For Nation’s Scam Artists, Crime Really Does Pay
Deep in Los Angeles’ underworld of con artists and stock swindlers, Rory Cypers rose to infamy as a telemarketer with a cold vacuum where his conscience should be. Authorities say he once threatened to sue a 78-year-old woman unless she invested $10,000 in his sham 900-number firm.
When the Federal Trade Commission declared war on Cypers, as well as others, at a news conference in Washington, one top official said the crackdown was “the only roadblock that can really make a difference” in the battle against such lawbreakers.
But it didn’t make much of a difference for Cypers’ investors. Federal officials put him out of business, but three years later the money he ripped off is nowhere to be found. The FTC collected just 6% of the $2.6 million in penalties imposed on American Fortune 900 and Cypers, who has since pleaded guilty to criminal fraud.
The FTC’s performance in the Cypers case is symptomatic of a much larger problem: Regulators and criminal investigators are failing to collect the money they win in court against white-collar criminals. As a result, billions of dollars awarded to victims and taxpayers have, in essence, been written off.
Such weaknesses have undermined the federal battle against scam artists. Just last weekend, President Clinton said he would request expanded powers for the Justice Department to cut off the phone lines of suspected telemarketing swindlers.
Cypers and other con artists who have made Southern California the nation’s fraud capital operate in a world where crime pays--so long as they make the cash disappear. And while the federal government can stop their bogus businesses, it usually fails to recover the money, a Times analysis shows.
The FTC collected just 24% of the $706 million in civil court judgments it won and penalties it levied over the last 10 years, records show.
Wall Street’s watchdog, the Securities and Exchange Commission, recovered less than 50% of the $5.3 billion in judgments it won and penalties it imposed over the same period, according to the commission’s data. Most of the money it did collect came from large Wall Street firms unlikely to risk their reputations by skipping out.
At the Justice Department, which oversees federal criminal cases, data show the U.S. collected just 26% of the $12.5 billion in penalties imposed from 1989 to 1997 for crimes from wire fraud to bank robbery.
“These agencies are good at identifying problems and ensuring that the perpetrator stops the [fraudulent] activities, but they don’t view themselves as collection agencies,” said Rep. Edward J. Markey (D-Mass.), who, as a member of the House Commerce Committee, has prodded the SEC to improve its performance. “The collection process falls through the cracks.”
As a result, high-profile scam artists, such as investment swindler Paul Bilzerian, can sometimes live in luxury even after convictions and civil fraud judgments.
And when the process fails, the agencies never meet one key objective: providing restitution to victims. Defrauded investors are often forced to return to work long after retirement, sell their possessions or defer college for their children. All the while, lawbreakers are free to live in affluence, enjoying estates and exotic cars.
Federal agencies aren’t exactly impotent. At their disposal is an array of weapons to collect restitution: property liens, wage garnishments and asset forfeiture, to name a few.
But the agencies have only recently started to centralize their efforts. And because their resources are limited, the low collection rates force them to make a difficult choice: Go after old debts or pursue new cases.
“To the extent that [the money] is there, we will chase it,” said Judith Starr, assistant chief litigation counsel at the SEC. “Sometimes there’s only so much you can do.”
For their part, FTC officials say their collection rates could be higher if they simply settled cases based on the amounts defendants said they could pay. By seeking high judgments--usually for an amount close to consumers’ estimated losses--the agencies are better positioned as creditors if the defendant files for bankruptcy or if hidden assets turn up later.
At the same time, however, white-collar criminals are refining the ways they cheat consumers and hide the spoils by exploiting bankruptcy laws, banks’ privacy policies and other potential weak spots in the legal and banking systems.
Many lawbreakers are suspected of stashing their spoils in offshore financial havens such as the Isle of Man and the Cook Islands. Others plunge their cash into the lifestyle of the rich and lawless, then seek shelter under bankruptcy laws.
Some fritter away their take on casino trips, first-class air fares, cocaine and other purchases that can’t be seized by authorities. Some are sent to prison. And some die before they can be forced to pay.
The SEC and the Justice Department have all but given up on billions of dollars’ worth of penalties because defendants had proved their inability to pay. SEC officials have “waived” about $800 million in penalties, while the Justice Department has labeled $5 billion of its delinquent debts as uncollectable. No one pursues those debts unless new evidence surfaces about a defendant’s financial status.
When the FTC or the SEC comes up short, uncollected debts are shuffled from one federal bureaucracy to another until they reach the Internal Revenue Service, which has an even lower collection rate.
Under a 1996 law, the Treasury Department was named the government’s primary collector of delinquent debts, but its effort sputtered at the start. Treasury officials spent $7 million on a debt-tracking computer system they later abandoned, according to the Treasury inspector general’s office.
Since then, the SEC has referred about $237 million of its old debts to the Treasury Department, while the FTC has referred about $220 million, officials said.
