You Can't Cheat an Honest Man (14 page)

And Holuisa lived high on the hog. He and his partner James Simpson had grown up together in gritty East Chicago, Indiana. They emphasized their roots to win over skeptical investors. “Hey, we’re local guys,” one investor remembered them saying. “You can trust us.”

This was another way Holuisa and his cronies were like the old master—they claimed to be people of the people, in conflict with the ritzy financial establishment. Still, Holuisa and Simpson worked hard to not seem
too
hometown. They both drove leased Mercedes to underscore their success. They rented offices in the ritzy Crown Point, Indiana, suburb of Chicago and filled it with high-tech equipment.

But the stock market crash of October 1987 sent many investors to the sidelines, effectively drying up fresh money to perpetuate the scheme.

In the early spring of 1988, Certified’s dividend checks began bouncing. In April 1988, the Indiana State Police stepped in. Responding to complaints from investors, detectives raided Certified’s offices. They seized 25 boxes of records for investigation. The company ceased doing business the same day.

When the scheme finally collapsed, Holuisa had spent $3.5 million on himself and his friends and returned the rest of the money—slightly more than $8 million—to his investors in monthly payments.

In 1990, Holuisa, Simpson and one of their salesmen pleaded guilty to charges of mail fraud, conspiracy to commit mail fraud and failure to report a currency transaction.

Holuisa received a sentence of five years on the mail fraud count and 57 months—the maximum sentence—on the other two counts. In sentencing Holuisa, the court considered that “he never intended to invest the money taken from the victims,” and “that the intent of this defendant was to defraud all the victims of their money.”

Holuisa’s lawyer pointed out that he had partially repaid the investments. The court’s sentencing calculation had been based on a loss amount of $11,625,739. The lawyer argued that, because over $8,000,000 was returned to investors, the actual loss was approximately $3,500,000.

In contrast, the prosecutors argued that the full amount should be considered, even though much of it was returned, because the money was not invested as investors had been promised. The district court agreed with that rationale:

In this case the gravity of the completed crime was more substantial than the ultimate loss suffered by the victims. The defendant never intended to invest the monies taken from the victims; the intent...was to defraud all of the victims of their money.

Nevertheless, Holuisa appealed the sentence as inappropriately harsh. The appellate court hearing Holuisa’s case had considered the various calculations of fraud-related losses in an earlier case that involved another precious metals loan scam. In that case, it had written:

Both the Sentencing Commission’s notes defining “loss” and this court’s cases call for the court to determine the net detriment to the victim rather than the gross amount of money that changes hands. So a fraud that consists in promising 20 ounces of gold but delivering only 10 produces as loss the value of 10 ounces of gold, not 20. Borrowing $20,000 by fraud and pledging $10,000 in stock as security produces a “loss” of $10,000: “the loss is the amount of the loan not repaid at the time the offense is discovered, reduced by the amount the lending institution has recovered, or can expect to recover, from any assets pledged to secure the loan.”

In the Certified case, the full amount invested was not the probable or intended loss because Holuisa did not intend to keep the entire sum. Indeed, return of the money—that is, payment of earlier investors with the funds of later investors—was an integral aspect of Holuisa’s scheme, essential to its continuation. And, in line with his intentions, Holuisa returned over $8 million to investors before the scheme was detected.

The appeals court concluded that Holuisa should not have been sentenced based on amounts that he both intended to and indeed did return to investors. The court vacated his sentence and sent the case back to trial court for resentencing—involving less jail time.

The appellate court’s decision rubbed a lot of people the wrong way. In fact, there was a dissent, arguing Holuisa had rightly been given the maximum sentence.

How he planned to use the money is irrelevant...because each time he took money from investors, he put their money “at risk” and left them without a “ready source of recompense.” ...Holuisa did redistribute $8.6 million to many of his victims before his scheme fell apart; but...the money was stolen the day he received it from his victims. Instead of corralling money from a few investors, then skipping town, Holuisa extended his scheme by giving back some money and taking in more. He literally robbed Peter to pay Paul (whom he had defrauded earlier). ...This case is no different than a series of thefts or embezzlements. An embezzler causes loss for the full amount taken, irrespective of his intention to repay.

