You Can't Cheat an Honest Man - James Walsh [55]
By late 1991, the continued diversion of funds from one project to another had put the various Dowmar projects under great financial strain. In December, it was apparent to most of the people involved that the projects were irrevocably insolvent.
In 1992, about two dozen of the investors filed a lawsuit in New York federal court, accusing Dowmar of running a Ponzi scheme and AIB of aiding and abetting. The charges included: common-law fraud, breach of fiduciary duty, breach of contract and violation of the federal RICO statute. The fraud charges focused on the fact that the Ashford and Dromoland deals were closed even though the minimum subscription levels hadn’t been reached. Instead, they were filled out with bogus stand-in investors backed by illusory loans from AIB.
The repayment of the bogus loans put the real estate syndications into debt from the beginning—and assured the need for future rigged offerings. Also, the stand-ins violated the investment contracts that Dowmar itself had drafted. The Ashford PPM expressly stated:
Investors will be required to represent that they are acquiring Castle Interests for their own account, for investment and not with a view toward resale or distribution thereof.
The Dromoland PPM contained virtually identical language.
After the Ashford and Castle deals closed, Curley, Dowling, Nickerson and AIB directed the companies to “make substantial payments...to themselves and to Dowmar, purportedly for fees in connection with the closing.” Lawyers for Dowmar and AIB said the fees were proper. One of their lawyers sneered:
The Ponzi scheme is baloney. It’s a figment of someone’s imagination.... The reason the Ashford investors are not making money has nothing to The reason the Ashford investors are not making money has nothing to 92 resulting from the Gulf War, I doubt there would ever be litigation. These big hotels had huge operating costs and not enough guests. Once you fall behind, you never really get back on your feet.
In a move that Ponzi perps often make when an affinity scheme collapses, the perps’ lawyer tried to paint the scheme as ethnic intramural bickering. “I’m sorry that Mr. Dowling and they are all of Irish descent, and that there are hard feelings among them,” he said, “but I don’t think anyone was duped.” By late 1996, the lawsuits were still grinding through court.
CHAPTER 9
Chapter 9: Trust
Affinity scams aren’t the only rip-offs that rely on trust. All pyramid and Ponzi schemes do. Of the key factors that allow Ponzi schemes to flourish, misplaced trust is most important. It’s the point on which burned investors—once they learn they’ve lost money—most often blame themselves. Invariably, the person will offer some version of “I can’t believe I trusted that crook....”
Law enforcement officials, who don’t usually feel much sympathy for Ponzi investors, often turn unexpectedly sociological when they are asked about the high level of misplaced trust. “It’s the age we live in,” says an East Coast assistant D.A. “Even smart people have no idea who to trust.”
Essentially, the theory holds that information overload has made people confused and vulnerable. Telephones, television, computers and the Internet have shattered the traditional sense of social proportion. People don’t trust their neighbors but believe they have a personal relationship with Oprah Winfrey or Hillary Clinton. This is an encouraging environment for Ponzi perps.
G.W. McDonald, the enforcement head of the California Department of Corporations, deals with the fallout of Ponzi schemes almost daily. He looks at Ponzi investors as the interesting phenomenon— and the perps as something more like a natural response.
McDonald says that most Ponzi perps dismiss their investors harshly— as nothing more than willing suckers, destined to lose their money. This is a rationalization for crime as old as mankind. The fact that so many