Christian Securities Fraud?

Two years ago the nation was riveted by the elaborate Ponzi scheme cooked up by investment advisor Bernie Madoff, which finally came crashing down and took more than $20 billion of investor assets with it. Such a scheme is usually characterized by promises of double-digit annual returns; it can only exist because earlier investors are paid off not from the actual returns on investments but from the contributions of later investors to a growing, pyramidal, scandal. Eventually it isn't possible to keep getting investors to invest, the market suffers a downturn, and the investment advisor is caught in a bind. This is what happened with him, and many many people were hurt by him.

In the past two years I have witnessed, at close hand, and with countless conversations with lawyers and investors, such an unfolding scheme in Oregon, though on a much smaller scale (about $3 or so million total money). A formerly successful investment agent in a major insurance company decided to wander from his limited investment authority (he was just investing in rather "boring" securities such as annuities and mutual funds) and launch out into the sexy, glitzy and big-return world of real estate condominium development. After all, from the collapse of the stock market in 2000 until the collapse of the real estate market eight years later, the investment in countless condo ventures made many, many people wealthy. But the only problem is that he didn't have authority to begin selling shares in condo units or to ask for "loans" from people to whom he then gave promissory "notes" promising all kinds of glowing returns for them. No matter. He was a Christian, and he had a vague idea that he would raise money from investors, build condos, make lots of money and then sink it into some kind of ranch in the heartland of America where wayward boys could learn the virtue of hard work, become reconciled to their fathers and become responsible citizens. It was a hare-brained idea from the beginning, without the slightest "head" to complement a questionable "heart," and when it was combined with an investment advisor working outside of his scope of authority, it had all the markings of a huge disaster.

What Happened

So, while he was still working at the insurance giant he began to collect money for the condo project. He would approach people whom he had helped in the past, urge them to give him large chunks of dough, and, without giving them very specific ideas of where the money was going ("trust me"/"you have to give me time"/"there is no way you are going to lose money in this one") then found himself having an extra $1 million or more on hand. What happened next is currently at issue in a Multnomah County (OR) lawsuit, but a reasonable case can be made for believing that the money went to two sources: consultant/legal fees and the pockets of the partners who developed the scheme. Stories abound about the lavish life-style that this Christian investment advisor sported; indeed, one of the ways to try forever to put behind you the nagging voices that you are just a failure is to overbuy, overmortgage, overflaunt things that many people would just reject as unnecessary trappings of a striving and fruitless lifestyle.

Sooner or later his employer got wind of his projects and canned him. At issue in the lawsuit was the extent to which the employer knew about the schemes while he was working for them. If the plaintiff's attorney can establish this point, then on the legal doctrine of respondeat superior the insurance company, which has the really deep pockets, would be responsible for the alleged fraud perpetrated by its agent.

Being fired didn't dissuade our intrepid investor from doing other investment schemes. He developed a similar one with even more vague aims in 2008, raising probably another $2 million that either went into his lavish lifestyle or to pay off some of the investors in the first project. He failed to communicate with any degree of regularity with his investors ("Will you please leave me alone or else I can't make money for you!"), and even began to develop more elaborate schemes for how he could help people who themselves had questions about how the markets worked. He would be an author, a speaker, an interpreter of data, a sage of sorts to the huddled masses of misinformed, misled and uneducated investors out there. Even though he had trouble putting two coherent sentences end to end, he thought he was brilliant (I am sure he was told this when he was a top seller at the insurance company), and the people he allegedly swindled were seemingly in awe of his ability to confuse them. The federal securities authorities came after him, and he was forced to pay a fine exceeding $100,000 at the end of 2009 for selling securities beyond the scope of his authority.

Today

Now he and his former employer--the insurance company--are facing several counts of securities fraud in civil court. A trial is scheduled for December, but the company, by most counts, would be foolish to take it to trial. But I think his troubles are just beginning. The state is now investigating his schemes; I believe they will then feed information to a prosecutor who will go for a criminal indictment on multiple counts of securities fraud. If he hasn't left the country by then, he could face some jail time.

It is not easy to say who is to blame in all of this. Certainly he combined an empty head with a unfocused heart. He may have had urgings on the home front to make more money. He may have heard Evangelical preaching so long that he believed that if you just have a good heart, God will take care of you. I think, in fact, that this is probably the biggest and almost unforgivable sin of most Evangelical Protestant preaching--it tends to give you the impression that if you are only "right" with God, then God will guide you in all your ways. But this preaching can easily muddle the brain and make you think that the rules as they exist just aren't necessarily meant for you. What is "man's law" or "man's petty way" of doing things when you have the Ruler of the Universe on your side?

Yet, it is time for the courts and the state to begin spanking him pretty badly. He has hurt several people very significantly, and I know a few of them. They are incredulous that this person, who touted moral virtues and was touted as a near genius, now appears as a furtive, babbling, incoherently-speaking person who doesn't even know who the investors are. Chalk up another one for Christian empty-headedness...

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