Joel and Todd Fisch taught G.W. McDonald an invaluable law-enforcement lesson.
A pair of fleet-footed father-and-son swindlers, the Fisches became McDonald's professors of procedure, instructors in the need for interstate cooperation among investigators on the trail of telemarketing fraud.
McDonald is chief of enforcement for the California Department of Corporations, and it took 4 years for him and a legion of law enforcement agents from two countries to bring the Fisches to justice. In that time, McDonald saw precious metals scams like the Fisch family's emerge as the fraud of choice among boiler-room operators.
By the end of the Fisch case in 1986, McDonald realized that California needed a new weapon to combat the growing threat to investors. This month, the state will unveil that latest addition to its boiler-room bashing arsenal: The Leviticus Project, a federal program named after the third book of the Bible, which states in part, "Thou shalt not defraud thy neighbor. . . ."
In 1982, Todd and Joel Fisch opened up First Trading Group, an El Toro precious metals boiler room. "When we served a subpoena on them," McDonald said, "they tossed all their books in the back of five limousines and headed for British Columbia."
Fisches Run Out of Vancouver
They were run out of Vancouver by the widening telemarketing investigation, and their next stop was Bellevue, Wash.--another city, another scam. The Fisches ended up in Miami, opening up their fourth precious metals boiler room in as many years, this one called Suisse Atlantique.
All told, they bilked 1,600 investors out of $8.5 million before they were arrested in Miami in late 1986. Last April, a U.S. District judge in Los Angeles sentenced Todd Fisch to 20 years in a federal prison. Last October, Joel Fisch was sentenced to 25 years.
"It (the Fisch case) indicates why you need multistate cooperation," McDonald said, "and it illustrates how long it takes to get these things done."
Just weeks before Joel Fisch was sentenced, California became the 20th state to join the Leviticus Project, which gives interstate cooperation and federal grants to boiler-room investigations to help wipe out an array of interstate fraud.
Leviticus officially began operating in 1980, with funding from the Department of Justice. But it was born in the Appalachian coal fields in 1977, when regulatory and law-enforcement agents from six coal-area states got together to battle criminal activity in the coal fields.
The state of New York joined the group, too, said Gerald McKelvey, a spokesman from the New York County district attorney's office, because "while we have no coal reserves, we had determined that a lot of the criminal activity ultimately led to Wall Street."
The Arab oil crises of the 1970s basically led to the formation of Leviticus, McKelvey said. During the crises, the federal government started emphasizing alternative forms of energy, and fraud in the coal fields ran rampant.
Targets Frauds in Several Areas
In addition to sales of fraudulent limited-partnership coal-mining ventures, Leviticus investigation targets included the theft of heavy equipment used in strip mining, frauds affecting financial institutions and boiler-room sales of fraudulent commodity futures in coal.
In the beginning, the group was merely an effort to coordinate investigations and share information among states to battle the coal problems. But in 1980, the group applied to an arm of the Department of Justice and received its first funding--$1.5 million, McKelvey said.
In 1985, when an oil glut replaced the fuel crises of the 1970s, coal fraud largely abated. But what Leviticus officials saw led them to branch out instead of fold.
"In 1984, we were starting to see the same principals from the coal cases move over to oil and gas fraud," said Jerry Conners, the Leviticus field service coordinator. "After a year, we were allowed to expand into the oil and gas industry. Last year, because of problems in the Western states, we were allowed to look into precious metals. On some occasions we saw the same people all over again."
This is how Leviticus works: A member organization targets an investigation that affects several states. Law enforcement agents from those states work together on the investigation and take the case as far as possible.
Then the member agency in charge presents the case to the Leviticus board of directors, along with a pitch for money. If the case is accepted, the board will reimburse the chief agency for expenses such as flying in witnesses, investigators and experts from around the country.
The money is sorely needed, members say, because travel expenses and complex investigative accounting make interstate boiler-room cases some of the most costly to prosecute. Grants have run from as little as $150 for a single witness's plane ticket all the way up to about $100,000, Conners said.
Agencies Strapped for Resources
State securities and law enforcement agencies say many cases will not be prosecuted without this money because investigating and prosecuting agencies are strapped for resources and manpower. They contend that the federal money is well spent by their agencies because their day-to-day dealings with fraud in the states take them closer to the problems than federal forces.
