You Can't Cheat an Honest Man (32 page)

The downward spiral accelerated when Prudential Securities demanded immediate repayment of a $44.9 million margin loan that Bennett had personally guaranteed. When he didn’t pay off the loan in a timely manner, Prudential sued Bennett and New Era. That suit opened the floodgates of trouble.
In May 1995, New Era sought bankruptcy protection. At a tearful meeting with New Era staffers, Bennett admitted the anonymous donors had never existed.

The Chapter 11 reorganization filing was quickly converted to a Chapter 7 liquidation. In June 1995, New Era’s creditors held a meeting in Philadelphia, where an interim trustee told them that the net losses totaled about $107 million and that the shortfall eventually could be around $41 million.

The interim trustee claimed that 163 investors were owed money and 74 investors had taken out net profits at the point New Era declared bankruptcy. He wanted the winners to give back the money so that other creditors could recoup some of their losses. He was ousted days later by a committee of creditors and investors frustrated with what it considered slow response. The committee voted in Arlin M. Adams, a former federal judge in Philadelphia, as trustee.

By September 1995, hundreds of New Era investors had filed more than $725 million in claims, many seeking not only the money they lost but also the promised returns on their investments. New Era’s bankruptcy estate had about $31 million in cash assets. So, there were going to be a lot of unhappy people.

In October 1995, Bennett released a videotape that contained his first detailed comments since New Era had declared bankruptcy. Apparently speaking with the aid of a teleprompter, Bennett apologized for the pain and suffering he had caused. “Please hear me when I say I never intended to hurt any one of you,” he said. “I know that I’ve done that, however. And I’m so sorry.”

He said that his shortcomings as a manager played a role in New Era’s failure.

Management was never my talent. Administration was never my expertise. But the responsibility rests with the chief executive, so the buck stops here.... I was at the helm when the ship sank and I should have long before attacked those weaknesses and paid attention to other needed areas of responsibility. Did I ever intentionally set out to hurt anyone? No. My professional life has been motivated toward helping people, not hurting them.

But Bennett whined that he couldn’t provide any details about his personal role until his attorneys had more time to review New Era’s documents. “I’ll be in touch with you as soon as the facts can be disclosed,” he said. Not that his investors were looking forward to that. But Ponzi perps often have an egocentric need to explain themselves. (“For some of these people, the confession is a thrill,” says one federal agent. “It’s part of the drama.”)

In January 1996, Adams—the new trustee—filed for court approval of a settlement under which Bennett would turn over about $1.2 million from a house, car, stocks, retirement savings and other sources. Bennett described these things as “literally all of my assets.”

One attorney representing some New Era investors was ambivalent about the settlement: “On the one hand, [we’re] pleased with the job the trustee has done in capturing most of Bennett’s available assets. On the other hand, the assets captured pale in comparison to the extraordinary damage done to nonprofits.”

Adams and a group of more than 30 investors sued Prudential for $90 million, alleging the brokerage firm was a “co-conspirator” in the New Era fraud. “Prudential’s involvement in the Ponzi scheme not only legitimized the venture to the charitable community, but was the crucial element that enabled Bennett and New Era to overcome any skeptics,” the lawsuit said. Prudential and Bennett “privately agreed to release the money directly to Bennett and New Era to use as they saw fit.”

The suit claimed that Bennett established a toll-free telephone number staffed by Prudential employees, who took calls from investors with questions about accounts. Prudential told investors their funds were being held safely in escrow accounts when New Era was actually using the money to pay off early participants.

Finally, the lawsuit argued that Prudential made more than $740,000 in interest from millions of dollars in loans. “Prudential knew, should have known, or had a reasonable basis to suspect that New Era was operating...a scheme to defraud its creditors,” the suit said. Charles Perkins, a spokesman for Prudential, said:

I sympathize with the charities that have invested their people’s money with the foundation. They were victimized. They were victimized in a very sophisticated scheme that took in some of the most sophisticated financial investors in the country, people like Lawrence Rockefeller and William Simon, but I think that they should be directing their anger at the people who are responsible, which is the foundation and Jack Bennett.

