You Can't Cheat an Honest Man - James Walsh [29]
Several investors tried arguing that Martin’s post-dated checks should count as securities under federal or local laws. A federal court ruled that “post-dated checks, issued in return for investments in a bogus air travel business, did not qualify as securities or investment contracts under federal or Louisiana securities law.”
In 1993, Martin was released from prison after serving a third of his 15-year sentence. Out of jail—but still on probation for years to come—Martin moved to Florida and found a job as a sales representative for a travel agency. He started making his restitution at the rate of $100 a month. At that pace, he was scheduled to pay off the fine in 833 years.
Most investors, who considered Martin little more than a nervously ingratiating salesman, didn’t believe he could have done it alone. “Lynn was the bag man,” said one burned investor. “Someone else was pulling his strings.” One common scenario: Martin had a silent partner in Las Vegas who made the important decisions—and was holding some $5 million in missing money.
Even the pros were suspicious. “I don’t think Martin did it alone,” U.S. Attorney Volz said. But, after months of interviewing Martin’s associates, pouring over records and grilling the star witness, the Feds had no hard evidence linking anyone in Las Vegas to the operation.
Lee Leonard, Martin’s attorney, offered a different explanation: “Maybe you don’t have to be that smart to cheat greedy people.”
CHAPTER 5
Chapter 5: 1040-Ponzi
Tax hedges and dodges are a major appeal for Ponzi schemes. There seems to be something buried deep in the subconscious financial mind that links the phrases tax shelter and con scheme.
There are some good reasons for this. One reason that Ponzi schemes work so well as tax shelters is that the secrecy on which they rely appeals to many people who have a strong aversion to paying taxes.
But secrecy isn’t the only aspect that makes a tax shelter a perfect place for a Ponzi scheme to flourish. There are other elements, too— primarily, greed and fear. An investor drawn by greed and fear (of the IRS) is a prime candidate for being burned in a Ponzi scheme.
Columbus Financial, a company that packaged and sold taxadvantaged limited partnerships in oil wells, was founded in 1987 in Beverly Hills, California. The company’s pitch: Taking advantage of specially-written language in the U.S. tax code, investors could put money into Columbus partnerships, take a tax credit for developing oil wells and later recoup the investment plus interest on a taxadvantaged basis from income generated by the wells.
The brokers selling Columbus partnerships worked through any hesitation. They insisted on sitting down with potential investors to deliver prospectuses—which had been filed with the SEC—in person and go over the fine print. To financially inexperienced people, the paper trail seemed to support the company’s legitimacy. “I didn’t understand how little it means to file something with the SEC,” says one burned investor.
Still, the promises sounded suspicious enough that the regulators who oversee partnership sales looked at Columbus’ operations carefully and often. The National Association of Securities Dealers inspected Columbus every year. The SEC periodically checked the NASD’s work. Both gave the operation a clean bill of health for eight years.
The agencies weren’t looking in the right places. Columbus was running a Ponzi scheme the whole time—using cash from new investors to pay old ones returns of up to 14 percent. (The supposed tax-advantage of the deal increased the effective rate of return to 20 percent.) It covered up the misappropriation with phony financial reports and geological studies.
The Internal Revenue Service, which was initially confused by Columbus’ claims of tax advantage, uncovered the fraud where the other Feds missed it. But, by the time the scheme was exposed by IRS and U.S. Postal Service inspectors, thousands of investors had lost $139 million.
Columbus had put $10 million—at