You Can't Cheat an Honest Man - James Walsh [51]
For several months, Tsao kept his promises to pay lucrative commissions. But the money he paid out was coming directly from money the friends and relatives were investing. By early 1992, Tsao was already having trouble paying commissions. His Ponzi scheme was beginning to collapse—after less than a year.
In early March, Tsao disappeared. His employee-investors were left with the harsh realization that Tsao’s companies were nearly broke...and his personal assets were encumbered with loans and liens. They called the authorities.
As it turned out, the San Francisco District Attorney’s Office, the Commodity Futures Trading Commission and the FBI had already been looking into Tsao and his companies. They’d been tipped off by a few employee-investors months before.
With Tsao missing and almost $25 million hanging in the balance, the Feds moved more quickly. The CFTC got a court order freezing Tsao’s assets and those of his three companies. One investigator who examined Tsao’s trading accounts said, “I’ll admit, [he] had one good day.... But his accounts show that at each month’s end, he was clearly losing money.”
The employee-investors, some 400 in all, decided to take their case public. They appointed new leaders, who held a press conference at which they pleaded with Tsao to come out of hiding and explain the disappearance of the money. They said they still had confidence in his ability to turn their losses into profits. “Everything will clear up if [Tsao] shows up in public,” said one employee-investor, speaking through an interpreter. “It’s not like this is a robbery. We gave our money to David to invest.”
The spokesman said that Tsao—who didn’t speak English—didn’t know much about U.S. law. “He is afraid of rumors that people will kill him.”
As was the case when Carlo Ponzi was arrested, many of Tsao’s investors insisted that he would come out of hiding and make their investments whole. “He said that if he lost any money he will play the market and return the money to us,” an employee-investor told a local newspaper. It was the same old reaction. If the Feds would just leave their guy alone, the investors believed they’d get their money back.
The Psychology Means More than the Details
Often, the details of the scheme underlying an affinity rip-off are suprisingly crude. The perps get away with this because their pitches rely on psychology far more than finance.
The Better Life Club—which targeted middle-class black families in the Washington, D.C. area—serves a good illustration of an affinity scam’s psychological draw. As is the case in many American cities, a large number of black families in the nation’s capital choose to live and socialize in essentially all-black communities.
Robert Taylor set up a system to exploit the separateness. Taylor— who is black—traveled the African-American social, business and religious circuits in and around Washington. Like Carlo Ponzi before him, Taylor claimed to have developed a method that would allow average working people to enjoy the profits usually hoarded by fatcat capitalists.
Following the cynical steps of Washington’s scandal-plagued mayor, Marion Barry, Taylor filled his talks with insinuations about racism...in his case, in the financial world. He played on long-held fears in the black community that minority entrepreneurs are kept down by establishment banks and commercial lenders. And he twisted legitimate calls for commercial self-reliance into support for his scheme.
Taylor’s Great Idea was pretty simple—and basically, pretty absurd. He claimed to be building an advertising and 900 number telephone marketing company. He’d set up over-the-telephone personal and financial advice lines that would generate big money. He claimed that he could double an investor’s money in 90 days. He made the promise well enough that few people questioned its validity.
“He said it was all a numbers game,” recalls one person who heard several Taylor pitches. “As much money as he could raise, he could put into phone