I ALWAYS WANTED TO BE A SECRET AGENT:
AGENT “00 NOTHING”
Buck still lived on the farm that his grandparents homesteaded seventy years ago. The farm had been parcelled off and rented to other ranchers in the area, but Buck still maintained the four acres that held his house, barn, and a few other outbuildings.
Buck was introduced to Timothy Morgan through his insurance agent, Michael Chase. Chase explained to Buck that Morgan would be taking over several of his clients, as he would be going away for a while. Morgan was heavy-set with thinning hair but was able to talk to Buck about farming, the lack of rain, and the price of cattle in a manner that put Buck at ease. Morgan seemed to have the knowledge about farming into which you had to be born. Purchasing insurance from him seemed to be a natural thing for Buck to do.
After getting to know Morgan for a year, Buck was surprised to learn that Morgan was no longer in the insurance business. As Morgan explained, there were a lot of young up-and-comers who made it difficult for someone like Morgan to be competitive. The companies now didn’t want their salesmen to get to know their clients like Morgan did. They wanted their employees to sign them up and move on to another client. Morgan had had enough of that, so he decided to get into the development business. As Morgan took the time to explain to Buck, there were lots of opportunities in today’s burgeoning real estate market. With his connections, Morgan knew that he could do very well for himself and for his friends, as Buck had come to be over the past year.
Morgan was working on a real estate investment that promised to be very lucrative, if Buck was interested. Pinnacle Land Development was building a new community west of the city, and Morgan was able to purchase half a dozen lots from the land owner, Simon Ratherson. Simon was in his eighties now and spent most of his time in Florida, as he didn’t like to deal with the Canadian prairie winters anymore. Morgan showed Buck the site plan and the proposed subdivision and some of the pictures that he had taken of the land already being cleared. If Buck was interested, he could buy into the deal for $50,000.
Buck was intrigued. It was true that development was going crazy, with the city encroaching on the outlining towns. Farming was getting to be too much work for him now that he was on his own, and his daughter had no interest in the land. This would be a tidy nest egg for her. Buck called his bank, arranged for a loan on part of his land, and presented Morgan with a cheque for $50,000 the next week. Morgan was careful to explain to Buck that this was an investment that would come due in about two years as people bought their land parcels. Buck said he understood that it would take time to earn a profit and agreed to the deal.
As the months went on, Morgan was able to offer Buck the inside track on a couple of other deals he had going. Through his connections in real estate development, he made contact with some overseas investors. As a result, Morgan was currently working with the Nigerian National Petroleum Company, developing off-shore oil wells. Morgan showed Buck his letters and contracts from the Nigerian government and copies of the letters of credit from the Nigerian National Bank. He also had the actual certificates showing that the potential for this investment would be in the neighbourhood of $23 million. Would Buck want in on this deal as well?
It seemed like a good deal with unlimited potential. However, Buck was skeptical. He had heard about Nigerian scams on the news. Morgan assured him that those schemes involved getting those get-rich-quick letters and faxes. However, if Buck wanted to just put in a few thousand dollars to start, that would work for Morgan as well. Buck was convinced and wrote Morgan a cheque for $6,000.
As the weeks went by, Morgan kept in constant contact with Buck, giving him updates on the petroleum project. The lawyer handling things in Nigeria was happy to provide Morgan and Buck with any documentation they needed. As the weeks turned to months, Morgan showed Buck the e-mails and the new certificates. Buck was convinced to put in more money, but only in small amounts of $4,000 to $6,000 at a time. Without realizing it, Buck had given Morgan almost $125,000 within eighteen months, in addition to the $50,000 for the real estate deal that still was waiting for home buyers.
At this time, Buck began to question Morgan more, and wanted to start getting some return on his investment. Morgan assured him that things were progressing as fast as they could, but deals of this magnitude take time. Moreover, the Nigerian government had so many barriers to releasing money out of the country.
As Buck became more insistent, Morgan told him that the money was available. He could probably arrange for Buck to get about $300,000 cash if he had another $10,000 available. If Buck was willing to fly to Nigeria and meet the lawyer acting for him, he could show him the cash and settle Buck’s fears. Morgan even suggested that his wife accompany Buck to give him some company and to prove things were legitimate.
