Suspect’s Arrest Lifts Veil on ‘Financial Scam of ‘90s’ : Money: Millions are lost in ‘prime bank note’ schemes. One financier, Harold Glantz, insists he is innocent.

Harold Glantz bought himself a glamorous address, a $5-million house on Pacific Coast Highway with a panorama of the blue Pacific and the beach for his back yard. Today, however, he sits in a New York jail cell, charged by U.S. and Dutch authorities with stealing $30 million from investors.

Glantz, a New York businessman who has been linked to underworld figures, is accused along with several others of ripping off the Salvation Army in England and wealthy investors in Germany and the United States.

Authorities say he funneled part of the loot into pricey Southern California real estate--including the Malibu beach house and fashionable homes for a son and a daughter in Los Angeles and Santa Monica.

Although his lawyers maintain that he is innocent, authorities have portrayed him as a major player in a type of fraud that one investigator has dubbed “the financial scam of the ‘90s.”

These scams, which usually target big investors, involve the marketing of bogus financial instruments, sometimes called “prime bank notes,” “prime bank guarantees” or “prime bank standby letters of credit.”

Lured by promises of huge, risk-free returns from a mythical market in these instruments, wealthy investors and institutions have lost millions of dollars to clever con artists around the world. Investors victimized by prime note scams have included the National Council of Churches, which lost $8 million; the Chicago Housing Authority’s pension fund, which dropped $19 million, and the South Pacific island state of Nauru, out $13 million.

Total losses may top $500 million, said Jim Byrne, a law professor at George Mason University in Virginia and an expert on letters of credit.

Concerned about the proliferation of these scams, U.S. agencies that supervise financial institutions--including the Federal Reserve, the Federal Deposit Insurance Corp. and the Comptroller of the Currency--issued a joint alert last October.

Similar warnings have come from the Commercial Crime Bureau of the International Chamber of Commerce and the U.S. Securities and Exchange Commission, which in the last two years has filed 16 prime bank actions--including a lawsuit last month against Glantz.

Legitimate instruments known as letters of credit are guarantees that banks provide customers to back up contracts--such as a promise to pay for a shipment of goods within so many days of delivery. They are the bank’s pledge to meet the obligation in case the customer defaults.

As such, letters of credit have no value beyond the specific transaction and, according to experts, cannot be traded in a secondary market.

But this is just the illusion the swindlers promote. Often they describe an arcane, virtually clandestine market in which the world’s elite (“prime”) banks and other heavy-hitters trade the instruments for hefty profits. The swindlers profess to have access to this market, enabling their clients to enjoy risk-free returns that will double their money or better.

In a typical pitch, investors may be told they can buy a one-year letter of credit at, say, 85 cents on the dollar--an instrument that costs $850,000 and can be cashed in 12 months for the face value of $1 million. But, according to the pitch, the real money is to be made in a “roll program,” in which discounted instruments are bought and almost immediately resold at a small profit, a process repeated over and over to create astronomical returns.

Byrne said many of the offerings are “preposterous” and wouldn’t fool “an expert in letters of credit . . . for more than 30 seconds.”

But what the swindlers “effectively do is cut the person off from his legitimate advisers, or confuse them enough that no one ever goes to a real source of expertise,” he said.

Knowing that professional titles lend a veneer of credibility, the crooks often employ lawyers and accountants--using them to lull victims and to set up bank accounts abroad from which the money typically disappears.

“If you want to quote two words, it’s deception and greed, “ said John Shockey, a special assistant in the Office of the Comptroller of the Currency and an authority on prime bank frauds.

“It’s the lure of quick profits, because everything is now, “ he said. “You provide these funds, and not only can I return your principal, but a huge profit immediately.”

The frauds sometimes fit the mold of Ponzi schemes, in which investors initially receive income (usually from their own principal) to create an illusion of profits and lure new victims.