In August 1996, the bankruptcy judge presiding over the New Era case approved a partial settlement—with the understanding that the lawsuit against Prudential would continue. The brokerage began negotiating a settlement.

In March 1997, facing 82 criminal counts of fraud, filing false tax returns and related offenses, Bennett pleaded
nolo contendere
and turned his focus toward convincing the federal judge hearing his case to be lenient.

In an ill-advised move, he tried to argue that, having grown up in povery with an alcoholic father, he had a delusional mental disorder which limited his responsibility for his actions. Aside from outraging burned New Era investors, this tactic had little effect.

In September, he was sentenced to twelve years in prison.

This satisified some of participants. As one group had written the court: “...the tremendous negative impact of Mr. Bennett’s actions on hundreds of non-profit organizations...and on the image of those associated with philanthropy in general warrants severe punishment.”

Contrary to this sentiment, some of the most observant of the people affected by the New Era debacle doubted that the non-profit sector would recognize another Ponzi scheme—if it were executed as carefully as New Era.

“It’s hard to say what everybody learned,” said Kathryn Coates of the Greater Philadelphia Cultural Alliance. “There weren’t any groups that participated in this that didn’t check [Bennett] out thoroughly. So I don’t know what’s changed. What else do you do? The only recourse is that, if you feel nervous about something, don’t do it.”

In the wake of New Era’s collpase, the Pennsylvania Joint State Government Commission considered changing state laws regulating NFPs. But it concluded...rightly...that the laws weren’t the problem:

[New Era] continued as long as it did due to the combination of its ostensible performance as promised, exceptional references, inadequate regulatory and enforcement efforts, and careless practices by boards of directors or some of the contributors....

CHAPTER 17
Chapter 17:
www.ponzischeme.com

The Internet is undoubtedly a commercial marketplace, which means it attracts gamblers, hustlers, Ponzi perps and other crooks.

“We are seeing a number of pyramid schemes taking to the Internet,” says Andrew Kandel of the New York State Attorney General’s Office. “One of the reasons this poses a particular problem for regulators is that they can reach an increasingly large number of people.” “[We’ve] established an Internet surveillance program.”

For most of the people who turn to the Internet for business or personal reasons, it is a useful tool for sending and collecting information. Some people get more intensely involved, however, spending long hours communicating with other people.

This split approach to Internet use is part of the reason that the thing has been such a challenge to businesses looking for commercial applications. The technology exists to buy and sell just about everything on the net. But only a few people trust it enough to use it to the full capacity.

“The comparison you keep hearing is to VCRs,” says an executive for a big West Coast Internet Access Provider. “Though a lot of people in this business don’t like the comparison.”

What he’s talking about is the familiar—and partly true—story that the application which made video cassette machines truly household appliances was pornography. In other words, the desire to watch dirty movies on tape (at home, rather than in a seedy theater) drove the first wave of consumer VCR purchases.

For the Internet, two vulgar applications are driving the fullest technological uses of on-line commerce. One is, as with VCRs, sex. Pornography (usually still photos) and on-line sex talk are big applications on the net. The other is get-rich-quick schemes, most of which are simple variations on the basic Ponzi premise.

Through the mid-1990s, two key characteristics of the Internet have acted as partial checks on fraud. Unfortunately, both of these checks may weaken over time.

First, Ponzi perps who use traditional media (telemarketing, direct mail, MLM) seek out investors aggressively. Perps on the Internet make offers on their websites—and then wait for consumers to find them—clearly, a much slower way of reaching people. This check is likely to weaken as so-called “push technology” makes it easier to send junk mail on the net.

Second, most users remain reluctant to give out their credit card numbers and other personal information over the Internet. This check is likely to weaken as legitimate businesses refine transaction security and people have a higher level of general comfort with the system.

