You Can't Cheat an Honest Man - James Walsh [73]
What started out as an aggressive tactic to create some extra capital quickly became a full-fledged Ponzi scheme. Between 1991 and 1996, BFG sold over $422 million of bogus lease-backed notes. Patrick commingled these proceeds with other company funds, creating a pool of more than $900 million. He transferred that money to a shell corporation—which, in turn, used some of the money to make payments to investors.
He used the rest of the money to buy a racetrack, a hotel, gambling casinos and a yacht. The titles to these various acquisitions were held in the names of individual Bennett family members. Specifically:
•
• foot Lady Kathleen. The boat and its owners spent winters in Florida and summers in the Thousand Islands—near where the St. Lawrence River flows out of Lake Ontario.
• Patrick and his brother Michael spent $13 million building the Speculator, a 238-foot gambling showboat which they planned to operate in Mississippi or Louisiana.
• Michael spent more than $60 million buying control of American Gaming Enterprises Ltd., which operated the Gold Shore Casino—a gambling barge in Biloxi, Mississippi.
• Michael also spent about $18 million buying and refurbishing The Hotel Syracuse, an art deco classic in a run-down part of Syracuse.
• Patrick spent several million dollars buying a majority stake in Vernon Downs Racetrack near Syracuse. He spent another $8.5 million to build a Comfort Suites Hotel at the track. All this was a long way from leasing copier machines to bureaucrats. According to people who worked at BFG, Patrick had never been interested in the core business. Other than racetracks and casinos, his focus had been on syndicating lease portfolios to suckers.
By early 1995, BFG was in deep financial trouble. It was selling $10 million to $15 million each month in lease-backed notes; but it owed between $20 million and $25 million each month in distributions. The company started missing payments. And the greedy investors who’d been its biggest supporters turned into vicious enemies.
In early 1996, the SEC and the U.S. Attorney in Manhattan filed criminal charges against Patrick. The Feds accused him of securities fraud and perjury. He was arrested, then released on $500,000 bail pending trial.
The SEC also sued Patrick and BFG in a civil complaint which alleged the company had been run as a Ponzi scheme. The Feds alleged that the Bennetts sold the same leases to more than one investor and sold other leases that did not exist. They then used money from new investors to pay off earlier investors.
The Bennetts had suspected that they’d been under an SEC investigation for several months. They were prepared with their responses. “Mistakes were made, but they weren’t intentional,” said Charles Stillman, Patrick’s attorney. “We’re trying to talk reasonably with the prosecutor to convince him that...there was no criminal intent. Patrick Bennett wasn’t looking to cheat anybody [or] steal anybody’s money.”
Lawyers for Michael, Bud and Kathleen Bennett all said that their clients knew nothing about any wrongdoing. “Our position is that Mr. and Mrs. Bennett didn’t do anything wrong,” said Alan Burstein. “Mr. Bennett turned over financial matters to his son, Patrick.”
In March 1996, BFG and several related operating units filed voluntary Chapter 11 bankruptcy. According to the filing, more than 12,000 investors had invested $674 million with the company.
Patrick, Bud, Kathleen and Michael all resigned their management positions in BFG. Soon after, the bankruptcy court appointed Richard Breeden, a former SEC Chairman, as receiver. “I don’t buy for a moment that Patrick did it alone, that the parents and others didn’t know,” Breeden said. “It was Bud’s company, and the employees say nothing happened that he didn’t know about.”
Their lawyer said the senior Bennetts suffered from multiple ailments that