Leviticus members are all state-level law enforcement agencies such as state police or securities commissions. Although there are 29 agencies from 20 states involved, membership has been frozen temporarily while project directors assess the group's growth.
What makes Leviticus so effective, Conners said, is that "we don't just bring charges in one area. Say someone runs a boiler-room in Virginia and they're selling in California and Arizona and Texas. We plan on prosecuting in all those jurisdictions."
Funding Level Is Confidential
So far, it has worked. From 1980 through the end of February, Leviticus, whose funding level is confidential, has been involved in 206 cases, filed 1,375 criminal counts against 393 individuals or corporations and 256 civil charges. The cases so far have been split evenly between oil and gas and coal; no precious metals cases have come to fruition.
The project has led to $4.6 million in fines assessed by the courts and $5.6 million in court-ordered restitution. Leviticus investigations have recovered $2 million in stolen equipment. And cases worth $439 million have been referred to the Internal Revenue Service, Conners said.
"They (Leviticus) have funded a huge number of cases over the years that have been successful in the coal and gas area," said California's McDonald. "I'm hopeful it can be as successful in precious metals."
Which is exactly why California, through the Department of Corporations, joined Leviticus last September. Of the 200 boiler rooms operating in Southern California today, the Southern California Fraud Task force figures that 70% are precious metals schemes of one sort or another.
"The real purpose of this exercise is to get a handle on the boiler-room problem in Orange County," McDonald said. "Orange County is the hotbed of the problem. . . . The Orange County D.A.'s office is really overwhelmed. The county is growing so fast, and the D.A. has not kept up with the growth of the fraud down there."
One reason precious metals fraud is so prevalent, law enforcement officials say, is that sale of such metals as gold and silver often falls into a regulatory gray area. Sale of gold coins, for example, is considered a "cash-and-carry" transaction rather than an investment, and, as such, it is unregulated.
California courts in 1986 and 1987 ruled that gold-in-the-ground operations do not fall under securities laws because they are merely prepayment plans for an item to be delivered in the future--a normal consumer transaction, not an investment. In such schemes, swindlers persuade investors to buy rights to ore on the promise that it contains guaranteed levels of gold.
As a result of the court rulings, McDonald said, as many as 30 to 40 other scams have switched to gold-in-the-ground since the decisions.
"Those two court decisions had the effect of creating a sanctuary, a haven for telemarketing con artists in California," said Scott Stapf, director of investor education for the North American Securities Administrators Assn. "They just literally cracked open a loophole that's as big as California."
California Receives Funding
California began applying for--and receiving--Leviticus funding in February. Investigations are proceeding, and law-enforcement officials hope that several should come to fruition this month. So far it is too soon to say whether this new weapon will work for the nation's boiler-room capital.
For New Mexico, which has received more than $100,000 in Leviticus funds, the program has yet to pan out.
"Positive results are slow in coming," said a cautious John Hiatt. "In part, that must be a result of having to deal with another level of government. We have had no convictions yet. Our investigations are still pending."
Missouri, however, has had better luck. John Perkins, the state's commissioner of securities, likes to tell the tale of Lester Eugene Chapman to illustrate the power of the project.
Chapman operated a boiler room from British Columbia and sold interests in oil and gas leases, what Perkins characterized as unregistered securities. Chapman had the ill fate of selling a lease interest to a doctor in Callaway County, Mo.
Regardless of whether fraud is involved, selling unregistered securities is a felony in Missouri. The doctor complained to Perkins' office, which worked with securities regulators in British Columbia.
Missouri officials tracked Chapman down, filed charges against him, and dragged him back to their state. But when the case was ready to go to trial, Chapman's attorney refused to have him plead guilty, arguing that there was no way the Missouri prosecutor could prove that Chapman was the man who sold the securities to the doctor.
Transactions Made Over Phone
The reason was that the transactions were made over the telephone, and the doctor never saw the man who bilked him. But when Chapman was arrested in Canada, Perkins said, he confessed to selling securities without being registered.
"I think this guy (Chapman) was convinced that there was no way Callaway County could actually bring in the witness from British Columbia necessary to convict him," Perkins said.
Leviticus provided about $1,000 in travel money, and the witness got on the plane in time for the Feb. 2 trial.
"When the defendant saw the guy was here," Perkins said, "he pleaded guilty to six counts of violating Missouri security law minutes before the trial began. That's the kind of thing Leviticus can do."