You Can't Cheat an Honest Man - James Walsh [37]
If Ford had stuck close to the original structure of his scheme, ILN would probably have continued on even longer than it did. Although ILN was pretty plainly a Ponzi scheme, Ford was cautious enough—at first—to avoid flagrant violations of investment and securities law. But, as time went on, he expanded his operation into an investment operation that would prove his undoing.
Offering Investments Instead of Advice
Ford had experimented with mechanisms for convincing ILN’s winners to keep pouring their money back into his schemes. Beginning in 1990, he expanded these efforts into what he called the Property Rights Assignment Program.
According to promotional materials, the PRA program offered investors “an opportunity to acquire property below market value.” Still part of ILN, the PRA program would assign tax lien sale certificates or rights to property acquired through foreclosures or government-assisted programs.
According to the PRA material, purchasers of $1,000 PRAs would be assigned property rights assessed at $10,000; purchasers of $5,000 PRAs would be assigned property rights assessed at $50,000; and purchasers of $10,000 PRAs would be assigned property rights assessed at $100,000. The property transfers would be made within 180 days of the purchase of the PRA investment units. If this weren’t tempting enough, ILN salespeople added a cash kicker. They promised potential investors the option of cash payment of five times the initial investment.
In other words, 180 days after making a $1,000 PRA investment, you could choose between $10,000 worth of real estate or $5,000 in cash.
Many of the ILN investors lucky enough to get money out of the recruitment scheme jumped at the chance to parlay their profits. Few cared much about property rights assignments—most wanted five times their money in cash. During the entire two-years-plus lifespan of ILN and the PRA programs, only one property selection list was ever distributed.
But Ford had stretched his persuasiveness too far. ILN declared bankruptcy in the summer of 1991, after the SEC filed a lawsuit charging that it was a giant Ponzi scheme. Of $110 million invested with Ford, only $1 million was recovered.
Much of the SEC’s complaint focused on the PRA programs. The Feds claimed that promises made in the programs amounted to guarantees, which meant the investment units were securities. Investors, most black and elderly, packed a Washington D.C. federal courtroom in June 1991 to hear the SEC make its case against Ford and ILN. They were there in support of the man who had taken their money. In this way, the trial felt like a replay of Carlo Ponzi’s trials in the 1920s.
After three days of live testimony and one day of argument, the court was still unclear about the mechanics of the ILN operation:
Programs as described in testimony and in written material are frequently incomprehensible.... As the Court understands Ford’s explanation, a person who purchases a $1,000 PRA, a $5,000 PRA, and a $10,000 PRA, for a total of $16,000, is eligible for...up to $80,000 because...“the velocity of money increases to such a point, the ability to create wealth expands to such a degree, that we could come back and give somebody an award for up to $80,000.”
Despite this gibberish explanation, the court found that the PRA programs fit relatively neatly into the framework established by the Supreme Court’s Howey decision. It concluded:
Clearly, each involved an investment of money. Similarly, each involved a common enterprise in the sense that the fortunes of investors were inextricably tied to the efforts of ILN management....
Ford insisted the investments weren’t securities. In his presentations, he had been careful not to make guarantees. He emphasized that ILN bonuses were awards and not commissions. However, he urged people to participate by saying “the system does work.... No, we can’t guarantee you any money, but we sure have got a