So far, Treasury officials say, they have collected $19.5 million--less than 1% of the $2.2 billion in debts referred to them under the new initiative. Officials say they also have compelled debtors to enter agreements to repay an additional $64.8 million.
If the Treasury Department is unable to collect the judgments, it will recommend that regulators write them off. Then the IRS can tally the forgiven judgments as income to the accused con artists and tax them accordingly. Still, the IRS itself can expect to collect only 13% of the revenue due from people who haven’t paid voluntarily, the General Accounting Office, an arm of Congress, estimated last year. Most of the $214-billion balance due is from people and corporations that are in bankruptcy protection or evading payment.
But before cases end up in the Treasury program, they may bounce around the federal court system for years.
“There’s a real tension in the law,” said Eileen Harrington, director of marketing practices for the FTC. “The laws of collection and judgment were written basically for legitimate interests. When you add . . . a criminal mind, it gets tougher.”
Last month, for example, the SEC went to court in Washington to press its 10-year-old case against corporate raider Bilzerian, who owes $62 million on his civil judgment. Bilzerian had also been convicted of securities fraud in 1989.
After regulators accused him of securities law violations, he filed for Chapter 7 bankruptcy protection. Bankruptcy law requires courts to throw out all civil debts, so the SEC, in effect, had to file its case again--and it lost, twice.
An appellate court finally upheld the judgment. And last month, a federal judge warned Bilzerian that he could soon be found in contempt and face prison if he doesn’t pay. In the meantime, the SEC said, Bilzerian has been living at a Tampa, Fla., estate worth $3.5 million.
SEC officials claim he protected it and two other homes he owned by transferring them first to his wife’s name and then to a Nevada limited partnership controlled by a Cayman Islands corporation--which in turn is owned by a Bilzerian family trust.
Bilzerian also sought shelter in a state law often used by lawbreakers in Florida and Texas--and to a lesser extent in California and elsewhere: the homestead exemption, which can make even lavish homes off-limits to the regulators or other creditors.
Even if a government agency gets its civil claim recognized in Bankruptcy Court, it must stand in line with other creditors. And in criminal cases, in which bankruptcy laws do not protect debtors, collections sometimes suffer because of lax enforcement, according to a GAO study of Los Angeles and Dallas cases.
In one case, a probation officer let a Beverly Hills doctor convicted in an insurance scam pay just $200 a month toward her $10,000 fine. The doctor had reported that her pool cleaner and her gardener were “necessary expenses,” according to the GAO.
Another offender, owing $168,000 in penalties for his role in a fraud scheme, was allowed to sell his second home for $680,000 without applying the proceeds to his sentence. Another offender took a $6,000 European cruise after his sentencing despite owing a $50,000 fine, the GAO report said.
And those were cases in which the offenders disclosed their household finances and the location of their assets. Lawbreakers can conceal their holdings in any one of dozens of countries with strict bank secrecy laws and a lax attitude toward U.S. fraud regulations.
Only the more savvy criminals insulate themselves from court judgments by using offshore accounts. More typical is the example of Rory Cypers, who lived comfortably even while a court-appointed receiver was trying to collect from him.
When Cypers settled the FTC’s allegations against him, he pleaded poverty and said he would empty the last $10,000 from his bank account to help defray the judgment.
Eight months later, while the case was still in the hands of the receiver, John Carroll, Cypers reported a robbery to the Ventura County Sheriff’s Department.
At the time, he lived in an upscale Thousand Oaks home, where he kept a new Ford Explorer and a Corvette convertible and had access to a $30,000 bank account, according to Ventura County court records.
Property data show that the house where Cypers had lived for at least four months was owned by David S. Fisher, a Woodland Hills property lawyer listed in state documents as the contact for American Fortune 900, Cypers’ firm. (Fisher did not return phone calls seeking comment.)
Cypers had no equity in his leased Explorer, which meant the receiver could not claim it. How Cypers paid for the lease remains unclear.
Cypers’ bank account was in the name of another of his corporations. And the receiver didn’t know about the Corvette until told of it by The Times, Carroll’s lawyer said. The FTC said it has referred Cypers’ debt to the Treasury Department for collection.
Howard Hamilton, a Tennessee horse trainer who lost $54,800 to Cypers’ telemarketing fraud, isn’t holding his breath.
“I’m not going to dwell on it,” said Hamilton, 48, who received $1,600 as part of the FTC settlement. Hamilton also testified at the trial of two Cypers associates, who were convicted of fraud.
Not only did his financial loss end his family’s chance of buying a new home, but “it jeopardized our whole lives,” Hamilton said. “What would really make me happy is to get my money back.”
* UNDERWORLD JUSTICE: Con man Rory Cypers found himself a victim of revenge. C2
