“HAPPY BIRTHDAY, CHARLIE!”

Written By: Phil Feigin

Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi was born 131 years ago this coming March, and died penniless in a Rio de Janeiro charity hospital two months shy of his 67^th birthday, just two months before I was born, in 1949. While he did not invent the sort of scheme he pulled off in Boston back in 1920, the brazen and spectacular nature and scope of his fraud warranted naming rights.

By now, most are familiar with the classic Ponzi scheme pattern. A promoter raises capital from investors for an enterprise, promising high returns paid in short order, perhaps weekly, monthly or quarterly. The promoter actually pays initial investors the promised returns. Recognizing that the unbelievable has come true, i.e., the operation is returning 20% a month (or whatever), these first investors decide to reinvest their initial returns and let them and future returns roll over for a compounding effect. The hook is now sunk.

These early investors tell all their friends and provide testimonials. Some of them have swallowed the bait so hard, they may even start selling the investments to family, friends and anyone else who will listen. And then there’s the Internet and social media.

The cash rolls in. A few months or years later, investors ask to withdraw some or all their funds. They get excuses, but no money. In reality, there never were any profit- or even revenue-generating operations; all the scammer did was raise money and keep the imaginary balloon inflated. Those first returns were just of some of the investors’ own money. Most of the proceeds have now been drained away by the scammer, less occasional payouts to the “squeakiest wheels.” You know the rest:  disconnected telephones, regulators, newspaper stories, subpoenas, interviews, denial, fury, fear, court documents, accountants, receivers, grief, greed, the occasional financial literacy editorial, clawbacks, those who weren’t bilked asking how those who were could have been so stupid, betrayal, desperation, anger, loss of trust and faith, excuses, recriminations, prosecutors, more court, retribution, contrition, sentencing, perhaps a legislative committee hearing or two, blame all around, and finally, nothing but  hollow questions of how it all happened and what might have been. A complete waste, except for boosting the revenue of casinos, drug dealers, mansion and exotic car sellers and leasers, jewelry stores, fashion retailers, art dealers, hotels, airlines and fancy restaurants.

In the Post-Madoff Era (“PME”), barely a week goes by without word of a new Ponzi scheme being uncovered and shut down somewhere. As I see it, three factors have contributed to this apparent bull market in Ponzi schemes. First, we’ve had five years of recession and bad economic times. A lot of people lost a lot of money in investments and real estate, a lot of retirees are suffering, markets have been volatile, and traditionally safe returns have been microscopic. The allure of higher returns in the “safe” strategies only a promoter not burdened with the truth can promise has for some been too much to resist.

Second, in good times, investors don’t need to withdraw principal from good, growing investments. In bad times, or after bad news in the media, they flee to cash. In some ways, that explains the longevity of Madoff’s scam. It wasn’t until after the Lehman Brothers/Reserve Primary Fund debacle that people who had invested in “hedge funds” started asking to liquidate their holdings by the thousands. The volatile markets and continuing problems here and abroad, as well as Ponzi scheme revelations themselves, precipitated unprecedented and unanticipated investor requests for liquidation of alternative investments. The scammer’s inability to meet broad scale requests for cash meant the beginning of the end.

Third, it is my completely unverified opinion, supported by nothing more than my 34 years of dealing with and observing the SEC Enforcement Division staff, that, before the onset of the PME, Enforcement personnel viewed work on Ponzi schemes as somewhat beneath them. That was not the path to greatness within the Division. Working insider trading cases, major company accounting fraud, mutual fund finagling, Foreign Corrupt Practices Act violations, wire house deception—now, you’re talking. Not everyone in Enforcement is there to cash in with a Wall Street or D.C. law firm partnership after 10 or 15 years toiling away at the Commission, but that prospect is hard not to at least consider. It is only natural to aspire to advancement within the Division as well. Before the PME, work on Ponzi schemes simply was not pursued with much vigor.

Once the Madoff and Stanford revelations started pounding the SEC’s midsection, it seems Ponzi schemes became Public Enemy Number One at Enforcement (and at the state level as well). I’m guessing a memo went out to all SEC Enforcement staffers across the country to review any complaints received in the last three years for potential Ponzi schemes and prioritize them. Reports were requested and generated regarding any current investigation or litigation. Headquarters made it a point to emphasize every enforcement action taken against anything even resembling a Ponzi scheme.

It is my unofficial observer’s sense that the PME saw the creation of a new term:  frauds were now described as “Ponzi-like schemes.” What in heaven does that mean? Does the Ponzi family have a copyright on the term, and SEC officials hoped the qualifier would avoid having to pay the royalties? “Operating a Ponzi scheme” is not an express violation or crime that I know of. You don’t get any more points if you prove it was a “Ponzi scheme” as opposed to some other form of fraud. It is merely a colorful and convenient way to describe how a lot of investment frauds operate.