Buck and Morgan’s wife, Delores, flew to Lagos, Nigeria, and contacted the lawyer, Midè Ogobuny, who agreed to meet them the following night. At the scheduled rendezvous, Buck and Delores showed up, and there was Midè and two other men standing beside an older Renault. Midè told Buck and Delores that the cash was in the trunk of the car and opened the hood. Inside the trunk was a case containing bundles of paper, about the size of United States or Canadian paper currency. But these bundles were all black.
Midè explained that these bills were treated with a special chemical to camouflage their appearance. Taking one of the notes from a stack, Midè produced a small plastic container and poured it over the note. The note began to change and revealed it to be a United States $100 bill.
According to Midè, the restrictions that the government placed on exporting currency out of the country made it difficult to move large amounts of cash easily. In order to move such large amounts, partners of Midè, who were chemists, developed a coating that would turn paper currency black. The money could then be shipped out of the country without detection by the authorities. Once the package of bills was received, a reversing agent then treated them and the money was ready to be deposited into a bank. The case in the trunk of the Renault held $5 million of treated money. If Buck was willing, he could transport it back to Canada. Midè would provide him with the chemicals needed to treat the notes once they were secure and out of the country.
It was like being in a spy novel to Buck. Everything was just as Morgan told him it was, and he saw it with his own eyes. Buck resolved to give Morgan the additional money when he returned to Canada and to make arrangements for the $5 million to be shipped to Canada.
Meanwhile, Morgan was also involved in other ventures that Buck was unaware of. Several years ago, Morgan had a small business providing water coolers to companies. The contracts were small, but lucrative, and had the potential for growth.
Morgan had approached his golfing partner, Alex, with a business proposal. He had just signed two large corporations to a contract for sixty months to provide them with water coolers. Morgan produced the contract with the signatures and showed the profit margin to Alex. If Alex would invest in the company, Cooling Spring Waters Inc., then Morgan would be able to expand the business.
The contract looked good to Alex, and he agreed to invest $100,000, writing Morgan four cheques of $25,000 each. Morgan then went looking for other investors and approached some members of his church, obtaining $340,000 from members of the congregation. He even obtained $60,000 from his daughter’s new in-laws after showing them the signed contracts. In all, Morgan obtained $500,000 in investments for Cooling Spring Waters Inc.
Unknown to Morgan’s investors, the original contracts that Morgan had with his clients had expired two years earlier. Most of the corporations had gone to contracted suppliers, purchased through their head offices. The contracts that Morgan showed to his investors were forged documents with new dates and signatures based on Morgan’s original contracts.
In all business, there is a certain amount of trust expected between the parties. When the business proposition is between friends and family, that trust is implicit. However, certain precautions are still necessary to protect yourself and your friendship. In this case, going that extra step may have helped protect Morgan’s victims. Asking for copies of recent paid invoices or purchase orders from both Morgan and his customers might have shown these victims something was not quite right with the deal.
Morgan was charged with fourteen counts of fraud and pled guilty to eight of them. He received a probationary sentence. The rest of the charges were withdrawn. He was also ordered to provide restitution to his victims. However, Morgan had declared bankruptcy and claimed he did not have any money to pay anyone. The church that he defrauded decided not to pursue any court action, either criminally or civilly, while one of the water cooler investors struck a secret deal with Morgan to get some of his money back before Morgan was charged.
In the end, the other victims joined together and sued Morgan in an effort to get their money back. After three years, the civil case has gone to court.
As for Buck and his investments, he lost all of the money he gave to Morgan. Morgan was never involved in land development nor was he connected to Pinnacle Land Development. Morgan had obtained at some time a prospectus from Pinnacle regarding their company and used this to create fake documents to show to potential investors.
Morgan did have connections in Lagos, Nigeria, but these connections were also part of the overall fraud scheme. Morgan was their “front-man” in Canada, and set up deals with victims whose trust he gained. Besides Buck, Morgan had convinced seven other victims to invest in the Nigerian Petroleum Company scheme. As a result, these victims sent over $600,000 to Nigeria and did not receive anything in return. To add insult to injury, Buck had paid for Morgan’s wife to fly to Lagos to prove that the deal was legitimate.
THE PHARAOHS WEREN’T THE
ONLY ONES TO BUILD PYRAMIDS
Christopher Malone was a salesman. It was what he had always wanted to do, and he knew he could do it well. Malone could talk to anyone and sell anything. He had been part of sales teams for furniture, automobiles, and electronics, and now he was selling shares in a very special organization.
