You Can't Cheat an Honest Man - James Walsh [42]
Many of the same legal theories that apply to investment contracts connect commodities investments to Ponzi schemes. In practice, though, the connection between commodities deals and Ponzi schemes is usually more simple...and more crude.
One of the most dramatic and detailed commodities Ponzi scheme in recent history was operated by Thomas Chilcott, a Colorado-based financial adviser who desperately wanted to be considered an investment genius. As is so often the case, the most surprising thing about Chilcott is how many people he convinced.
From 1975 to 1981, Chilcott attracted nearly $80 million in investments for a commodities pool from approximately 400 persons. He talked grandly about his market perspective as a “quant,” financial industry jargon for a quantitative investor. He didn’t care for stories that might impact commodities markets—he focused instead on market trends and abstract formulas to keep ahead of everyone else.
On paper, Chilcott was entirely legitimate. He was a registered commodities adviser and investment pool operator with the CFTC. In person, he seemed to fit the part—with a young, aggressive demeanor and an office full of computers (still a novelty during his peak) blinking quotes from around the world.
It was all a fraud. Chilcott didn’t make very many commodities trades...and the ones he did usually didn’t do very well. (At one point, he invested heavily in worthless Oklahoma oil wells being peddled by another Ponzi perp.)
What Chilcott did do well was follow Carlo Ponzi’s model. He pooled investment money into a few accounts, moved it around and then gave small pieces back to investors as dividends and distributions.
The Chilcott funds collapsed in the fall of 1981. No longer able to keep the illusion going, Chilcott started issuing distribution checks that bounced. He tried the usual delaying ploys—blaming the banks and trying to convince investors to reinvest their distributions.
Within a few weeks, the FBI had taken over Chilcott’s Fort Collins office. The Feds estimated that the commodities pool had only about $8 million in liquid assets, more than half of which were held by Chilcott in his own name. The rest of the $80 million had been diverted into personal ventures, lost in speculative trading and returned to investors as bogus profits.
Denver lawyer James P. Johnson was appointed receiver. The court ordered him to take custody of all money and records and prevent further dissipation of assets. About that time, Chilcott was indicted on criminal fraud charges. He struck a plea bargain and avoided trial. Meanwhile, several civil lawsuits, filed by Johnson as well as groups of Chilcott investors, inched through the federal courts.
Chilcott was released from prison in early 1987 and promptly began a new commodities investment pool. Between March 1987 and February 1988, he attracted about $1.3 million—some of it from investors who’d put money into his old scheme.
In January 1988, a federal jury awarded $39.4 million in damages to the original Chilcott investors, who’d charged that Shearson/American Express Inc. had substantively helped Chilcott defraud them of $31.6 million, by refefering clients to him. The jury found Shearson liable for negligent management, breach of fiduciary duty and conversion of funds. The award included the defrauded funds and an additional $7.8 million in punitive damages. Shearson lawyers said they would appeal—if only to convince the court to reduce the size of the verdict.
In the meantime, Chilcott’s new venture was collapsing. This time, he skipped town before his distribution checks started bouncing. In the spring of 1988, a federal arrest warrant was issued by an Evergreen, Colorado, court charging Chilcott with wire fraud.
For almost a year, Chilcott evaded FBI agents and other law enforcement officials by moving around the west coast. Finally, in February 1989, he was arrested by federal agents near Del