A Ponzi Scheme Gone Bad

It has been 20 years since I started my financial Management firm called “Coin, LLC.” All these years have gone by and I still love the rush of getting up at 6 am, shaving, showering, getting the 2 kids on the school bus, slamming down two to three cups of coffee and reading the news. Then logging into the software I have to track the stock market. I trade for a living. I trade stocks and options. I do good by other people who are my clients. I make them a nice return on their money and they love me for that. What can I say? It is the perfect career path for me.

My client base is somewhere around 600 plus people now. It has been steadily growing for the last 20 years by word of mouth. Thinking back on it, this is quite exceptional. My business grew with ease. Not relying on advertising or knocking on doors to drum up more clients. Quite simply, just promising a steady annual rate of return on their invested dollars of 15%. I started off knowing I could make that kind of return. I knew it because I was making much more for myself with my own invested dollars. I started with the intent of giving out 15%, if I made 30% in a year then I would just keep 15% for myself as my fee. Seemed easy and harmless enough so I did it. People trusted me. Was it my demeanor? Was it a certain way I expressed infliction in my voice? Was it how I stood or looked? Maybe because I was not pushy in any way, just conveyed my knowledge and that was it. Not sure to this day, but I still have the ability to gain others trust with the greatest of ease. I guess that is a redeeming quality all in itself.

It the beginning, I was in the US Military. Back it the 80’s I would enjoy reading Forbes Magazine, Money Magazine and mutual fund prospectuses and how asset allocation worked. In addition, things like what to do with your money for long term investments, etc. I enjoyed sucking up all the knowledge I could on my time off between shifts. After a few years, my peers would seek me out for my advice. It was probably because I talked about personal financial matters and investments often as that’s what was always on my mind. It was nothing I did on purpose, just a hobby. Looking back on it, I did not think anything of it, just saw this as an opportunity to help others who did not know what to do and could not trust anyone else.

By 1989 I realized after helping so many of my military peers and friends back home that there was some sort of demand for this type of help. Three am I could not sleep. For some reason I was wide awake. Kept checking the clock every half hour or so. Getting more frustrated as the night went on. By 2 am I thought “Shit, I have to get up for work at 6, maybe I should just drink a few shots of Vodka, that will knock me out”. Then realizing that would not be a good idea “You can’t do that, you will be drinking until the bottle is empty and end up going to work drunk”! At 3am, it hit me like a meteor landing in my room from outer space! “Yes, that is what I will do”!! I will just let my friends know that I can help them by investing there money for them. It is a win-win for everyone! How excited I was to come to this idea. I could not sleep the rest of the night. But, now I did not care if I was losing sleep, I was too excited. I had to plan and write down some thoughts to tie this all together.

The next shift came and went like a breeze. I was too focused on my hobby now to care about anything else. Yes that first adrenaline of excitement did wear off after a week or so, as I recall. However my career path was just starting to shift coarse. Like turning the titanic from southwest to northeast. It was a slow change but once it changed coarse it was full steam ahead. I remained thrilled at my new idea and started to tell all my peers that I lived with and worked with about how I would now help them with investing their money. I remember not having to force anyone into allowing me to take their money. I just let it be known what I would do for them and word started to spread.