Trust is a difficult Issue

While many investors know the Internet contains a wealth of investment information, they often don’t know how to find what they’re looking for and have no way of knowing whether the information is reliable when they
do
find it.

Overall, few people—only about one in eight—say they would invest money based on anything they read or heard on the Internet. But, according to a 1996 survey by Massachusetts-based Dalbar Associates, demographic groups that tend to use the Internet the most trust what they read on it more. And another factor troubles many regulators. Heavy users of the Internet share a libertatrian, frontier mentality that is conducive to investment frauds.
And more than a third of people under 35 years old—Generation Xers—told the Dalbar survey that they considered the Internet a reliable source of investment information. This level of trust is music to Ponzi perps’ ears. From a crook’s perspective, there are suckers born every time a new person goes on-line. And more are going on-line all the time.

In 1995, about 40 million people used the Internet at least once in a while. That number was only a hint at what could be, though. Some marketers were predicting that by the new millennium, the number could be several hundred million.

The SEC has dedicated an entire unit to investigate and prosecute on-line investment fraud and is stepping up its own on-line presence to raise consumer awareness and access to the agency.

“It’s becoming a bigger and bigger problem,” says John Stark, who oversees Internet fraud for the SEC. “But they’re just the same old swindles with a new medium.... These [perps] are not like hackers, who can be difficult to track down. As long as they’re located in the U.S., it’s no different from any other fraud case. They need to advertise to lure victims, which means they need to post a phone number or an address or a post office box.”

On a more optimistic note, Internet regulars don’t yet seem to have developed the shame that shuts up burned Ponzi investors in other environments. The SEC has been surprised by the amount of information some web users are willing to disclose about themselves and their experiences.

“This is a very sophisticated group of self-policing individuals, and they’re willing to identify themselves to help us because they don’t like fraud,” Stark says.

He tells the story of one group of crooks that not only created a professional-looking web site, it even created links to bogus investment newsletters that touted the offering as a good investment. Some of the people conned by the set-up showed a refreshing outrage at having been ripped off.

Cyberspace Ponzi Perps Learn Quickly

Jeff Herig, a computer evidence analyst for the Florida Department of Law Enforcement, says: “The time it takes for criminals to learn a new way of beating the system is compressed down considerably from what it used to be. It used to be year to year that criminals would find a new hole to get through. Now a new way to beat the system is being developed from month to month.”

In the early stages of the Internet, much of the financial fraud was based on hyping stocks. “When we see a stock fluctuating wildly, we go into the chat room and take a look at what’s being said,” said Mike Robinson, spokesman for NASDR, an independent regulatory arm of the National Association of Securities Dealers (www.nasd.com).

But, as more people logged on and technology advanced, the Ponzi perps started getting active.

Internet Fraud Watch (www.fraud.org), a project of the National Consumers League, was launched in the mid-1990s to discourage online fraud before it gets a hold in the workplace. “Our Web site alone has received more than 300,000 visits from consumers and averaged 25,000 hits a week,” said NCL president Linda Golodner.

Cleo Manuel, an Internet fraud specialist with NCL, offers an explanation for all the interest:

The Internet is the new frontier. For con artists, it’s the natural next step. It’s the evolution of fraud. People see a sense of credibility when they see something on the ‘net because they trust the technology and trust the people on there. It’s a new marketplace and people need to be as careful there as they are in other marketplaces.

“The Wild West of Fraudulent Schemes”

“Cyberspace is a new frontier for advertising and marketing,” said Jodie Bernstein, director of the FTC’s Bureau of Consumer Protection. “But the Internet will not achieve its commercial potential if this new frontier becomes the Wild West of fraudulent schemes.”
Ponzi schemes crop up all the time. “It’s interesting that over the years, the scams remain the same,” says William McLucas, director of the SEC’s enforcement division. “It’s just the pitch that changes.”