While many legal experts agree with this dissent, it remains a minority opinion in most judicial circles. The majority opinion—which seems crook-friendly to many wronged investors—holds that Ponzi perps lessen the severity of their crimes by returning part of the money they steal to other people.

Case Study: Robert Johnson’s Peso Scam

In the span of just a few months in 1988 and 1989, hundreds of people—including Oklahoma teachers, Kansas churchgoers and a Texas motorcycle gang—invested in a Ponzi scheme that was supposed to create huge profits by swapping money from U.S. dollars to Mexican pesos and back into dollars again.

The scheme’s main perp, Australian-born Oklahoma resident Robert Leslie Johnson, told investors that he had extensive political connections in Mexico. Using these connections, he said he could buy pesos below the daily commercial exchange rate. Then, he’d convert the money back into dollars at current market rates.

Johnson told people that his plan was profitable; just
how
profitable was anyone’s guess. He needed more money than he could raise by himself to test the upper limits.

The whole story was bogus. But Johnson’s worldly attitude—and lilting Aussie accent—convinced people he was telling the truth. Political and financial instability in Mexico helped, too.

Initially, Johnson told investors he could get pesos for 5 percent under official exchange rates and that a complete cycle of currency swaps would take about a week to complete. But an annual profit of more than 250 percent wasn’t enough to attract the volume of money his scheme would need. So, Johnson gradually increased his promised returns—to 22 percent per week. At this rate—more than 1,000 percent a year—the money started to flow in.

It was a good thing for Johnson that he could turn on the charm; he’d had a long history of trouble with the law. He’d come to Oklahoma in 1988 from California, where he’d been paroled from prison. But his arrest record dated back to the 1960s. “He was basically a con man,” says one burned investor. “And always had been. I guess most of us kind of knew this. But who could tell? Maybe this was going to be his big strike.”

While most of his currency-swap scheme was a basic Ponzi, Johnson did buy some black market pesos. He’d purchase the currency secretly from Mexican businessmen who embezzled cash from Mexican corporations owned by U.S. companies. These connections—not quite the political movers Johnson’s investors envisioned—sent the pesos to Johnson at a San Diego address. In southern California, Johnson would convert the currency at various exchange bureaus, careful not to draw attention to any single transaction.

He wasn’t very successful. The scheme first caught the attention of the Internal Revenue Service in 1987—just after it started. The IRS initially thought Johnson’s operation was laundering money for central American drug smugglers. But, after watching Johnson for several months, the Feds concluded he wasn’t moving enough currency to be connected to drug runners.

Once the Feds checked out Johnson’s background, they guessed— correctly, as it turned out—that he might be running some kind of Ponzi scheme. But Ponzi perps don’t mean as much to the Feds as drug money launderers do. Johnson fell to a lower level of priority.

Beginning in the summer of 1988, Johnson had created enough of a track record for his bogus peso operation that he was able to recruit a network of shady seminar leaders and investment brokers to raise millions of dollars from hundreds of investors in Dallas, Houston, Oklahoma City and other cities throughout the Southwest. At his peak, he was operating in California, Nevada, Tennessee and Florida.

Johnson and his main partner, Dallas native William Wayne Gray, started living flashy lifestyles. In the course of the scheme, Johnson would take in something like $50 million. In January 1989, he bought a new Mercedes for $92,000. A few weeks later, he wrote a check for $112,000 to pay off his mortgage.

But the peso pyramid was about to collapse. According to the IRS, to circumvent tax laws the men had established several phony companies. Income from the Ponzi scheme went to those corporations rather than directly to Johnson, Gray or their brokers. “The network of companies wasn’t especially creative. It was just complicated,” said one investigator who tracked Johnson’s operations. “They figured if they moved the money around enough we wouldn’t be able to find it.”