The Canadian Adolescent Recovery and Support Network (CARSN) was setting up a system of recovery centres to help kids with drug problems. They would develop self-esteem, receive counselling, and still be able to attend school while recovering. The added bonus to investors was that by carefully and profitably investing funds, investors would be able to realize a return of 20 to 35 percent.
Using his connections in the retail trade and his wife’s position on the Health Board, Malone went about selling shares to friends and colleagues. Investors would invest $10,000 and Malone would promise them a return within six months of 20 percent, or $2,000. The project had everything that an investor could want — a worthwhile charity that helped youth and a large return on an investment.
Malone was very busy contacting clients and obtaining their money for the CARSN program. Within six months, he was able to offer the promised return to his initial investors. But, as Malone explained, if these investors would keep the money with CARSN, their return would only increase. After seeing the first returns, these initial investors kept their money in the program. Malone kept selling investments and kept convincing the investors to let their money grow.
After eighteen months, some of the initial investors felt it was time to take their earnings and contacted Malone to give them their money. They would not be convinced to keep the money invested any longer; by their calculations, it should have almost doubled by now. Malone reluctantly paid his initial investors their money, but explained that due to the investment structure, the profits were not as high as he originally thought they would be. However, the rest of the money should be available in a week or so. The investors took the money offered and agreed to wait for the rest. Malone continued to sell investments, which he used to pay the investors their profits. However, the more investors who wanted their returns, the more Malone had to sell, until the scheme collapsed and Malone disappeared with $3 million.
This scheme is known as a Ponzi scheme, named after Charles Ponzi. Charles Ponzi was an Italian immigrant to the United States. In the 1920s, Ponzi convinced investors that he could take advantage of the difference between foreign and U.S. currencies used to purchase and sell international mail coupons. The basics of Ponzi’s scheme were to purchase international mail coupons at a low price and then re-sell them at a higher price.
After the First World War, inflation in Italy had decreased the cost of postage. An agent could cheaply purchase an international mail coupon in U.S. funds and exchange it for U.S. stamps at a higher value. These U.S. stamps could then be sold for actual cash. Ponzi saw the potential profit in this and started his own company, the Securities Exchange Company, to manage the scheme. His initial startup cost was $30!
Ponzi offered his investors a 40 percent return on their investment. Initially, these investors were quickly paid their profits as promised. The word spread and more investors began pouring money into the scheme. Within seven months, Charles Ponzi was making millions. However, the entire scheme was hollow. None of the money that Ponzi collected was being re-invested into the company. An analysis at the time showed that over 160 million mail coupons would have to have been purchased by Ponzi, but there were less than 28,000 coupons in circulation. Yet, as long as the money kept coming in, Ponzi could pay investors and keep ahead of the eventual collapse.
When Ponzi’s scheme collapsed, thousands of people lost their investments. His Securities Exchange Company was shut down, and Ponzi was indicted on eighty-six counts of fraud. Ponzi pled guilty to mail fraud and was sentenced to a total of fourteen years in prison. Federal officials tried to trace the money Ponzi obtained but were unable to do so. With his initial purchase of $30 to start his scheme, Charles Ponzi ended up stealing millions of dollars from investors.
The principle of the Ponzi scheme is one of “robbing Peter to pay Paul.” As long as the scheme has a sufficient flow of money to complete the circle, it will continue. However, instead of a circle, the scheme tends to resemble a spiral. As the number of investors increase, the supply of new investors begins to decrease. The scheme collapses under its own weight.
Ponzi schemes resemble pyramid schemes as there is no real product being sold for the investment. A pyramid scheme, or multi-level sales program, gets its name from the pyramid structure of the organization. Usually there is a large sales base that pays royalties to a smaller, higher level, which in turn pays royalties to a still smaller, higher level, and so on to the top. As long as there is a product or service of real value being sold, and the salespersons receive money based on these sales, these pyramid organizations are legal.
However, if a person participating in the scheme receives a return on his or her investment for recruiting only, they are participating in an illegal pyramid scheme. The participants in these schemes are not offering a product for sale, the product has no value, or does not exist. Quite often the scheme is disguised in an elaborate set of investment rules that are poorly understood by the investors.
