You Can't Cheat an Honest Man - James Walsh [68]
Of course, the appearance of legitimacy was only part of the equation. As is often the case, some investors were motivated by simple greed. The Schwartzes offered high interest rates on money invested in STS Acquisition, as much as 18 percent plus bonuses on 90-day loans. These numbers meant annual interest rates ranging between 64 and 216 percent.
Bridge loans are profitable—but they’re not that profitable. Despite the impression Sidney and Stuart cultivated with their neighbors and friends, they were crooks. STS Acquisition was a Ponzi scheme. And the father and son used Old Westbury as a proving ground for investors. “I gave them money because I felt, how could a family so involved with the temple and their country club...steal from me,” said one.
For at least four years, from 1988 to 1992, the Schwartzes sloshed investors’ money through a series of pyramid transactions. As their bogus empire was reaching its limits, the Schwartzes claimed a joint net worth of $5.7 million. In truth, their companies were running in the red.
Like many Ponzi perps, the Schwartzes had some problems which they managed to resolve but which pointed to the bigger collapse ahead. The crisis came in early 1992 when the Schwartzes defaulted on interest payments to their biggest client—who would eventually lose $2.4 million in the scheme. Stuart used his personal relationship with the big investor to plead for more time. His story was that STS Acquisition was growing so fast that all of its money was out working. Better to be cash-poor and collecting big interest than just sitting on the money.
The big investor would later say: “[Stuart] came to weddings and birthdays. He was like a son to me. When he asked for money, I said, ‘What’s the collateral?’ He said, ‘Collateral? I’m dealing with millions of dollars and bank presidents.’ So I gave a series of loans, and he gave me promissory notes. But now there is not a day I get up that I don’t wonder how could I be so stupid.”
By late 1992, the Schwartzes couldn’t charm investors fast enough to prevent the collapse. Dozens of STS Acquisition interest checks were bouncing. Sidney and Stuart were suddenly hard to reach. Panicky investors got together and demanded a meeting.
The first meeting took place in Florida, where many STS Acquisition investors had either winter or full-time residences. Because the Schwartzes had been receiving physical threats, they hired a security guard to keep order. At one point Stuart put his head against the wall of the conference room and cried, one investor who attended the Florida meeting recalled. Another investor said: “One man was so agitated, saying, ‘This is not just my money, it’s my son’s money, and he can’t afford to lose this.’ He leapt across the table and tried to strangle Stuart.”
After this meeting, the Schwartzes decided that the best tactic was to admit their theft. The candor was disarming. An investor who attended the second meeting, in Manhattan, recalled: “I looked straight at Stuart and said, ‘Did you ever invest any money? Did you ever have any bridge loans?’ And he said, ‘No, we used it personally.’”
Most of the STS Acquisition investors were so shocked that they left the meetings without extracting any repayment—let alone liquidation—plan from the Schwartzes. But the shock wore off and, by early 1993, various investor groups turned the case over to prosecutors for criminal charges and moved in civil court to have the Schwartzes declared bankrupt.
When word of the fraud spread, the Schwartzes became pariahs in the Old Westbury social circle. In a strangely naive turn, Stuart was surprised by this. He continued going to the club and acted insulted when one member said “Hello, crook” in the locker room.
Ponzi perps don’t usually play stupid about their deeds. And acting indignant about being called a crook after admitting to investors that he’d stolen their money seems downright weird. But, one Old Westbury member offered this insight into Stuart Schwartz: “He was the