You Can't Cheat an Honest Man - James Walsh [66]
Although D&S Trading was a long way from collapsing, some investors made complaints to the SEC and state regulators in Illinois and Wisconsin. The SEC sent letters to D&S Trading, seeking information on its investment program and principals. In September 1988, under the auspices of Illinois securities regulators, Douglas agreed to be barred permanently from selling securities in the state and made a full refund to all his clients.
But Douglas would not be sidetracked. In an astounding act of brashness, he asked the D&S Trading investors to put their refund checks into Analytic Trading Systems (ATS), a new company he was starting. Many of them were still happy with the performance of their investments with Douglas, so they agreed.
ATS continued to operate the Ponzi scheme started by D&S Trading. Early winners spread the word that Douglas was an investment wunderkind. More money flowed in.
Douglas did make some investments. He boasted to anyone who would listen about a $4.2 million profit he made on 42,000 shares of RJR Reynolds Inc. stock he bought and sold during a three-week period in February 1989. “He probably did make that money because he was so impressed with himself about it,” recalls one investor. “It should have been a sign. He was too excited. It’s like [college football coach] Joe Paterno says: ‘When you get in the end zone, you should act like you’ve been there before.’”
Douglas didn’t. And, still, more money kept flowing in. By September 1989, ATS had raised almost $40 million from more than 300 investors spread across seven states.
The SEC and the local authorities weren’t far behind. The SEC made a series of requests for information about ATS and the money it was managing. In late October, Douglas supplied the SEC with a document showing that ATS investors had $35 million deposited in segregated trading accounts. The document was a fake, though. It was based on a single trading account which actually contained less than $28,000.
In November 1989, the Feds arrested Douglas and charged him with stealing about $12 million from his investors. The SEC ordered all of Douglas’s operations closed. A federal court appointed Chicago lawyer Steven Scholes as receiver of ATS to untangle its finances and recover as much money as possible for its investors.
Douglas had divorced his first wife and married a second time. The second marriage collapsed after his arrest. Douglas—who often spoke about himself with a strange detatchment—said, “When my wife found out about all this, she simply could not fathom how I was able to commit such a huge fraud and keep it hidden from her.”
More family shocks followed. Four months later, Douglas’s father was accused in a civil racketeering lawsuit of illegally pocketing more than $800,000 in “finder’s fees” from the scam.
Scholes argued that Douglas pere was paid the finder’s fees for acting as a middleman who solicited investors by phone and at meetings. “David Douglas knowingly joined, combined and conspired with Michael S. Douglas and others in schemes to defraud investors in connection with the sale of interests in investment partnerships,” the suit charged.
The father reached a quick, quiet settlement with Scholes. The settlement limited his ability to help his son.
In October 1990, Douglas fils pleaded guilty to three counts of mail fraud and one count of lying to the Securities and Exchange Commission. At his sentencing hearing a few months later, Michael Douglas offered a tearful explanation for his actions:
The investor money was coming in too fast—so fast, in fact, that