Scam Operators Find There’s Life After Conviction

When Crandall Financial Corp. was closed down by law enforcement officials in 1984, more than 800 people had been defrauded out of millions of dollars in a precious gem investment scheme.

Nearly four years later, when the fraud case against the Costa Mesa company’s principals finally reached federal court in Los Angeles, the Crandall legacy had grown, with links to at least half a dozen other telemarketing operations throughout the Southland.

Through Crandall alone, widowers lost their homes. Widows lost savings earmarked to care for spouses suffering from Alzheimer’s disease and children afflicted with mental illness. The disabled lost the nest eggs hoarded to protect them from rocky times.

In the years between Crandall’s closure and the sentencing of 10 company owners, managers and salesmen, those 10 operators went on to start up or join in a variety of intertwined telemarketing firms, which are now being investigated by the Southern California Fraud Task Force, according to prosecutors, investigators and court records.

They created the sort of snarl that law enforcement agents contend is nearly impossible to break, one replicated throughout Southern California, which in recent years has replaced Florida as the nation’s investment-fraud capital.

Police, postal investigators and other federal agents can raid an operation, seizing documents and shutting it down. But months--and even years--can go by between closure of a boiler room (a telephone-sales office) and the indictment and arrest of its operators.

In that time, “any boiler-room operator worth his salt could start up a new office every month,” said Larry Lambert, an investigator with the major fraud division of the Orange County district attorney’s office.

“It’s basically like a cancer,” Lambert said. “An operation starts out like a cancerous cell and divides out into a multitude. If you start one, in a few years you’ll end up with 50 to 60 more.”

The end result, said Newport Beach fraud investigator Mark Fisher, is that “there is no such thing as a stand-alone boiler room. . . . I don’t think there is any large boiler room that isn’t connected with some other telemarketing company by management or salesmen.”

Victims Bilked of About $260 Million

Crandall was one of at least 10 major “unconventional, organized, white-collar crime networks” operating in Orange and Los Angeles counties that link or have linked at least 60 separate boiler-rooms and have bilked victims out of about $260 million, Lambert said.

And the company’s tale illustrates perhaps the worst characteristics of the boiler-room scam--tenacity, a tendency to prey on the helpless and a willingness to victimize the same people over and over.

It also shows the difficulty law enforcement agents face in stopping investment fraud. Lack of police manpower and the ease of operating boiler rooms are two of the reasons.

“It’s so easy and lucrative that the only thing that shuts them down is a set of bars between them and the outside world,” Fisher said.

In 1979, brothers Michael Edward Smith of Fallbrook and Ronald Allen Smith of Fullerton founded Crandall with the owners of John Crandall Jewelers, a Southern California retail jewelry chain.

Until that time, Michael Smith had been a salesman in the jewelry department of a J.C. Penney department store, and Ronald Smith sold musical instruments through a company called Organ Town. By 1984, the Smiths were the sole owners of the Crandall investment company.

New Company Was Formed

“The Smith brothers found out on July 5, 1984, that they were being investigated by the Securities and Exchange Commission,” said Sharon McCaslin, a deputy attorney general and prosecutor in the case. “They rather immediately formed a new company, Global Marketing, which is still in business in West Covina. They then rather methodically took the money out of Crandall through checks to themselves and by siphoning off assets.”

In addition, McCaslin said, the two brothers took out loans from their company at 3% and 4% interest. And just before a receiver closed Crandall down on Sept. 25, 1984, seizing the company’s records, McCaslin said, the Smith brothers siphoned off Crandall assets into the newly opened Global Marketing.

“Crandall had a West Covina office,” McCaslin said. “The Smith brothers renamed it (Global). The West Covina office was selling coal. They just stopped the coal operation and went on selling gems. . . .”

McCaslin said Global did not reimburse Crandall for office furniture, gems or other assets assumed by the new company. “No money changed hands,” she said, when Crandall became Global.

The U.S. attorney did not indict the Smith brothers or Crandall’s managers and sales representatives until nearly two years after the company was closed and placed in receivership.

When a company is raided by law enforcement agents, as Crandall was, its records are seized and it is effectively shut down. Lack of manpower, however, keeps fraud investigators from quickly analyzing the seized evidence and seeking an indictment.

As a result, the Crandall trial did not begin until October, 1987, and the last of the defendants were not sentenced until Thursday.

Involved in Other Telemarketing Operations

Between the Crandall indictment and trial, the 10 people named in the indictment became involved in at least four--possibly as many as eight--other telemarketing operations, according to court records and interviews with law enforcement agents.

