Dominelli Reveals Details of How He Swindled Investors

J. David (Jerry) Dominelli spent much of 1984 trying to persuade his once-satisfied investors that their funds were safe and secure.

On Thursday, he admitted it was all a lie--about the money being safe, about the money being secure, about the money being traded, about his past, about everything.

Dominelli’s admission--in a 13-page statement explaining his guilty pleas to four federal felony charges of mail fraud, bankruptcy fraud and income tax evasion--puts to rest once and for all any doubts that his J. David & Co. empire was anything but a fraud from its founding in 1979.

The moniker of “financier” now hardly seems to apply.

Dominelli, 43, admits in his statement--written as part of his plea agreement process--that he commingled and misused investors’ funds for his personal use, that he fashioned a complicated business empire to prevent anyone from tracing his assets, that he lied about his track record as a successful money trader, that he fabricated investors’ statements to show profits that didn’t exist, and that he needed new investor funds to pay off existing clients--a typical “Ponzi” scheme.

“We may never use the term ‘Ponzi scheme’ again,” said Assistant U.S. Atty. Robert D. Rose, who led the government’s two-year probe into J. David. “We may just hear people ask, ‘Is this another J. David scheme?’ ”

Dominelli’s statement and the accompanying government documents also reveal for the first time that Dominelli and his companies lured about $200 million from 1,500 investors. About $80 million was for his own personal use and is considered lost, while about $120 million was given back to investors over the years.

Only about $11 million of the investors’ monies was ever traded, according to a source close to the case. Even that limited trading, Dominelli admitted, was not profitable.

“When you cut through everything,” said Frederick R. Wirtz, attorney for the bankruptcy trustee, “this basically was people writing a check to Jerry Dominelli and then him doing whatever the hell he wanted to do with the money.”

The following is the gist of Dominelli’s statement filed in federal court Thursday--one year to the day after he told The Times he would like to be in charge of any reorganization of his once-mighty J. David & Co. empire.

“Between June, 1979, and February, 1984, I carried out a scheme to defraud investors by means of my J. David companies. I did so knowingly and willfully. I used false and fraudulent pretenses, representations and promises to obtain money.

“To encourage people to entrust their money to me and my companies, I portrayed myself as a broker, trader and investment counselor who was particularly knowledgeable and successful in the Interbank and currency futures markets. I distributed a ‘track record,’ or trading history, which showed phenomenal and consistent success with the funds I had managed.

“This portrayal was false. I had traded in the Interbank market. My trades had been largely unprofitable, resulting in overall losses rather than profits.

“I also claimed that I personally managed all the money which was invested with J. David for Interbank trading. I claimed that my efforts were responsible for annual returns averaging 30-40%. In some instances, the returns I reported would have exceeded 100% on an annual basis. One type of account I created was called ‘Special Leverage.’ For January, 1984, I reported that the monthly trading profits had been 16%.

“In truth, I fabricated all of the money

figures for Interbank trading. Those figures were completely fictitious. I designed the Special Leverage accounts to attract new funds and to avoid additional withdrawals of old funds. The monthly statements of account were false. The books and records at the J. David offices were false. All reports and financial statements which showed profits from Interbank trading were false, and I knew it.

“I also commingled investors’ funds with my own funds and diverted millions of dollars to my personal use. I accept the government’s calculations that approximately $200 million was invested with J. David, that approximately 60% of that total was returned to investors and that not more than $80 million was owed to investors at the time the scheme collapsed. The $80 million amount does not include the earnings which the investors were promised.

“I misused investors’ funds to create and finance new business ventures and to pay commissions to persons who raised money for the J. David companies. Only by soliciting and using new funds from new investors could I satisfy demands for withdrawals. I falsely promised to secure investors’ money with purchases of Eurodollars or U.S. Treasury bills.

“I used the J. David business structure to prevent my assets from being traced, to create a false impression that I was a successful trader, broker and investment counselor, and to lull my victims into a false sense of security.

“I intended to avoid governmental regulation of my illegal activities. For example, I am responsible for the false statements made to the California Department of Corporations that the Interbank fund raising and banking activities were being conducted outside the United States. In truth, virtually all of the J. David investors were residents of the United States.

“To execute the fraudulent scheme, I knowingly caused statements of account for approximately 1,000 investors to be delivered by U.S. mail during December, 1983, to J. David investors residing in San Diego, California, and elsewhere.

“Those statements falsely reflected that approximately $140 million in funds were under management as of Nov. 30, 1983. In fact, by that date I had virtually no funds.”

Dominelli’s statement contains other specific examples of deceit.

For instance, he repeats his admission--first made in court last August--that he lied when he told the J. David & Co. court-appointed bankruptcy trustee that $112.8 million in investors funds were on deposit in overseas banks. His claims were made as a condition to his release from a 10-hour prison stint on Feb. 25, 1984, for not cooperating with the trustee’s search for J. David assets.

“When I made these statements,” Dominelli said in his statement, “I knew they were false and that the trustee and his attorneys would rely upon them in carrying out their duties.”

The trustee’s search for those particular assets included a trip to Europe that cost the estate $250,000.

Those lies formed the basis for Dominelli’s guilty plea to one count of bankruptcy fraud.

Dominelli also admitted that he lied to secure a $2.3 million loan in late January, 1984. The admission was part of Dominelli’s guilty to plea to one count of mail fraud.

Dominelli told associates he needed the funds to purchase a commodity trading company in San Diego called Commodity Monitors. The funds were raised in one day, thanks primarily to the efforts of Michael Hall of Newport Beach, one of the chief fund raisers for Dominelli’s interbank operation.

In truth, Dominelli had invented the Commodity Monitors story so he could raise money to pay back angry investors, according to Dominelli’s plea agreement statement.

“As soon as I received the money, I began making false statements in order to postpone complaints, to make the loan transaction less suspect and to lull the lenders into taking no action against me,” Dominelli’s statement reads.

Dominelli’s admission of tax evasion is equally interesting. He reported taxable income in 1982 of $294,507, although his real taxable income that year was a whopping $21.6 million.

His official tax bill that year was $329,922 (which included special tax categories, including capital gains and the alternative minimum tax) but he admitted Thursday that he actually owed about $10.7 million in federal taxes.

Dominelli could be liable for paying back investors about $80 million, for paying back for the $2.2-million loan, for the back taxes and for up to $107,000 in fines in connection with his guilty pleas.

There is also an automatic fine of $50 for each of the four charges he pleaded guilty to.

However, Dominelli’s statement insists that “I am personally bankrupt, that I am unemployed, that I have no earning ability now or in the reasonably foreseeable future and that I do not have the financial resources to support myself or my dependents.”