Other times, the frauds are married to advance-fee schemes, in which people seeking loans pay upfront fees for financing they never get. According to Shockey, prospective borrowers are told their fees will buy letters of credit to serve as collateral for loans, but the documents never materialize.

Some of the scams have flowered in exotic locales.

Consider the case of Nauru, a tiny South Pacific island nation of 9,000 people that became fabulously wealthy from phosphate mining royalties. In 1991, Nauru’s phosphate royalty trust was swindled out of about $13 million in a prime bank scam involving the Commonwealth National Bank of Antigua. Two officials of that bank were convicted last year in New York in a separate white-collar scheme.

Another fraud brought scandal and ruin to the Czech Republic’s Banka Bohemia, once a shining star of that country’s shift to a market economy. The bank was liquidated in July amid allegations that bank officials seeking Western capital had been tricked or corrupted into issuing hundreds of millions of dollars of largely unredeemable notes that were being peddled in the United States and Europe.

Among those stuck with the notes was the National Council of Churches, the oldest and largest ecumenical church group in the United States. In December, the council paid nearly $8 million from a retired employees’ health insurance fund for Banka Bohemia notes with a supposed redemption value of $12 million. Now in court in London trying to recover its investment, the council has fired two officials for failing to consult an in-house investment committee.

The Chicago Housing Authority’s pension fund was another big loser. A former housing authority executive put about $19 million from the pension fund into prime bank investments that were “nothing more than a scam,” according to the Securities and Exchange Commission--which in June sued the former executive, along with investment promoters in the United States and the Virgin Islands.

Two Chinese American businessmen and two Chinese banking officials were sentenced in May to long prison terms in China in a scheme involving the Agricultural Bank of China. According to news reports, Francisco Hung Moy and Raymond Lee persuaded officials of a rural branch of the bank to issue 200 letters of credit with a redemption value of $10 billion. Collateral for the deal was a $10-billion letter of credit from a nonexistent Russian bank.

Although Chinese authorities have vowed not to honor the letters of credit and most have been recovered, some may yet be circulating among unsuspecting traders.

As law enforcement agencies fight back, one case they are putting pressure on involves Glantz--a man with a checkered business career and seemingly a penchant for living on the edge.

Glantz was arrested in April in New York on an extradition warrant from the Netherlands, where he and a Dutch associate have been charged with stealing $4.36 million from the Salvation Army and $775,000 from John C. Hammeke, a private investor from Kansas. Glantz has remained in custody pending an extradition hearing later this month.

“There has not been any impropriety here,” said Glantz’s attorney, Herb Kantor. According to Kantor, Glantz failed to complete the investment deals simply because some parties “felt insecure and began objecting and seeking to freeze matters where they were.”

On Thursday, Glantz and two other men were indicted by a federal grand jury in Boston on charges of swindling $24 million from German investors in another prime bank fraud scheme.

Glantz, 61, who lists his occupation as “the private placement of commercial paper for banks and institutions in Europe,” has had links to organized crime figures for many years, according to court documents and official reports.

One of Glantz’s lawyers acknowledged his association with reputed mobsters, but attributed it to Glantz’s upbringing in a poor area of New York.

“There are certain people who grow up on certain streets in New York,” attorney Robert A. Scher told The Times. “You can never turn your back on what you are and who you are.”

He is “all aces with me,” Scher said. “The man’s word is his bond. . . . He is one of the most decent human beings that I ever in my life have met.”

Glantz’s alleged links to underworld figures were cited in a 1970 report by a New York state commission on mob infiltration of legitimate businesses. According to the report, Glantz was involved in running bagel shops with members of the Genovese organized crime family.

He also was president of Bagels U.S.A. Inc., a chain of bagel stores whose stock offering was suspended by the SEC. The agency said the offering failed to disclose material facts, including loans owed by Bagels U.S.A. and the identities of owners of its predecessor firms.

