You Can't Cheat an Honest Man - James Walsh [80]
According to Andersen, the investors could not sustain their negligent misrepresentation claims because they failed to allege either that they had a fiduciary relationship with Andersen or that Andersen possessed actual knowledge that the investors would rely on the alleged misrepresentations. The court disagreed.
Because Shuch was merely the “brother of a member’s spouse,” Andersen argued that he could not have jeopardized its professional independence. Therefore, the firm believed it was not required to disclose Shuch’s relationship with its errant employee. The court disagreed.
The burned investors alleged that Andersen broke RICO law because it secretively “sought to place Shuch as an employee of Colonial so as to obtain control of Colonial,” that “[t]he dramatic increase in Colonial’s business was a direct and proximate result of Andersen’s control over the Colonial syndications,” and that Googel and Sisti “may not have fully understood” the financial status of their burgeoning operations, while Andersen “knew everything” because it was “[sophisticated] and highly skilled in business, real estate finance and syndication.” In short, they claimed that:
Andersen created in Colonial an industry giant which Andersen could and did display to other potential clients as an example of the success and prestige which any company could attain if it hired and paid Andersen.
But the court doubted that Arthur Andersen controlled Colonial Realty through Shuch. The investors’ lawsuit described Googel and Sisti as “Ponzi Participants,” which the court called “an unlikely description for entirely subordinate, dominated toilers in the Ponzi vineyard.”
Finally, in May 1996, Arthur Andersen agreed to pay $10.3 million to settle the charges. This brought its total settlement to about $15 million. (After a state investigation in 1993, Andersen had paid $3.5 million in refunds and fines.)
As a result of the various settlements and the bank forgiveness, most of the burned Colonial Realty investors were able to recoup more than half of their losses. Of course, it took them more than five years to get the money back.
CHAPTER 13
Chapter 13: Loneliness, Fear and Desperation
White-collar thieves often think they can make up a loss and come to believe they deserve what they are taking. But these rationalizations usually crumble under the weight of anxiety and paranoia.
Pyramid and Ponzi schemes exploit impulses like trust, greed and secrecy. But these schemes are built on darker foundations. For both Ponzi perps and investors, the impulses which get them involved are pretty bleak—usually wrapped around loneliness, fear and desperation.
These factors fit the circumstances. A Ponzi scheme requires a certain amount of fatalism on the part of the perp. The schemes always collapse. When the perps go in, they know there’s going to be a reckoning. The battle is to delay the reckoning as long as possible.
Many people find the impulses that motivate crooks more interesting than those that motivate their marks. It’s almost a staple of crime novels and magazine stories to portray con men as characters from the psychological and philosophical theories of Friedrich Nietzsche. That is, perverse supermen with a twisted strength for shouldering the weight of their crimes.
The truth is less dramatic. There’s no doubt that Ponzi perps are affected by some dark impulses. But they usually aren’t supermen. They’re more like unexamined people who give in to fairly common weaknesses.
Time and again, in the wake of a collapsed Ponzi scheme, burned investors and participants ask “How could this person sleep at night?” The answer seems to be that, from the perp’s perspective, the fraud is usually impossible or inevitable.
Perps candid enough to speak truthfully about their deeds will admit that they’ve always felt like they don’t belong—in any group. “It’s been like that since I was in school,” says one perp who ran several Ponzi schemes in the Midwest, got in legal trouble for two, and then moved to southern California—where