It first started with 5 people literally giving me their money within a few months. I think it was about one thousand dollars per person. It was all my military buddies. In those days none of us made a lot of money off the government so we did not have tons to invest. None the less, five thousand dollars plus the three thousand dollars which I had was plenty to work with. The internet was not around back in 1989 so I had to call my brokerage firm to make a trade. I did not do that too often back then for two reasons. One, I was overseas which made it difficult for with the time zone changes and two, I could stick the money in an aggressive mutual fund and pull out 24% per year, so why make it difficult like work? With reinvested dividends and compounding it was a breeze to pay my promised 15% and have some left over. I kept track of all the dollars with a notebook, just because I did not want to forget anything. You see, we drank a lot in those days. Partly because we were young, booze was cheap, possibly lonely for family, who knows all the reasons? Forgetting things was almost expected. It was a fun time back then. It was exceptionally fun for me because I was doing a hobby that I loved to do and helping others with it! What a perfect place to be. I am not sure exactly how to explain it. This felt somehow god like. There was a feeling of an inner rush, a feeling of power, control, accomplishment all rolled into one. The people who invested with me and the those who chose not to idolized me for what I was doing. After a couple of years it seemed as though they hung on my every word. Like no matter what I said, they could not get enough and devoured everything that came out of my mouth. To my recollection, I do not think I took it for granted and had no intention of taking advantage of anyone. This was simply my business agreement with each investor.

At the time I did not think it would make me a wealthy man. I think it did though. How ironic, “Do what you love to do and the money will follow.” I can honestly say that is what happened.

I finished my 4 year enlistment at the end of 1991. Came back to where I was from. A sleepy suburb in upstate NY, outside of a medium size city called Rochester. By then there were approximately 40 from the military that had entrusted me with no less than one thousand dollars each. I don’t think there was any that had more than five thousand with me due to the income level of the people I associated with. I was a saver in those days. I kept saving my military income and reinvesting the income from the $150,000 or so that was generating income for all 40 of us. When I got out and went back home I decided to take a job that my neighbor offered me selling cars at a good size dealership. The reason I took the job was I always loved cars and thought this would be a good outlet to play with them and utilize my time since the money I was investing still did not require my attention full time based on my choices on how to invest it.

This career only lasted about a year before I was totally over it and bored. You actually have to be there for something like 45 to 50 hours per week. You have to try to sell a car to the customers that walk in and call back the customers that did not buy as well as anyone you can think of to sell cars. This concept was way to foreign to me. It was difficult, much like work and far from fun.

“Ah-ha”, I thought, somewhere in ’92. “I know, I can be a Realtor”. That will allow me my freedom where I don’t have to sit in a stupid showroom. Did so for a few years all the while still investing money for myself and others, sending them hand written statements of the dollars that I had of theirs and mailing checks of dividends to each “client”. This was great during that time. I was still getting word of mouth spread with my friends here at home, the military peers I still was in contact with, and, the new people I came across within my sphere of influence. I should mention that while I was not in the service any longer and in my early to mid twenties, I discovered there were more people that I encountered with more savings than I ever knew was out there before. So, when I got new clients, they were entrusting me with much larger sums of cash.

By 1997, about 8 years from the start of my great idea, I had more than 3 million dollars I was working with for approximately 150 “clients”. I had also trained myself on how to trade options and other risky investments which helped to compound the dollars. The numbers started to get staggering. I decided to give up my so called Real Estate career for doing the one thing that I love the most. I was almost forced into giving it up since trading and keeping track of all this money was consuming most of my days by now. Real Estate sales was starting to bore me by this time too. You still had to work at getting business, it did not just fall into your lap like money did. During the ’97 era, computers were out in full force and very expensive compared to today’s dollars. I decided to get with the times and purchase one to try to keep a handle on my investments and investors. This was needed because I was starting to get overwhelmed. It took me a few days to get everything sorted out, get the information loaded into the computer and get my printer working. Then I discovered at an Office Store of some sort that I could purchase software that would give me templates of many different uses. One I like the best was a generic statement. I thought that would be brilliant to use and would make me look and feel professional. I can send “official statements” each quarter to my “clients”. In addition I printed fancy, nice professional business cards. Streamlining on my part to delegate some of the tasks was to hire a personal assistant. I interviewed and found a nice quiet girl named Sara. She started to do all my statements that I always promised to send out. I would just dictate the content, she would type it up and get them mailed out. No questions asked. What did she know about my business anyhow? Perfect for both of us. This saved me a lot of time.