Related to pyramid schemes are chain letters. Chain letters again derive their name from the structure of the scheme, where each participant forms a link in the chain. A recipient of a chain letter will be promised something intangible, such as good luck, if they send the letter on to a number of friends, thereby keeping the chain going. Some chain letters tell how you can make money by recruiting several friends and sending cash back down the chain. These friends will then recruit more friends to send cash and you will eventually begin to get your portion. Once a chain letter asks you to send cash it becomes a pyramid scheme.
Under the Criminal Code of Canada and the Competition Act, all pyramid schemes and chain letters are illegal in Canada. Similar to pyramid and Ponzi schemes are lapping schemes. The difference is that lapping schemes are usually perpetrated against financial institutions.
SHE WAS MY FAVOURITE CUSTOMER?
Laura Sampson and her husband, Jason, owned a number of businesses in Winnipeg, Manitoba. The businesses were based on the copying and printing business. Laura looked after the finances of the companies, making deposits, paying bills, and so on, while Jason looked after the business itself. Business was good for the Sampsons. They vacationed in Hawaii, owned a large home in the western part of Winnipeg, and for Jason’s birthday, Laura bought him a new Mustang convertible.
Laura continued to manage the finances and would go into the bank to make her deposits and transfers. She had struck up a friendship with a particular customer service representative named Shelly. If Shelly was busy, Laura was quite happy to wait until she was free.
What Shelly did not realize was that Laura was actually transferring funds among her three businesses, writing cheques for products and services that did not exist. For example, Laura would write a cheque from Company A for $15,000 and deposit it into the account of Company B. She would then write a cheque from Company B for $10,000 and deposit that cheque into the account for Company C. Laura would then write a cheque from Company C for $10,000 to Company A and deposit this into the account. This overlapping of cheques would show on the financial institution’s books as Company A having a balance of $25,000, Company B a balance of $10,000, and Company C a balance of $10,000. The scheme relied on the delay that was incorporated into the bank’s financial system for processing deposits and the willingness of the bank to carry the overdraft at least until the end of the business day.
Laura carried on this scheme until it was eventually caught by another customer service representative who was filling in for Shelly while she was on holidays. The unique aspect of Laura’s scheme was that it was carried out entirely at the same branch. Usually a lapping scheme is carried out using several institutions and branches.
THE STRUCTURE OF PONZI AND PYRAMID SCHEMES
Most successful Ponzi and pyramid schemes share the same characteristics.
First and foremost, they rely on the greed of the investors. The promise of substantial gain for little investment often overrides an investor’s better judgment. Next, there is the promise that it is a surefire, guaranteed investment that cannot fail. If there are any doubts, the fraudster will offer to buy out the investor immediately, although this might result in a substantial transaction fee to the investor. Such an offer is not due to the benevolence of the fraudster, but in the hope that by buying out one dissatisfied investor, no one else will hear of problems and ask for their money as well.
Frequently the fraudster uses relatives, close friends, business associates, and acquaintances to get new victims. In Morgan’s case, he was able to get $60,000 from his daughter-in-law’s parents and $100,000 from his golfing partner. Once the investors realize that their money has gone, they often cling to the hope that somehow everything will work out in the end; either the investment will actually pay off, or the fraudster will do the right thing and pay back the money they took.
Finally, as with most fraud schemes, the fraudsters count on the victims being reluctant to admit to anyone, especially family members, that they have been cheated for the fear of looking greedy.
If you are approached, or are tempted to participate in what appears to be a Ponzi or pyramid scheme, there are a few things you should look for before you invest any money:
1. Beware of promises of high profits that are guaranteed a sure thing. Remember that nothing in life is guaranteed, least of all making money.
2. Avoid financial advisors who fail to provide clear explanations of the investment or use confusing jargon that makes them sound knowledgeable and you incompetent.
3. Ask for and obtain written details of the investment. Ask for bank statements, stock quotes, or statements from other investors. Be cautious of any details that cannot be verified in person.
4. Resist the pressure to reinvest without obtaining your profit first. If you do decide to invest, think about the investment as a day at the casino. Plan to invest or play with a certain amount. When you win or make that amount, pocket and continue to play with your “winnings.”
Remember, if it seems too good to be true, it is. Also, remember that just as at the casino, the odds are always in favour of the house.