In February 1989, Johnson and Gray were charged with violating Texas state securities law. Federal agents cooperating with Texas Rangers in Dallas seized about $3.2 million from a bank account one of Johnson’s brokers had set up for the peso operation. The broker’s account, which belonged to a shell corporation called FHL Group Inc. (FHL stood for “Faith, Hope and Love”), funneled money to Gray’s WWG Investments Inc., which in turn passed it to Johnson.

State and federal investigators also confiscated more than $820,000 in cash in a search of Gray’s home. They found 11 promissory notes, ranging from $1 million to $20 million, from Gray to Johnson. Nearly $2.4 million was seized from bank accounts held by Gray’s firm and FHL.

Gray, who’d been arrested, was eventually free on $15,000 bond. Johnson was arrested a month later, during an extended gambling trip to Las Vegas. Federal agents seized more than $250,000 in cash and property from Johnson’s accounts in Tulsa and confiscated more than $1.2 million in cash and gold coins when they arrested him.

Incredibly, Johnson was also allowed to post a bond at his arraignment. He was free on $100,000 bond pending trial on securities charges. Even with all of the money seized during the arrests, millions of dollars channeled through the pyramid scheme had not been located. And, within a few weeks, Johnson and Gray couldn’t be located. Both jumped bail.

Johnson’s flight didn’t last long. In September, he was arrested near Anaheim, California. (Once again showing that Ponzi perps don’t usually flee to exotic locations.)

In October 1989, he was charged in a 63-count indictment with laundering more than $216,000 in investor funds. The indictment also charged that Johnson engaged in a series of illegal financial transactions with proceeds from the investment scheme.

In a related move, federal officials also filed a civil lawsuit seeking forfeiture of Johnson’s home in Tulsa and a $43,000 certificate of deposit and a $25,000 annuity purchased in his name. They contended that all had been purchased with proceeds from the fraudulent investment scheme.

Eventually, the IRS decided to drop the civil suit against Johnson. But the criminal cases proceeded slowly.

Burned investors were frustrated by delays in the federal investigation. The delays kept seized money...seized. Hundreds of people nationwide contacted the FBI to lay claim to the money. The Feds said investors had little hope of recovering their losses. So, the smartest investors took matters into their own hands.

Fort Worth-based H&O Marketing and Landmark Financial Network filed suit against Gray, Johnson and WWG Investments in February 1989 to recoup about $17 million in lost investments and proceeds. Two Fort Worth investors, Richard Sims and Mark Pace, joined in the suit in July 1989. Sims and Pace bought into the scheme shortly before state and federal regulators began to dismantle it.

A judgment in the civil case was handed down during the summer of 1990. It sided with the burned investors, awarding them $4.5 million of their initial investment and about $16 million in returns. “It’s definitely nice to have a big judgment,” said John Proctor, a Fort Worth attorney who represented Sims and Pace. “It would be even nicer to collect. [The investors] would like to get a return
of
their money first, and secondly, they would like to get a return
on
their money.”

The judgment was the first major development in the case since federal agents in Dallas had seized millions of dollars in assets from the investment organizers. “We were able to get our initial investment back plus the profit that the money made,” said John Gamboa, an attorney representing dozens of burned investors. “We know where [Johnson] is, and we know where his assets are,” he said. But Gamboa said he expected the judgment would be appealed. “With that sizable a judgment, I’d be surprised if they didn’t appeal,” he said.

While the civil suits mounted, Johnson was awaiting trial on the federal criminal charges in a Tulsa jail.

Gray’s whereabouts were unknown, although he was believed to have fled the state. His former attorney, Don Crowder, said he did not know how to contact Gray. “Even when I was representing him, I just had a phone number that I would call and leave a number and he would call me back,” Crowder said.

Gray was eventually found by federal agents and returned to Texas for trial. He was convicted and sentenced to more than 10 years in federal prison. But he insisted the Feds had seized all of his money. Informed opinion differed on this issue. “Bill Gray’s an idiot...a pathological liar and a thief,” says one of his former defense attorneys. “He has still got $10 million buried somewhere. I believe that with all my heart.”

CHAPTER 8
Chapter 8:
Affinity Scams