help us endure what we have to endure.
After the meeting, a number of investors went away happy with their investments. But the grind of regulatory scrutiny continued.
The investigations forced Financial Concepts to start recognizing the money problems caused by their numerous distressed projects. In March 1988, the Illinois Securities Department obtained a court order barring Financial Concepts from selling real estate limited partnerships on the ground that the ones it had sold were not properly registered. With that order, the scheme collapsed. Gordon and Boula declared bankruptcy for themselves and Financial Concepts.
A federal lawsuit followed a month later, in April 1988. The suit claimed that Gordon and Boula had sold property to partnerships at prices far above their true market value, mailed false financial statements and juggled funds among partnerships.
Prosecutors estimated that as many as 8,000 investors entrusted at least $60 million to Gordon and Boula. “Equity” partnerships bought real estate, including homes and resort property, and “income” partnerships lent money to the equity partnerships to buy property. They claimed that many of the income partnership investors were unaware the assets of the equity partnerships were “significantly less in value” than amounts lent to them.
All entities owned or controlled by Gordon and Boula were eventually placed under the receivership. Illinois-based real estate expert Jeffery Cagan was appointed receiver and charged with managing the remaining assets of Financial Concepts. Cagan’s appointment meant that investors could not withdraw any money pending a resolution of the case. Worse still: Under the court order, investors could be required to make additional payments to the partnerships in which they invested.
At the time of the receivership, a preliminary review placed the value of property owned by the partnerships at $10 to $20 million. Investors hoped to recover between 30 to 40 cents on the dollar of their investments. That hope turned out to be optimistic.
Prosecutors charged that, just before they entered bankruptcy, Gordon and Boula transferred $270,000 in investor funds to Swiss bank accounts in an unsuccessful effort to conceal their