I don’t think we will ever know if there have been more Ponzi schemes in the PME, or if it is simply a fact that more are being detected, investigated and publicized. In spite of the best intentions and efforts of financial regulators everywhere, the number of people willing to fall prey to Ponzi schemes seems endless and infinite. This demand inexorably leads to more and more scammers, who, in my experience, universally believe they are smarter than the morons before them who got caught.

The purported deterrent effects of heightened enforcement efforts and ever increasing prison sentences are myths. These scammers don’t think that way. As proof beyond my own personal experience in dealing with them, I offer the following as empirical evidence. If the scammers feared being caught, wouldn’t they take the money and run? Pull a “Body Heat”? Raise lots of money and then disappear to an unnamed Caribbean island and wile away the rest of their lives under an assumed name, tanning and sipping umbrella drinks by the pool? But, remarkably, few do. Perhaps their hanging around can be explained in part by their greed for ever more money and the lifestyle riches brings in South Beach, Beverly Hills or SoHo, but there’s got to come a point, no?

Well, Happy Birthday Charlie! Your soiled name lives on, and will for the foreseeable future. Would that it and the scams it describes wither and disappear into the ashes of history.

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Looking Back: July 1982, Part Three: The States Come to Denver

Written By: Phil Feigin

In the last two segments, I discussed the beginning of NASAA’s modern era, and in particular, its Enforcement Committee and my first dealing with group. I turn now to what brought me to Denver for the first time, opening new doors I could not have anticipated.

As memory serves, we in Wisconsin and several other jurisdictions were investigating a rather significant and sophisticated national tax shelter scam called “Gold for Tax Dollars” run by a guy named Gerald Rodgers. I was frustrated by the case, because it cried out for a coordinated national effort yet the SEC was not particularly interested in exotic scams (sound familiar?) and individual state efforts were ineffective when crucial records were strewn across the country. I prepared a long letter to Rick Tucker urging him to revisit the idea of joint state investigations with travel, room and board to be funded by NASAA. Unbeknownst to me, Royce Griffin had also petitioned Tucker for help in dealing with his big problem, the penny stock industry in Denver. Colorado had adopted (in my view) the weakest state securities law in the country in 1981, for one thing, stripping the Commissioner of the authority to require licensing of, or regulate, brokerage firms and reps that were registered with the NASD. In Royce’s view, penny stock brokerage firms and their reps in Denver were doing business in states where they weren’t licensed, and committing securities fraud to boot.

It was April or so of 1982. We were at the annual spring meeting at the Hyatt Regency in Washington, D.C. The Enforcement Committee was meeting in one of the lower level conference rooms, and I remember that Ed Greene, then of the SEC, was giving a presentation on the new Regulation D that the SEC was in the process of adopting.

I was pulled out of the meeting by forensic accountant Nancy Jones of the Arkansas staff. My letter and Royce’s entreaty to Tucker had prevailed. Nancy had been recruited by Tucker and Royce to put together what would be NASAA’s first “special project.” She sought my help, along with that of several other enforcement types. We would put together a team of examiners from states where selected/suspected Denver penny stock firms were registered/licensed, thus giving them inspection authority, and these examiners would gather evidence the firms and reps were conducting business in states where they were not licensed. The evidence gathered would then be distributed it to the offended states. To be honest, at the time, I really didn’t know what a “penny stock” was. I had to ask one of my Wisconsin mentors, Ron Burtch, when I got back to Madison.

Back then, it was pretty unusual for state securities agencies to conduct onsite examinations of the headquarters of firms licensed/registered in their states but located elsewhere, particularly out west. It was one thing for a Boston-based Massachusetts examiner to inspect a Providence-based, Rhode Island firm just down the road; it was quite another matter for a Boise-based Idaho examiner to check out a Salt Lake City firm. They simply didn’t have the budget, even though they had unquestioned authority, to do so.

NASAA funding made it possible, particularly if an issue of regional or national concern presented itself. That was the case with Denver’s penny stock firms. The team of 16 or so staffers, including me, flew into Denver the first week of July 1982. (Among team members was Ralph Lambiase, at the time, an examiner from Connecticut, who would later become the state’s long time administrator and a NASAA President, and Lee Polson from Texas, who would become NASAA’s General Counsel a few years later.)

We had arranged for our own rented copying machines to be delivered to each firm that Tuesday morning. Back then, some firms would complain about examiners using their xerox machines, and insisted on having their own people make copies of requested documents. That of course allowed the firms to identify which documents were of interest. Bringing in our own machines obviated that problem.

