A Losing Bet: Stock Gambler Used Theft to Play Market
In July, 1986, accountants from Pomerantz Kavinoky & Co. were checking the books of Commodore Products, a Chatsworth maker of bathroom fixtures, when one entry caught their attention.
The books for Commodore’s fiscal year ended May 31 showed the company had loaned $40,000 to an unidentified borrower, whom the accountants learned was Commodore’s controller, George Stoffmacher, recalled Martin Kavinoky, senior partner of the Woodland Hills accounting firm.
The books also showed that a $40,000 deposit had been made to Commodore’s bank to repay the loan, Kavinoky said. But when the accountants tried to confirm the deposit on Commodore’s monthly bank statement, they found the May and June bank statements had “mysteriously disappeared,” Kavinoky said.
So the accountants asked Commodore’s owner, Larry Pallitz, about the “loan.” He didn’t know what they were talking about. He then called Stoffmacher, who asked for a private meeting.
“He came over to my condominium and we sat by the pool,” Pallitz said. “And he informed me that he had taken this money and that it was more than my accountants had picked up so far.” Stoffmacher also told Pallitz that he’d “gambled in the stock market and lost,” Pallitz recalled.
“I just couldn’t believe what I was hearing,” Pallitz said. “I was flabbergasted because in the time he worked for me, he was a very personable, very competent management person.”
Controller Fired
Nonetheless, Pallitz immediately fired Stoffmacher, who had worked for Commodore for three years.
Pallitz, Kavinoky and court records quote Stoffmacher as saying he was a compulsive gambler in the stock market. And to feed his habit, Stoffmacher, 49, stole more than $100,000 from Commodore, according to the grand theft charge to which he pleaded no contest Aug. 17.
A no-contest plea carries the same weight as a guilty plea in a felony case, except that it cannot be used against the defendant in a civil lawsuit. In exchange for the plea, the Los Angeles County district attorney’s office dropped four counts of forgery against Stoffmacher.
On Sept. 18, Superior Court Judge David Perez in Van Nuys sentenced Stoffmacher to one year in jail. But Perez simultaneously stayed the jail sentence on condition that Stoffmacher, a Woodland Hills resident, spend the year getting therapy to prevent his gambling again.
Stoffmacher also must regularly attend meetings of Gamblers Anonymous, a self-help organization he joined before his sentencing, according to his probation report. (Stoffmacher declined to be interviewed for this article.)
Make Restitution
As part of his sentence, Stoffmacher must also make restitution to Pallitz, who sold Commodore Products in March. The exact amount Stoffmacher owes is in dispute. Court records show that Stoffmacher believes it is no more than $110,000; Pallitz claims it is $157,000. A hearing on the matter is scheduled Nov. 19.
There are between 6 million and 8 million pathological gamblers in the United States, experts say. Stoffmacher was one of a growing number of Americans addicted to the financial markets.
“There are more compulsive gamblers in the markets today than two years ago, just based on the bull market of the past two years,” said Jean Falzon, executive director of the National Council on Compulsive Gambling in New York.
One stumbling block to getting a true count of the compulsive gamblers is one of definition, she said. What is the difference between investing, speculating and gambling in the market? “We have struggled with that,” Falzon said.
Nonetheless, Stoffmacher matched what the experts say is the profile of the compulsive gambler in the financial markets: a man in his 30s or 40s, married, a college graduate, personable and usually a good employee.
Earned $60,000 a Year
Stoffmacher, who had no prior criminal record, earned a bachelor’s degree in engineering and a master’s degree in mathematics from Northwestern University, according to his probation report. As Commodore’s controller, he was earning about $60,000 a year, Pallitz said.
Stoffmacher, who has been married for 23 years, also was popular and admired for his professional abilities, and gave no hint of wanting to gamble in the market so badly that he would steal for it, Pallitz and Kavinoky said.
Stoffmacher would occasionally mention his stock market investments, but “nothing he told me portended anything out of the ordinary,” Kavinoky said. He said Stoffmacher also took one of the accounting courses Kavinoky teaches at UCLA, earning an “A” grade.
“We have discovered embezzlements before, and I must tell you this one really hurt and disappointed me,” Kavinoky said. “He is an exceptionally bright individual and exceptionally likable.”
Over a one-year period, Stoffmacher allegedly embezzled much of the money by using forged checks drawn on Commodore’s account with Security Pacific National Bank, according to a civil suit Pallitz has filed against Security Pacific and Stoffmacher. Stoffmacher cashed 27 checks, ranging from $1,500 to $20,000 for a total of $295,000, from Commodore’s account and then had Security Pacific either pay him in cash, deposit the money in his personal account or give him a cashier’s check payable to Stoffmacher’s broker, Sutro & Co., the suit alleges.
Stoffmacher’s investments worked well at one point, and he was able to return more than $100,000 he had taken from Commodore, according to the probation report. But soon, Stoffmacher was stealing more money from Commodore to play the market, it added.
Stoffmacher gambled with one of the financial markets’ riskiest instruments--options, particularly stock-index options, the report said.
Bets Where Stock Will Go
In effect, the holder of an option bets on which way the stock will go over the life of the option contract, usually three months. If the holder guesses wrong, the option can be worthless when it expires.
Stock-index options work basically the same way, except that instead of betting on one stock, the option holder is betting on the direction of an index of stocks, such as the Standard & Poor’s 500 composite index.
Index options have become one of the most volatile investments on Wall Street. Major firms have developed computerized trading tactics in which they buy or sell the index options and take the opposite action with the underlying stocks to take advantage of temporary price differences between the two.
With this so-called “program trading,” the firms buy or sell millions of shares and thousands of option contracts in just minutes. The tactic has been credited with whipsawing the entire market, especially during last week’s record plunge.
Pallitz contends in his suit that Security Pacific is liable along with Stoffmacher for Commodore’s losses from the embezzlement because the bank should have caught the unauthorized and forged checks. Security Pacific denied the charges.
2 Signatures Needed
Checks written against Commodore’s account required signatures from two Commodore officials, Pallitz said. Stoffmacher allegedly would sign his name to the checks and then forge the name of another Commodore official, according to the district attorney’s complaint.
At other times, Stoffmacher allegedly obtained Commodore checks that had been pre-signed by one official, signed his name to them and then collected the money, his probation report said.
Stoffmacher, who was responsible for compiling Commodore’s monthly financial statements, usually camouflaged the stolen money by listing it as “accounts receivable-others,” indicating merely that an unidentified party owed Commodore money, Kavinoky said.
Stoffmacher did the same on the year-end books, except that those books were reviewed by the accountants, who wanted the names of the “others.” That’s when Stoffmacher’s plan began unraveling, Kavinoky said.
For Stoffmacher, the stock market took its toll before it crashed last week. Said Judge Perez at Stoffmacher’s sentencing: “It’s clear to the court that you have a disease. It’s a shame your family has had to suffer with you.”
But Stoffmacher is working to make amends. His probation report said he is active in Gamblers Anonymous and is getting therapy. And it said that in January, he started his own firm, George Stone & Associates, that finds jobs for accountants, a business that could help him repay the money he took.
