You Can't Cheat an Honest Man - James Walsh [77]
The trader/investors at AYM would have been better off talking to the Feds. Their secrecy may have made them feel like princes of commerce, but all it did was prolong and enlarge the scheme—and their losses.
In affinity schemes, reluctance to speak with investigators will often be attributed to cultural issues. In family schemes, it will be chalked up to protection. What it should be chalked up to is embarassment.
The embarassment Ponzi investors feel and the reticence that follows are the main reasons perps rarely go to jail. One west coast law enforcement agent estimates that his office hears from fewer than one in 10 pyramid or Ponzi investors who get burned. “People are embarassed because they know they should have known better. They’re worried that they’ll seem greedy and stupid—which, to some degree, they will,” he says. “They shouldn’t feel this way. Ponzi schemes are illegal for a reason.”
Because prosecutors have such a hard time getting the cooperation they need to build Ponzi cases, their bosses will usually argue criminal charges aren’t a good use of the state’s resources. That’s why in these situations civil lawsuits often come first, followed later by criminal charges—the opposite of how most legal issues proceed. The nature of most Ponzi schemes—participants taking advantage of their friends and family members—makes it more difficult to acquire witnesses. “They’re not exactly jumping up and down to turn each other in,” a Nevada police officer said in the wake of one Ponzi collapse.
But the reluctance occurs in more than just a few specific situations. And it happens too often to be dismissed as the deserved embarassment of greedy investors with enough money to lose in the first place. The reluctance comes from a deeper impulse. It comes from the desire that most people in a capitalist system have for secrecy. Ponzi perps understand this desire—and the smart ones exploit it.
The impulse toward secrecy serves as a contrast to several good human instincts. It can be a side-effect of privacy. It can also be an extreme—and twisted—product of trust. Finally, it supports greed by hiding the ugliness that usually marks that impulse.
To an experienced and balanced investor, the urge for secrecy is a logical application of a general sense of caution. It can also be seen as a by-product of trust: To believe in one person or idea is, in practice, to believe less...or not at all...in another.
But Ponzi investors aren’t always experienced and balanced. They’re often inexperienced and excitable—about money in general or the premise of the particular scheme. Excitable people tend toward extreme responses in all things; inexperienced investors will often take secrecy to an extreme.
“The sure sign of a thief, a sucker or an idiot child is that they think everything has to be a big secret,” says a world-weary New York money manager. “The first thing they’ll do is call me and say they’ve got a hot piece of information on a stock. Then they’ll tell me something that was in the Wall Street Journal last Tuesday. The second thing they’ll do is call me with another hot tip—multilevel marketing for long-distance [phone service] or some Ponzi scheme to sell ostrich eggs or Lithuanian gold pieces.”
His conclusion: There really aren’t such things as hot tips that need to be whispered on the QT. Useful information comes in pieces that are too small—on their own—to make or break an investment. Top secret information is usually hype.
Case Study: Colonial Realty
Jonathan Googel and Benjamin Sisti formed Connecticut-based Colonial Realty in the 1960s as a vehicle to sell limited partnerships that invested in property in and around Hartford. For the first 15 or 20 years they were in business, the two boyhood friends seemed to do things legitimately.