Three of the operations have been raided and closed down, and grand theft charges have been filed in one of those cases. Another, Global, is under investigation by the Orange County district attorney for potential fraud stemming from a gold-mine investment plan.

“We have an informant who has given us some information,” Lambert said. “We believe there is a strong potential for fraud there (with Global), so we are investigating it.”

Together with Crandall, these firms are suspected of swindling nearly 5,000 victims nationwide.

Here is what happened to Crandall’s company owners, managers and salesmen: - Ronald Smith, Crandall’s vice president of marketing, and Michael Smith, executive vice president and chief operating officer, went on to become president and chairman of the board of Global.

The Smith brothers were sentenced Thursday to 10 years each in federal prison, after being convicted on 10 counts of mail fraud in the Crandall case. Their attorneys argued that the Smiths instituted safeguards in the company to keep unscrupulous employees in check, but that renegade salesmen, acting on their own, bilked unwitting customers. In addition, they said, the diamond market collapsed during Crandall’s lifetime.

“Some of them (investors) were preyed upon by very unscrupulous salesmen,” said Marcus Topel, attorney for Michael Smith. “That doesn’t mean Mike Smith committed a criminal act. We had to try everyone together. There was a lot of bad smell in that courtroom and some of it stuck.”

Attorneys for the Smiths contend that Global is a legitimate business. The Smiths plan to appeal their convictions.

- Frederick Terr, a Crandall executive broker, moved up to become a senior account executive at Capital Trust of Irvine, Newport Beach and El Toro, and later became president of Brock International of El Toro.

Capital Trust was a precious metals investment company suspected of bilking an estimated 1,800 investors out of at least $10 million. It was raided and shut down in January, 1987, by the Newport Beach Police Department’s Economic Crime Unit, the Orange County district attorney’s office and U.S. postal inspectors.

The company also operated under the name Capital Coin and Bullion. It offered investors a chance to own silver, gold and platinum by making a 15% down payment, investigators said. But when investors tried to liquidate their accounts, their money allegedly was not returned. An indictment has yet to be returned in the case.

Brock, yet another precious metals investment company, allegedly swindled 2,000 investors out of up to $5 million, investigators said. It was raided and shut down by law enforcement agents from the Southern California Fraud Task Force last September.

Brock operators were accused of selling European strategic-metal options by attracting clients through newspaper and television ads and seminars. At the time, selling European commodity options in the United States was illegal under federal law. Although that law has since been changed, investigators said, the way Brock operated is still illegal. As yet, no indictment has been returned in the case.

According to prosecutors and victims, Terr was a smooth, cold, “salesman’s salesman,” who lived fast and fell hard. He drove a late-model Porsche with a license plate that read “EGO PLUS” and also used the names “Terrazo” and “Terrazas.” He was convicted on mail fraud charges in the Crandall case and sentenced to 10 years in federal prison. His attorney could not be reached for comment.

“He had the reputation in the office of being a shark, because of his uncanny ability to turn the transactions and to get more and more from people once he smelled blood,” U.S. District Judge Edward Rafeedie said during Terr’s sentencing.

- Raymond Girard was managing broker of Crandall’s Los Angeles office. He eventually became trading director at Brock. Prosecutors believe that he may have worked at Capital Trust between his stints at Crandall and Brock. He is characterized as an educated, dignified, Englishman with a penchant for quoting Kipling and Shakespeare. He was sentenced to six years in federal prison in the Crandall case and is appealing his conviction.

- After leaving Crandall, where he was a managing broker, Alphonse D. Lewis went on to at least four other telemarketing schemes, according to members of the boiler-room task force. The major one, which he founded and ran, was Transamerican Numismatic Coin Co. of Laguna Niguel.

According to court records and interviews, Lewis took the Crandall victim lists and put them to further use with Transamerican Numismatic. His basic spiel to unwitting customers was that he blew the whistle on Crandall, knew that they had lost money on their diamond investments, and would be only too happy to take what few diamonds they had left and recoup their losses by investing the gems in rare coins.

When he got the diamonds, he disappeared. Lewis bilked at least 30 clients out of more than $1 million, according to court records. He faces grand theft charges in two upcoming Orange County Superior Court cases stemming from Transamerican. Lewis was sentenced to seven years in federal prison in the Crandall case.

- Frank LoBasso, James McGuire, Michael Zenesky, Virginia Lewis and Thomas Newell all went on to Global from Crandall, Deputy Atty. Gen. McCaslin said. LoBasso and McGuire were both sentenced to five years in federal prison in the Crandall case. Zenesky, Lewis and Newell all pleaded guilty to reduced charges, cooperated with the prosecution and were sentenced to serve four months each in a community treatment center.

