You Can't Cheat an Honest Man - James Walsh [30]
Columbus president Neal Stein spent a lot of the money on himself. He lived in an ostentatious Beverly Hills mansion. He owned at least five luxury cars, including several Mercedes-Benzes and a Bentley convertible. He had three nannies to watch two children. But, even considering these extravagances, nearly $60 million of the money raised by Columbus was simply missing at the end.
A number of angry investors argued that Stein may have moved what was left to overseas bank accounts.He pleaded guilty to tax evasion and securities fraud in September 1995. He faced up to 10 years in prison and a fine of $1 million at his sentencing, which was delayed indefinitely. The Justice Department was investigating several of Stein’s compatriots—and wanted his cooperation.
One of the surprising aspects of the Columbus scheme was the failure of the regulatory agencies to pick up any sign of fraud. Many of the investors did their homework before handing over their money—and still bought in because the partnerships looked legitimate. “What you need to remember is that this was basically a tax fraud,” said one burned Columbus investor. “All the stuff that was wrong from the beginning was stuff the NASD doesn’t even know to look for. Their people focus on securities issues. The IRS people would have been able to see that Columbus was a scam.”
But the IRS didn’t get involved until Columbus had already sold tens of millions in limited partnership shares. As one IRS fraud specialist said: “We don’t look for problems pre-emptively. A crime has to take place before we can begin.”
Lump Sum Pension Payments
The lump sum payments that many employees receive when they leave a company or retire are prime targets of Ponzi perpetrators who promise tax advantaged investments. Often, the perps will exploit the common misperception that “tax advantaged” means low risk.
For several years beginning in the late 1980s, Harold Sherbondy convinced a number of his San Diego County neighbors to invest almost $5 million in what was supposed to be a tax-advantaged commodities trading partnership (that is, essentially, an oxymoron). Most of the money came from retirement buyout funds that pilots, flight attendants and mechanics received when U.S. Airways bought San Diego-based Pacific Southwest Airlines.
Sherbondy’s pitch: He had discovered a novel way to obtain IRS approval to invest buyout funds in commodities and have the income be tax free. His plan would allow investors to realize profits of between 25 percent and 50 percent a year.
This was an unlikely proposition. Commodities trading is not only one of the most volatile forms of investment around, it’s also taxed just like any other investment. Other than the tax breaks given—by law—to certain kinds of government debt instruments (muni bonds, T-bills, etc.), the IRS doesn’t offer tax advantages to particular methods of investment. It focuses its tax breaks according to how the money being invested is intended to be used.
However, Sherbondy never got to the point of hashing out tax policy. He never really invested his clients’ money—only putting about 1 percent of the funds in a commodities account he used for show.
Most of the money went directly into Sherbondy’s personal bank accounts. Like so many Ponzi perps, he needed to keep up the impression of wealth. The trappings—the Mercedes Benz, the private plane, the big house—were important elements of his credibility.
He also used church membership and apparent religious piety to convince people to invest with him. Sherbondy and his wife were regular members of a Christian