Love was in the air around this time. My wife and I were married in the summer of ’97. It was wonderful and she is beautiful. In those days when we were courting she looked at me like I was some kind of hero. Probably because all the things that she had heard about my drive to make more money with the existing money I had and all the great returns I would provide to others. She also expected that I had an exorbitant income and I did not want to disappoint her. She was spending ten thousand dollars a month on who knows what at that time.

By ’97 I started to figure out that the more money I had it was becoming increasingly more difficult to make huge returns on it. There were a couple of notable reasons for this. One, back in the late 80’s I could throw money in a savings account and make 8%, now it was more along the lines of 5%. That is a small loss but it just shows that because inflation was not around any longer which created higher interest rates, the rates were lower for “safe” investments. Also, I had to be careful because you cannot just throw 4 million dollars at one security or you will have problems and be accused of manipulation, etc. by the SEC. So I was forced to work with smaller amounts most of the time. This started to cause me headaches because I was still promising a 15% return, however, I was not making 24 to 40% on the total pot of cash like I was making just a few years back. This bothered me some, but I suppressed it deep inside. It will all be fine, there are more and more people investing with me anyway.

By the end of 1998 there was quickly more than 10 million dollars in my control. This was still exciting and fun but I was continuously getting very nervous. I had to keep this money invested, make more with it and pay out to my hundreds of “clients”. Not to mention it was right before the Tech Bubble burst in the stock market. I knew everything was way overvalued and it was a matter of time before we had some sort of correction. Everyone just kept investing and thinking they could not do anything wrong, everything you did made money in the late 90’s. With that type of mentality, more “clients” were throwing money at me all the time with the expectation that I could not go wrong. This also put pressure on me since no matter what I researched to invest in or trade scared the living crap out of me. The ratios on the investments were way too high. Something was going to give, just did not know when.

2000 rolls in quick. Just to keep you up to speed, I easily moved to 15 million dollars of money that I controlled at that time. I had 2 houses, one in the Hamptons on Long Island and one on Canandagua Lake in upstate NY just south of Rochester. The homes had a combined staff on my payroll of 10 which equates to somewhere around half a million a year for just salaries and benefits. Heck, the building that housed my collection of 30 priceless automobiles cost $2500.00 per month in heat alone. And my wife was somehow spending thirty thousand dollars per month. Our homes were under constant renovations and additions by this time since my wife needed a hobby also. I could not blame her since I had my perfect hobby. She seemed to find a creative outlet having the houses redecorated all the time. Everything was clipping along with just a couple of small ulcers when the bubble burst!

This tech bubble burst and 9/11 were extremely stressful for me. Although I kept it all to myself not leading on to some potential problems that could arise. For example, losing a bulk of money in the stock market and fifteen percent of my “clients” asking to take their money out of my account. I only lost 15 % of my “clients” because I still had statements that indicated a 15% return on their money and NO losses. This was difficult to do, but by now it had to be done. There was no way I could tell anyone they lost some of their money. First of all, over the last hand full of years so many clients were signing up and giving me money, and, money was not growing as fast as it used to, my household spending was getting seemingly out of control and I was having a hard time trying to keep track of it all. I just did blanket statements to all the investors to try to simplify and not get anyone nervous.

Well, all that settled down by 2002-2003. By the end of 2003 I had more investors pouring in than ever before. This was mostly due to word of mouth that me as a Money Manager could do no wrong. I continued right through the bad years with showing great returns on the “clients” statements. These people would gloat and brag all over the place how brilliant I was and how smart they were to give me their money. The money was flowing my direction again like I have never seen. In 2004 I could honestly say I stopped keeping track of where the money was going and/or coming from. I kept track of the “clients” because I owed them a return and their statements. At that time I was up to 600 clients and money all over the place. Was diversifying the cash since there was so much of it. I think when I lost count it was somewhere around 60 million dollars. Looking back now, I should have hired more staff and probably certified myself as a legitimate Financial Planner and Stock Broker. Oh well, that was more effort than I wanted to spend on something I did not care to be bothered with.