As I recall, the team conducted exams of about 12 firms. Virtually all of them would go out of business over the next few years. Some I recall were Blinder, Robinson & Co., N. Donald & Co., E.J. Pittock & Co., Vantage Securities, Wall Street West, First Financial, Rocky Mountain Securities & Investments, Hanifen Imhoff (probably shouldn’t have been on our list), S.W. Devanney & Co. and R.B. Marich. The team left for a week and then returned for a second week of exams later that July.

Collectively, the exams collected evidence that the firms and their reps had hundreds of accounts in dozens of states where they and their reps were neither registered nor exempt from the requirement. For some reason, the Vantage numbers stick in my mind. Per NASD records, they were only authorized to do business in Colorado, but our team examiners found they had something like 693 accounts in 39 other states. (Paul Hurtado, who ran Vantage, was murdered years later here in Denver. I don’t think the crime was ever solved.)

Even more glaring than the 693 accounts in states where Vantage wasn’t licensed was the fact that team examiners noted the NASD Denver District office had inspected Vantage twice in the last few years, and had noted the fact in their reports. Even so, the NASD had not done anything on its own to make Vantage correct the problem, and had not notified any of the state securities agencies in the offended jurisdictions. When we brought that to the attention of Georgia securities director H. Wayne Howell, now NASAA’s President, sparks flew. I wish I had copies and recordings of the communications between Wayne and Gordon Macklin, the head of the NASD back then. This issue and other similar bones of contention helped forge the attitudes of a generation of state securities regulators toward the NASD and SROs in general. Things got a bit better in later years, but my sense is the distrust is pretty hard-wired and genetically imprinted in state securities regulators.

A wave of enforcement actions followed in the wake of the distribution of the evidence the team gathered in the two weeks of examinations. I think the count was about 110 cease and desist orders and the like. As I recall, Wisconsin was the first state to enter into a consent order with Blinder. A dozen or so other states took action against Blinder based on the project evidence as well, a statistic that was later cited by a federal judge in granting injunctive relief against the contentious firm in a hard fought SEC action. Colorado had been the jurisdiction to examine S.W. Devanney & Co., and they took Colorado to court in an attempt to preclude the Division from distributing the evidence of violative conduct to other jurisdictions. Eventually, Devanney would lose the case,* and ironically, strengthen the Commissioner’s powers under the Colorado act in doing so.

During my two weeks in Denver, I spent most of the time in “headquarters,” the Colorado Securities Division office, and got to interact with Royce Griffin. It was not long afterwards that he offered me the job of Assistant Commissioner. I was ready for a change, and took on the challenge, moving to Colorado in November 1982.

I had no idea what lay ahead for me. My state regulatory career gave me the opportunity to testify in Congress on many occasions, I would represent Colorado and NASAA traveling to almost every state and Canadian province, Cambridge and Oxford Universities, London, Tokyo, Paris, São Paulo and Montevideo. I would be named to a federal advisory committee, work on the drafting of two Uniform Securities Acts, the Model State Commodity Code, a bunch of federal legislation, and NASAA model statutes, rules and policies. I would go on to be named and serve as Colorado’s Commissioner for ten years, chair NASAA committees and sections, serve on NASAA’s Board, as its President and later, Executive Director, speak at more conferences than I can remember, work on national cases against Salomon Brothers and Lloyd’s of London, and forge friendships for the ages. It all traces back to Nancy Jones plucking me out of that Enforcement meeting about Regulation D that Spring day in 1982.

State awareness of the penny stock problem was certainly raised by the Denver effort. Soon, the NASD would, grudgingly, begin advising states of firm problems with state registration they uncovered in their exams. National publications started covering firms like Blinder, with the famous Forbes story entitled, “Blind ‘em and Rob ‘em.” While I have always held that New York, New Jersey and Florida had far more of a penny stock problem than Denver, at least by number of firms, they had lots of legitimate firms as well. With the predominance of Denver’s penny firms in this market, they stood out like a sore thumb.

Over the next decade or so, the combination of bad publicity, NASD efforts (particularly those of Frank Birgfeld and his staff here in Denver), the SEC’s dogged pursuits, U.S. Attorney actions, Colorado efforts, national, Colorado and Utah legislation and combined enforcement efforts and private litigation combined to end the bulk of penny stock abuses in Denver. I like to think what became known as the “Denver Project” was the beginning of the end for the worst of the Denver penny stock market. It also laid the groundwork for the dozens, if not hundreds, of “special projects” that NASAA has funded in the cause of investor protection.