Glantz has also been involved in running amusement parks, including one in the New York City borough of Queens. When the site was condemned in the 1970s, Glantz sought the city’s help in opening a new park in Brooklyn. However, city officials lost interest after running a check on Glantz.

In a 1976 letter to New York City’s Economic Development Administration, the city’s Department of Investigation said law enforcement officials believed that “close ties have existed between Mr. Glantz and high-level organized crime figures.” Glantz sued for defamation, but the claim was dismissed by the courts.

After a failed attempt to buy the Todd Shipyards in Brooklyn, Glantz was sued in 1990 for allegedly borrowing $1.2 million for the purchase and failing to return the money when the deal fell through.

His creditor was a man in the construction business named Emanuel Garofalo--a reputed associate of mob figures whose brother, Edward Garofalo, was the victim of a mob-style execution about the time the suit was filed.

The dispute caused Glantz some uneasiness, according to court papers filed by his lawyer.

Although Glantz and Garofalo were longtime friends, Glantz believed Garofalo “has been, for many years, associated with some of the legends of organized crime in the metropolitan area,” Scher wrote.

And Garofalo’s brother, Eddie, “was the subject of a sudden, severe and fatal case of lead poisoning not too many months ago,” Scher went on, adding that Glantz and his wife “live in fear that some of Mr. Garofalo’s associates will deliberately do harm to them as a result of some of the transactions which lie in the background of this complaint.”

The next year, Glantz was reported to have been murdered by the mob. In a debriefing by the FBI in November, 1991, mobster-turned-informant Alphonso (Little Al) D’Arco said he understood that Glantz had been killed for failing to pay a $600,000 debt to former Gambino family underboss Salvatore (Sammy the Bull) Gravano, and Eddie Garofalo, the “lead poisoning” victim.

D’Arco was wrong, however. Glantz was very much alive.

Early in 1992, Hammeke, a retired ophthalmologist from Leavenworth, Kan., signed an investment agreement with Continental Capital Markets Inc., a firm Glantz ran out of his fashionable apartment on East 57th Street in New York City.

Hammeke, 67, placed $1 million in a “roll program,” in which letters of credit were to be bought and sold for a profit of $225,000 per transaction.

His funds were deposited in an account at Merrill Lynch and transferred first to one Swiss bank, then another. Ultimately, the $1 million was moved to the Kansallis International Bank in Luxembourg, where Glantz’s Dutch associate, Guido Haak, had opened an account.

Hammeke later told Dutch investigators he thought his funds were safe because he had signed papers stating that Continental Capital could not “send the money to themselves.” But according to Dutch authorities, Glantz had signing power over funds in the Kansallis account, and had granted the same to Haak.

According to documents filed in the extradition case, Glantz and Haak began draining the Hammeke account in July, 1992, transferring funds to other bank accounts in the Netherlands and the United States.

With Hammeke’s suspicions ripening into fears, Glantz sent him $225,000--ostensibly profits from the first successful “roll” transaction. As Hammeke told Dutch investigators, he later realized the payment--the only money he ever got back--was intended to make him “keep quiet and keep faith.”

Dutch authorities say Glantz and Haak used the depleted Hammeke account to embezzle the Salvation Army funds.

The Salvation Army funds had already been looted when Glantz came on the scene. According to Salvation Army lawyers and Dutch investigators, however, Glantz and his band were lurking downstream to rob the original thieves.

The Salvation Army’s troubles began when a fund-raiser and financial adviser named Stuart Ford befriended a few well-placed officials at Salvation Army headquarters in England, and suggested a better way to invest donations and bequests.

Ford introduced them to Gamil Naguib, an Egyptian-born Canadian and supposedly a senior executive with the Islamic-Pan American Bank. This elusive institution and an affiliate, Eastech International Bank, had surfaced the year before in an insurance fraud case. When FBI agents dropped by the Dallas office that supposedly served as the banks’ U.S. headquarters, they found it occupied by a nightclub management firm.