Over the years we entertained a lot. We held dinner parties, cocktail parties, parties at the club. Any excuse to party with friends. All these parties were very lavish. Top shelf all the way. Sometimes we would hire limousines to pick up and drop off all the guests. Why not we had so much abundance that we had to spend it. This also helped cover up the underlying nervousness still there. It distracted me on my off time. Boozing it up at parties also helped me sleep at night too. If I did not drink myself to sleep, I would medicate with sleeping pills at bed time. I think it kept me sane on some level. Kept the wolf from knocking on the door.

There was this lifestyle most could only dream of. I certainly tried not to take it for granted. I think that started to become more difficult as the years went buy due to the people who continued to treat me like some kind of god like figure. Everyone one in site “yes’ ed” me. I started to think I deserved it and it was my right to have so much abundance in my life. I think it became me or I became it, I am not so sure which. We flew via private jets exclusively. Shopped in Paris, vacationed in Monaco, traveled anywhere our hearts desired. Threw parties at our South Hampton home to impress all the big money form New York. Purchased a penthouse apartment in Manhattan just as a status symbol. I even had a 25 million dollar yacht that we use about once a year.

Well, now, Holloween 2008. What would someone in my position do now? Is the only question left for me to ask. Why? Do you ask. To date I have had 2000 of the 3000 “clients” ask to redeem some if not all of their invested dollars back. It all started on a steep downward slide in January 2008. It was all fine until now. I was sending checks to the ones that wanted out. At the same time printing more statements to the investors still with me and trying to dodge the downward spiral in the stock market all year. I managed to save myself from most of the freefall but lost some. I did not even give it a thought about the amount of people requesting their money back. I figured it was no big deal, like in 2000/2001 time frame. We could weather the storm and move on. This time it was different. I believe there is honest fear entrenched with the average person. Well, with the housing market screwed up, the banking crisis and all. There is too much fear now vs. then. July ‘ 08 hit a new bottom in the stock market and the amount of withdrawals spiked. Now, Oct. ’08 and we saw another new bottom in the stock market, foreclosures are at an all time high, the auto industry is imploding and the financial crisis is still in full swing. It is so bad that interest rates are at 47 year lows and lenders are not lending out the money to consumers like they used to. Consumers are not buying at all. There is definite fear in real people. We are history in the making now.

I am down to my last 6 million dollars of liquid money. Not long ago, I know I was somewhere over 100 million dollars. Where do I go from here? I mean, what do I tell the last investors still holding the bag? For god sake, what do I tell my wife?? 6 million dollars!! I cannot live on that let alone pay out more requests to cash in and try to pay dividends on it! This is bad. I could come clean, but, that would mean jail time since I never was certified as a Financial Planner or broker. I am only 41 years old. Jail? Could I last the rest of my life in jail? Is this an option? If I DO come clean, would there be a hit put out on me? Do I want to look over my shoulder until the time comes when I get into my car, turn the key and it blows up!? Talk about stress, I think keeping it all a secret is much easier than coming clean.

What are my options, then? Well, I could run to another country. But then I would have to live with the horrible guilt of leaving my family and them dealing with the fall out and living in poverty like they have never known. Could they get by? Could I live with that knowledge? I don’t know.

There seems to be only one more option for me to explore. But which way do I go? Hanging by belt or something? No, I cannot do that. What if my family finds me? Not good. What about too many pills? No, that is still to graphic. How about hose from the tailpipe into the car with the garage closed? Nice thought but too graphic for the family to find me. Besides, the garage is too big, probably will survive. I know, I will have to take the whole family with me. Yes, that is my best answer. Just have to make sure it is quick and easy. I have the perfect solution, we rent a small house in the adirondacks for a weekend. We all go there, and I loosen the natural gas line supply to the hot water tank or furnace to create a leak. Then when we all go to sleep……