You Can't Cheat an Honest Man - James Walsh [70]
Jerome and Phyllis Berenbeim had each been married before when they met in the mid-1970s. However, they got along well and decided to try once again—with each other.
Since graduating from UCLA in the mid-1950s, Jerome had been an insurance salesman and a financial adviser. From 1972 to 1974, he sold tax shelters to high-income neighbors in suburban Orange County. As part of this business, he held himself out as a financial consultant with expertise in insurance, real estate, pension and profit sharing plans, tax shelters and tax return preparation.
Phyllis was also well-educated, with a master’s degree in education and a supervisory credential for teaching in California. She worked for the Orange County public school system in various capacities as a music teacher and administrator.
When they got married, Jerome—who had a history of money problems—didn’t own a house. But he compensated for this by spoiling Phyllis with smaller indulgences. He gave her a grand piano and a diamond ring. He leased her a Datsun 280ZX, even though she already owned a late model Toyota Celica and an older Jaguar. And, most personally, he paid for some plastic surgery for Phyllis in the early years of their marriage.
The Berenbeims’ day-to-day financial arrangement was fairly standard. Phyllis paid household expenses out of her checking account and Jerome would contribute any amounts in excess of Phyllis’s salary needed to run the household.
He was in charge of the long-term financial planning. Which was too bad, because he was running a Ponzi scheme the whole time they were married. Selling tax shelters was just Jerome’s premise to getting to know potential investors. His real job was convincing neighbors, friends and acquaintances that he was a successful financial dealmaker who earned huge profits on money that wealthy clients invested with him.
Although Jerome’s pitch varied somewhat according to each potential investor, the basic premise remained consistent. He said that he worked with a regular group of entrepreneurs whose small, fast-growing business needed growth capital quickly—and somewhat unpredictably. These businesses were accustomed to paying high interest rates and bonuses for loans. This was the nontraditional world of venture capital and factoring, high-risk financing that potentially paid big money.
Jerome said his operation was different because, by diversifying his loans, he eliminated the risk that other financiers faced. He called his operation “The Fund” and told potential investors he’d pay between 20 percent and 30 percent on invested money.
An investor would send money to Jerome, who would then execute a note in the amount of the investment along with interest to be paid monthly for a set period of time. At the end of that period, the principal of the note would be repaid to the investor. He usually asked investors to give him cashier’s checks in amounts less than $10,000 to avoid the reporting of currency transactions to the Internal Revenue Service.
In one case, an investor gave Jerome $30,000 in four separate cashier’s checks. Jerome produced a $30,000 note, providing for $750 monthly interest payments (that’s 30 percent per annum) for a period of two years. The note matured at the end of the two years—but the holder could redeem it at any time, with 24 hours’ notice.
To provide himself with some cover, Jerome told investors that The Fund paid him a commission on investments that he arranged. He kept the details of these commissions vague, saying only that they came out of The Fund’s end.
In reality, there were no wealthy or successful businessmen. Jerome was paying interest on the notes from the money received from investors and converting some part of the funds received to his own personal use.
He used money from the Ponzi scheme to invest in real estate up and down the California coast. While he made some money from these investments, it wasn’t anywhere near enough to generate big profits