Salvation Army officials decided to take the plunge and in May, 1992, transferred $10 million to a bank in Antwerp, Belgium, for investment in letters of credit. The charity still controlled the funds because the account bore the names of two Salvation Army officials and Ford, and required two signatures for withdrawal.

The next month, however, Ford and a Salvation Army official transferred $8.8 million to a different bank in Luxembourg. Again, two signatures out of three were needed to access the funds, but this time Ford and Naguib were signatories.

The floodgates opened. According to lawyers for the Salvation Army, about half the money was cycled back to England to be used by Ford in loans and other ventures. The remaining $4.36 million stayed with Naguib--but not for long.

How the $4.36 million was allowed to fall into Glantz’s hands remains something of a mystery. Naguib may actually have believed in the market in letters of credit, or felt pressure to invest the funds as promised. Whatever the reason, Naguib, working through intermediaries, sought to put the $4.36 million into a $5-million letter of credit.

His agents soon were put in touch with Leslie R. Barth, a Connecticut attorney who was to help with the transaction.

A graduate of the Wharton School of Business and Harvard Law School, Barth was also a longtime Glantz associate who had once gone to prison in a tax case.

When he offered his services in June, 1992, Barth also was under indictment in Connecticut in an investment case. He would later be convicted of mail and wire fraud in that case and get a 15-year sentence.

Naguib’s intermediaries presumably knew nothing of this. And they went along in August, 1992, when Barth and Glantz suggested using the Hammeke account to “expedite the transaction.”

“Another counsel, Mr. Hammeke, a longtime customer of the bank, was the original holder of this account,” Barth and Glantz explained in their letter--even though Hammeke was not a lawyer and had banked at Kansallis just long enough to lose his shirt.

When the $4.36 million reached the Hammeke account at Kansallis, authorities say, Glantz began dispersing it to bank accounts in the Netherlands and the United States.

In the wake of the scandal, the Salvation Army has dismissed one officer and transferred three others. Salvation Army lawyers in England have won multimillion-dollar legal judgments against Ford and Naguib, although it is unclear how much they will collect.

Ford could not be reached for comment, and his lawyer did not return phone calls. Contacted in Belgium, Naguib declined comment, saying, “I’m sorry, I’m not allowed to talk to anyone on that subject.”

The Salvation Army has also filed lawsuits in Los Angeles seeking to wrest control of properties Glantz bought in 1992 and 1993 for himself and two of his children.

In the three lawsuits--each relating to one of the property transactions--the Salvation Army says its plundered millions were used to buy the homes.

In response, lawyers for Glantz said in court papers that Glantz “has not been unjustly enriched,” and that the Salvation Army’s losses resulted from its decision to engage in “patently risky foreign investment activities.”

The U.S. government has also laid claim to Glantz’s Malibu beach house and a shopping center in West Hollywood in connection with the Boston case.

According to the 118-count indictment unsealed Thursday, Glantz and two associates, doing business as Kinder Capital Inc., talked eight wealthy Europeans into investing $24 million in so-called prime bank notes and discounted letters of credit. The investors were assured they would double their money in a year and that the money would remain under their control in accounts at the Bank of Boston in Marblehead, Mass.

In fact, the indictment said, the money disappeared almost as soon as it was deposited. Glantz was said to have used his share to cover personal expenses, to make loans to friends and to help purchase and decorate his Malibu retreat.

The U.S. attorney’s office said he also used $2 million of the proceeds to repay two victims from a previous scheme. The victims, a New Jersey investor and the pension fund of a small Pennsylvania manufacturer, were persuaded to put up $1 million each to trade in “prime bank” notes. Glantz allegedly repaid the money within days of learning that the Securities and Exchange Commission was investigating him in that case.

That did not seem to have helped much, however. On Aug. 8, the Securities and Exchange Commission sued Glantz in federal court in New York.