A $90-Million Financial Tremor in the Bay Area
It’s like the “Twilight Zone” without Rod Serling, so picture this in shadowy black and white, shot at a nervous angle.
The old-fashioned phone rings and the caller, an attorney, calmly explains that his client has information about a major fraud against your company.
When you show up at the appointed hour in a Mountain View conference room, you find yourself among 30 other anxious company representatives, and what you hear is horrifying.
Millions of dollars in taxes you thought you’d paid never reached state or federal coffers. At subsequent meetings, you get more bad news. Every time you turn around, the story gets worse.
You’re in the twilight zone all right; the twilight zone of Bankruptcy Court, where you and the other unlucky firms are wondering whether you’ll ever see any of the $90 million of your money you estimate is missing. The lucky thing is, you’re not bankrupt yourself.
Thus begins the extraordinary tale of Hamilton Taft & Co., whose sudden collapse--it was ordered closed by U.S. Bankruptcy Judge Lloyd King here last week--has blossomed into one of the stranger California business debacles in some time.
Hamilton’s blue chip client roster included such California institutions and near-institutions as Diamond Walnut, Sunsweet Growers, Stanford University, Mills College, the Oakland Athletics, the San Francisco Chronicle and the State Bar Assn., as well as Tandem Computers, Sun Microsystems and C&R; Clothiers.
But the case goes far beyond California. Some 250 customers paid $3.5 billion a year in payroll taxes through Hamilton Taft, including Sony, Scott Paper, R. R. Donnelley, Neiman Marcus, Castle & Cook and Primerica.
Not all lost money, but 23 are convinced that they’re out $73.5 million, and counting some other customers, the total in question is $90 million. Federal Express estimates in court papers that its losses alone exceed $32 million.
In an effort to recoup, Fed Ex and Stanford forced Hamilton Taft into Chapter 11 bankruptcy. Now federal law enforcement authorities are taking a closer look.
“We do have an open investigation into allegations of criminal activity involving Hamilton Taft,” affirms Barbara Madden, an FBI spokeswoman in San Francisco who said the probe began in December.
Hamilton Taft is--was--an obscure San Francisco payroll concern that saved businesses the headache of paying payroll taxes directly.
Fed Ex, for example, operates in 50 states, most of which require the withholding of payroll taxes. Hamilton Taft would periodically collect enough from Fed Ex to make all the necessary payments, and would also handle the paperwork. It apparently charged fees but quite legitimately made most of its profit on the float, earning interest on its customers’ money before turning it over to tax collectors.
Everything seems to have been OK until, in a complicated transaction, a 36-year-old former firefighter from Texas named Connie C. Armstrong Jr. acquired Hamilton Taft on March 29, 1989.
Fast forward to March of this year. An attorney for former Hamilton Taft controller Steven Solodoff invites Hamilton customers to a meeting at the office of Sun Microsystems in Mountain View on March 8.
That day, before the meeting, an apparently unwitting Stanford transmits $1.7 million to Hamilton Taft. Later, at the meeting, Stanford’s representative hears Solodoff characterize Hamilton Taft as a “Ponzi” scheme.
(In a Ponzi scheme, you keep borrowing from Peter to pay Paul; sooner or later you run out of new sources of money, which is why Ponzi schemes fail.)
Basically, Solodoff accused Armstrong of diverting millions of dollars of his customers’ tax money to other companies he controlled. New money from customers would be used to pay old tax liabilities and penalties, leading to yet additional liabilities and even more penalties, Solodoff alleges.
Lawyers for Fed Ex and other customers who went over to Hamilton Taft demanding evidence their taxes had been paid claim they couldn’t get satisfaction, and legal briefs soon began to fly.
Armstrong, who filed for personal bankruptcy in 1985, couldn’t be reached for comment. But one of his lawyers, Lawrence Callaghan, says Armstrong is innocent of any wrongdoing and that Hamilton Taft’s contracts with customers permitted him to invest their money any way he saw fit, as long as the taxes eventually were paid.
Armstrong’s attorneys, in fact, contend that Fed Ex and other panicky customers are to blame for the company’s collapse, forcing bankruptcy “solely on the speculation and ravings of a paranoid cocaine user, Steve Solodoff,” according to one of their briefs in the bankruptcy case.
Solodoff’s attorney, Daniel Bartley, scoffs at this allegation, and Judge King isn’t buying it either. Following the advice of court-appointed trustee Frederick S. Wyle, who is often called upon to sort out cases that raise questions of financial propriety, King ordered the company closed and complained, “There is never any substance from Hamilton Taft.”
The question now is, what has become of the money? Armstrong’s assets include oil wells, shopping centers and a 2,000-acre cattle ranch near Tyler, Tex., his representatives say. Hamilton Taft’s former customers will probably try to seize these in court.
Like his assets, Armstrong’s apparent flamboyance seems characteristically Texan. Solodoff, for example, says in his affidavit that Armstrong paid $130,000 for year-round use of a suite at San Francisco’s luxurious Mark Hopkins Hotel and kept a chauffeur and limousine here at a cost of $45,000 a year so he could get around on visits.