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* Griffin v. Devanney, 775 P.2d 555 (Colo. 1989)

Looking Back: July 1982 Part Two: Origins of NASAA’s Enforcement Committee

Written by: Phil Feigin

One of the side effects of the system was the creation of Series 63, the Uniform State Agent Securities Law Examination (“USASLE”). The states were required to drop their own exams in favor of the national exam, to the great relief of firms and reps across the country. Most states weren’t all that keen on keeping their own exams up to date and administering them anyway, so it was of benefit to them as well as the industry. Series 63 was to be administered by the NASD along with all the other NASD exams at its testing centers, at the NASD’s expense. That was another saving for the states. Finally, and perhaps most importantly, Series 63 was to be drafted and owned by NASAA. For the first time in its existence, NASAA would have an independent, and significant, funding source producing revenue and a budget far exceeding the experience of the past dependent on member jurisdiction dues. NASAA would only get a small fraction of the test fees, but it was still a substantial figure.

That meant that for the first time, NASAA could afford to fund staff members from NASAA member jurisdictions to attend face-to-face meetings at national conferences and otherwise during the year. This gave projects an enormous boost. Certainly, there had been meetings before, and staff members from jurisdictions with ample budgets had attended conferences in the past, but it was nothing like what the new era of Series 63 revenue provided.

I began my securities regulatory career in April 1979 as the Chief Attorney of the Enforcement Division of the Office of the Wisconsin Commissioner of Securities. The first annual conference I attended was that fall, in Little Rock, Arkansas (Anchorage had been selected site, but as it turned out, could not accommodate the meeting, so Little Rock filled in at the last minute). I attended on Wisconsin’s dime because NASAA funding had yet to kick in.

In 1979, I knew nothing of securities law, regulation or practice. Over the next three and half years, the excellent staff at the Wisconsin office had the patience to share with me their estimable and comprehensive knowledge and experience, on which I still rely every day of my practice, and for which I am forever grateful. I thrived in my new career, and being able to attend conferences and meetings, I began to participate in issues of national significance, initially, precious metals fraud.

With NASAA funding, the first winter enforcement meeting was held in January 1980, at the Big Mountain Ski Resort outside Whitefish, Montana, with R.G. “Rick” Tucker as our host. There were about 20 of us. Tom Krebs, the legendary director of the Alabama Securities Commission, was NASAA’s new president, and the Enforcement Committee chair was Wayne Howell of Georgia. There was no conference room—we sat wherever we could in the bedroom, with Krebs and Howell running the meeting from the bed. I remember discussing the idea of multistate investigations to be funded by NASAA, but worries about potentially adverse insurance ramifications quashed the idea.

We tromped along for the next few years, and enforcement types across the country got to know each other better from the face-to-face meeting opportunities. The first winter meeting in Whitefish had grown into a significant annual enforcement conference taking place in various venues. The January 1982 meeting was held again in Montana. Rick Tucker was the Chair of the Enforcement Committee for 1981-82. It was at this Montana meeting that I first met Royce Griffin. I had seen his name in the NASAA directory for prior years as a member of the Arkansas staff, but in February of 1981, he had been named Colorado Securities Commissioner. It would turn out to be an important meeting for both of us.

Looking Back: July 1982 Part One

Written by: Phil Feigin

My life and career changed dramatically and forever in July 1982. I have been encouraged to do some reflecting on times past every once in a while. I couldn’t help but think back to 30 years ago this summer. It was one of those pivotal periods in my life—which is not particularly important to anyone but me, my family and friends—but also in securities regulation and the maturation of the North American Securities Administrators Association (“NASAA”).

Let me set the stage, first on NASAA. Until the late 1970s, NASAA was an organization where the “blue sky” administrators, the bosses, met twice a year, in Washington, D.C. in the spring and a host state venue in the fall. The administrators were usually outnumbered by a large multiple by industry professionals from brokerage firms, investment companies, law firms and the like. It was a good opportunity to discuss events, issues and projects blue sky staffs had been working on back home. NASAA was funded by the dues paid by the blue sky agencies and their jurisdictions. Therefore, it was usually the bosses alone who got to attend the meetings, and only those administrators able to obtain state funding for the trips.

Investing was becoming a middle class/consumer fact of life to an ever increasing degree, inflation was rampant, and brokers across the country were reaching out to investors everywhere, not just where the brokers had their offices. That meant that both firms and agents had to fill out forms, take qualification examinations and meet other requirements of each state jurisdiction where they sought investors, on top of what they had to do for the SEC and the NASD. That was becoming an unholy mess.

The late 1970s and early 80s saw an unusual spasm of uniformity and cooperation that must be marveled at and commended. The SEC, the states and NASAA, and the NASD worked together to come up with uniform forms, entry requirements and tests, and a computerized system for administering all of it. The most recognizable feature of the new system was the Central Registration Depository, or CRD. There were bumps in the road to be sure, and it wasn’t perfect, but the CRD and coordinated registration/licensing process for firms and reps remains a model and paragon for every multistate/federal regulatory registration/licensing structure.