One problem law enforcement officials face when confronted with such intertwining boiler-room webs is the inability to prosecute every scam. The major reasons are the lack of manpower and the incredible proliferation of telemarketing schemes.

“There are some companies here that will not be investigated,” said Fisher of the Newport Beach Police Department. “They start up so many companies, it’s just not worth the time (to investigate). Why investigate Global, for example, if the same people will be sentenced in Crandall and Capital and Brock?”

The legacy left by Crandall is, perhaps, best seen in the damage done to Dorothy O. Wright, a 75-year-old Woodland Hills woman.

Mrs. Wright met Raymond Girard when she was a widow of nearly 10 years, and he filled some of the gaps in her life left by the husband she had loved and lost. He listened, she said, and he laughed. They talked of history and world politics. There were flowers and cards, wine and long lunches.

She gave him her life savings of $100,000, money set aside to care for her mentally ill son after her death. When she began to doubt the diamond investments that he recommended, he quoted Shakespeare as proof of his personal integrity and a reassurance that he would never hurt her. “This above all: to thine own self be true,” he told her.

So she mortgaged her home for $50,000 and invested even more in Crandall. Soon after that, Crandall was shut down and taken over by a receiver. She had lost all but a few gems. Girard had disappeared.

Months later, she said, the Smiths wrote to her regarding her Crandall investments. She replied:

“Thank you for your letter, but where have you been so long? . . . Death is moving in faster than usual. I have a mentally ill son who will never be able to earn his own way. Two weeks ago yesterday, he tried to get me to do a suicide pact with him. (He knows about Crandall.) I told him I was not finished with my commitments to life yet. . . .”

Then she got a phone call from yet another investment company--Transamerican Numismatic. “I can get you back every cent you lost through Crandall,” Alphonse Lewis said. “Give me your diamonds and I’ll reinvest them for you. Rare coins. You’ll get everything back in two years.”

She gave him seven gems and never heard from him again.

Wright’s case, however, has a happier ending than most. She filed a civil suit against Crandall, which was settled out of court, and received $100,000. Of that, about $40,000 went to attorney’s fees and the rest paid off the mortgage on her home.

“Today, I’m still laundering my dental floss,” Wright said. “Instead of shopping at Robinson’s and Bullock’s, I’m shopping at Pic ‘n Save.”

Although the outlook seems bleak, the Southern California Fraud Task Force has made a dent in the web of investment fraud. In its two-year history, 33 federal cases have been prosecuted, resulting in 105 convictions, 139 years of jail time, $3 million in fines and $2 million in restitution.

“It’s like a glob of mercury hit with a hammer,” Fisher said. “What happens? Do you make the mercury disappear? No. You end up with small balls of it all over. We have been incredibly successful, but the problem continues to exist in large numbers.”

HOW PRINICPALS OF A TELEPHONE INVESTMENT FIRM MOVED ON

Ten principals of Crandall Financial Corp. have been convicted in U.S. Court on charges of mail fraud. When Crandall closed in 1984, all 10 went on to other telephone-soliciting investment firms. Three of those firms have been closed by law enforcement officials, and a fourth is under investigation.

Crandall Financial Corp.

1979-84.

Raided by law enforcement agents and closed. 800 victims defrauded of at least $9 million.

The following principals convicted of mail fraud in U.S. District Court:

Ronald Smith

Michael Smith

Raymond Girard

Alphonse Lewis

Frederick Terr

Michael Zenesky

Not pictured: Frank LoBasso, James McGuire, Thomas Newell, Virginia Lukei.

TRANSAMERICAN NUMISMATIC COIN CO.

Jan. 1985-June 1986.

Raided by Law enforcement agents and closed. Two grand theft cases are pending in Orange County Superior Court. The firm is accused of defrauding 30 victims of $1.2 million.

Alphonse Lewis

GLOBAL MARKETING

1984-present

Current under investigation by the Orange County District Attorney.

Ronald Smith

Michael Smith

Michael Zenesky

CAPITAL TRUST

1984-Jan. 1987.

Raided by law enforcement agents and closed. Under investigation by Southern California Fraud Task Force.

Frederick Terr

BROCK INTERNATIONAL

Late 1986-Sept. 1987.

Raided by law enforcement agents and closed. Under investigation by Southern California Fraud Task Force.

Frederick Terr

Raymond Girard

Source: Court records and state, federal and local law enforcement officials.