Agents Fight Uphill Against Hucksters

Who wear the white hats in Orange County’s war on investment fraud?

Private investigators, police detectives, sheriff’s investigators, FBI agents, district attorneys, and federal securities and commodities officials form the first line of defense against Orange County fraud promoters.

They face an overwhelming number of investor complaints and pending cases and their efforts are frustrated by the public’s persistent habit of making questionable, if not downright foolish, investments.

Here’s how four fraud fighters view their difficult task:

“There is a humongous amount of money involved” in Orange County investment frauds, says Irving Einhorn, regional administrator of the Securities and Exchange Commission’s Los Angeles office. “We see the same people at it over and over again. It’s very tough because they move faster than we do.”

He said most promoters are “articulate, intelligent professionals” who can be incredibly convincing. They frequently work with financial planners or investment advisers who can be certified by mail, without taking a test, by paying a $150 fee to the SEC.

“The better they make the deal sound, the more likely the suckers are to part with their money,” said Einhorn during a recent interview in his Wilshire Boulevard office. “If all you know is what the guy told you over the phone, don’t do it,” he suggested.

‘Sleep Factor’

He said it’s hard to believe people send money without making inquiries. “Would you let an unbonded person clean your house?” asked Einhorn.

Einhorn suggests judging all investments on “the sleep factor--ask yourself if you will be able to sleep at night after sending in the money.”

Arthur Salzberg, regional counsel for the Commodity Futures Trading Commission, becomes emotional when he talks about boiler room operators and others who he says steal money from the public. He calls the promoters a variety of unprintable names because on most days, his Westwood office receives up to a dozen calls from confused or complaining investors. He said it is difficult to believe so many “people send money off before getting something in writing.”

Salzberg, a bearded and curly-haired Northwestern University Law School graduate, has become an expert on battling precious-metals frauds perpetrated by Orange County companies.

“The only safe way to participate (in gold and silver) is to pay full price and take possession,” he said in a recent interview.

Metals Cases a Priority

Salzberg’s staff monitors commodity sales of all kinds in 13 Western states. But in the last two years, investigating and prosecuting precious-metals cases have been a top priority.

Federal judges, acting in response to CFTC complaints, have frozen assets and placed Brazier Corp. of Newport Beach, First International Trading Inc. of Irvine and Smythe-Wheatley Inc. of Arizona into receivership.

At least 10 other Orange County precious-metals dealers shut their doors and disappeared in the wake of subpoenas issued early last year by Salzberg’s office and the California Department of Corporations.

But at this point, the promoters of fraudulent commodity deals seem to be winning. The CFTC faces a 15% budget cut that means about 50 staffers nationwide will have to go. “All we can say is let the buyer beware,” said Salzberg, who stands to lose about a third of his 10-member staff.

The first thing private investigator George Johnson tells investors when he’s unraveling a deal is, “Your money is gone.”

The chances of finding any money left are slim to none, says the former Orange police officer who took a reduction in rank from a patrol sergeant a few years ago to specialize in fraud cases. Johnson, now an investigator for the National Investigative Agency’s Santa Ana office, said, ‘It’s a kick. I love it. If I were rich, I’d do this for free.”

His cluttered desk faces a wall decorated with plaques commemorating his biggest fraud cases. Every day, he can remember the men he helped send to prison because their pictures are hanging on his wall.

For one Orange County real estate company investigation, which led to four grand theft charges, Johnson drew a 60-foot-long flow chart tracing thousands of checks written in a web of limited partnerships. For another case, he spent a day with an expert on jojoba beans to investigate a fraud relating to growing the desert plants. “You’ve got to take the whole thing apart and put all the pieces together.”

Bouncing Checks

Johnson said most frauds come to light in the same way--checks to investors bounce, the office phones go unanswered, company officials disappear. Then a bank, creditor or individual calls for help and Johnson goes to work.

He believes most Orange County fraud cases go unprosecuted because local police departments are swamped with about 10 times more fraud cases than they can handle. Even if a police detective or sheriff’s investigator begins a case, it means months or years of tedious paper work and interviewing.

“If you like watching a glacier melt, you’ll like working on frauds,” he said with a smile.

Guy Ormes, a deputy district attorney in Orange County’s overworked criminal fraud unit, said, “More people are injured, hurt or emotionally damaged by fraud” than any other crime. Ormes’ office is stacked with boxes of files from dozens of fraud cases pending in court or waiting for county investigators to pursue.

To date, the fear of going to prison has failed to be a deterrent because penalties for white-collar offenses are generally light. Most first-time fraud convictions result in a few months on probation. A multimillion-dollar theft may earn the perpetrator a maximum 10-year state prison sentence, which is, in most cases, automatically cut in half.

“Restitution is not the way to go,” said Ormes, because promoters usually set up another illegal investment scheme to repay the first set of investors. Another problem is that when a judge orders restitution, it gives investors false hope that they will see their money again, and that rarely happens, Ormes said.

“We always encourage people to file civil suits,” to go along with a criminal action, he said. It is more difficult to prove the guilt “beyond a resonable doubt” needed for a criminal conviction because 12 jurors must agree on the verdict. In a civil suit, however, only nine jurors must agree on a verdict.