Market Overview

Legacies of Shame: The White Collar Crime Epidemic in America

On Thursday, two prominent fraudsters were sentenced to lengthy prison terms, underscoring the seemingly epidemic levels of white collar crime in America. The prior day, former Illinois governor George Ryan was released from a federal penitentiary in Terre Haute, Indiana after serving more than 5 years of a 6 1/2 year sentence for a corruption conviction.

The release of George Ryan cut the number of former Illinois governors that are currently guests of the Government in half. His predecessor, Rod Blagojevich, is currently living in a Colorado federal prison where he is serving the first year of a 14-year sentence. Blagojevich was convicted of a laundry list of charges, including trying to sell Barack Obama's vacated Senate seat. If the situation wasn't so sad, it would be comical.

The two fraudsters sentenced on Thursday were Peter Madoff, who needs little introduction, and Russell Wasendorf Sr., a prominent futures industry executive who carried on a crudely simple fraud for nearly two decades. Madoff, whose notorious brother is serving 150 years in a North Carolina Federal prison, was given a 10-year sentence for crimes relating to the long-running Ponzi scheme orchestrated by Bernard Madoff.

The younger Madoff brother admitted to falsifying documents, lying to securities regulators and filing sham tax returns among other things. He denied, however, having knowledge of the scam which cost investors a record-breaking and truly preposterous $17.3 billion in cash losses.

If you tack on the fictitious profits that Madoff clients thought they had made through their investments, the total losses were considerably larger. Many observers argued that Peter Madoff's claims of ignorance about what was going on at the money management arm of Bernard L. Madoff Securities are dubious at best.

Russell Wasendorf Sr.

Also racking up the years in prison on Thursday was Russell Wasendorf, the founder of Cedar Falls, Iowa-based futures brokerage Peregrine Financial Group. Like so many of his white collar criminal peers, Wasendorf's fraud was shocking and egregious for a number of reasons. His sentence was also a jaw dropper -- 50 years, which amounts to a life sentence for the 64 year-old.

Wasendorf founded Peregrine Financial, which operated futures brokerage PFGBest, in 1980 as Wasendorf & Son Inc. Peregrine was not registered as a futures brokerage, however, until 1992. The high-flying executive was arrested on July 13, 2012 after attempting suicide in the parking lot of Peregrine's gleaming headquarters in Cedar Falls. Wasendorf had run a hose from his exhaust pipe into his vehicle.

He was discovered with a suicide note that detailed twenty years of fraud, suggesting that he was cooking the books essentially from the beginning. In the note, he admitted that for decades he had forged bank documents using little more than a rented P.O. Box, Photoshop and inkjet printers. The forgeries disguised a large shortfall in customer funds at the futures brokerage which had been previously misappropriated by Wasendorf.

The fake documents showed that PFGBest's customer accounts held nearly $200 million more than they really did and Wasendorf subsequently admitted to defrauding his clients out of more than $215 million. He accomplished this by setting up a fake P.O. Box in the name of Firstar Bank, and later U.S. Bank, where futures industry auditors would send confidential forms to verify the firm's account balances.

Wasendorf would then return statements which he doctored using Photoshop, Excel, a scanner and laser and ink-jet printers. He was caught when the National Futures Association switched to an electronic verification system to look directly into Peregrine's bank accounts.

In his suicide note, Wasendorf explained that he began the scheme in an effort to save his company from failure. "I was forced into a difficult decision: Should I go out of business or cheat?" he wrote. "I guess my ego was too big to admit failure. So I cheated." Prior to his fraud being discovered, Wasendorf was one of the most successful and respected executives in the futures industry with a lifestyle commensurate with his position in life.

PFGBest had built an $18 million headquarters in Cedar Falls in 2009 which included day-care, a four-star cafeteria and state of the art geothermal climate control. In Cedar Falls, where he created hundreds of jobs, sponsored numerous charitable causes, and owned two restaurants, Wasendorf was seen as a business hero.

He lived in a compound outfitted with an indoor pool and a 1,000 bottle wine cellar. He also owned a private jet which he would use to travel to Chicago for frequent meetings. In addition to his role as founder of PFGBest, Wasendorf also authored or co-authored six books about trading and futures and founded industry magazine "Stocks, Futures, Options" in 2001.

Wasendorf and Madoff are just the latest two in a long procession of white collar criminals who have been sent off to to prison in recent years. What is so striking about most of these cases is the success, prominence, and lifestyle that most of the fraudsters enjoyed prior to their downfall.

It is also hard to imagine how someone like Bernie Madoff or Russell Wasendorf was able to function for literally decades knowing that there was a high likelihood their reputations would be utterly ruined and they would see the inside of a prison cell one day. Even more incomprehensible is the risks that these men took when they seemingly had the world at their fingertips.

Raj Rajaratnam

Few personify this conundrum better than billionaire convicted inside trader Raj Rajaratnam. His story is one of rags to riches and back to rags again. The founder of the Galleon Group hedge fund had a $1.8 billion net worth in 2009 before being ensnared in an insider trading investigation which eventually led to an 11 year prison sentence. Rajaratnam was convicted of 14 counts of conspiracy and securities fraud for repeatedly trading stocks on non-public information.

Born in Sri Lanka, Rajaratnam's rise to to the top of the New York hedge fund world was as improbable as his eventual downfall. U.S. Attorney Preet Bharara put the total profits generated by the scheme at around $60 million, which was a pittance compared to the hedge fund manager's net worth. The only seemingly plausible explanation for his crimes, like most white collar cases, is that Rajaratnam's ego got the best of him.

One of the key pieces of evidence in the trial were wiretapped phone conversations which all but proved the conspiracy. Highly educated and clearly extremely driven and intelligent, Rajaratnam's dumbfounding stupidity to trade on inside information in the first place, and then talk about it on the phone, seems inexplicable. Unfortunately, his case is just one of hundreds of white collar crimes that have been uncovered in recent years which were perpetrated by intelligent, successful and formerly respected business leaders.

Marc Dreier

Of these, the most incredible is probably the scheme pulled off by New York attorney Marc Dreier. Despite a successful legal career and a reputation as one of New York's top litigators, greed, envy and an inflated ego led Dreier to detour into a life of crime. His fraud will go down in history as one of the most brazen and shocking financial crimes on record.

Dreier was the Leonardo da Vinci of Ponzi schemers. The Yale and Harvard educated attorney has said that feelings of inadequacy and unhappiness about his career led him to bilk hedge funds out of around $700 million. Dreier was by all accounts a very successful lawyer who had earned many millions of dollars in his career.

It wasn't enough, however, and by the time he was in his 50s he felt as if his career had been a disappointment both on a financial and professional level. He recalled admiring a waterfront compound one day while walking on the beach in the Hamptons.

Overcome with envy and self-pity, Dreier made a conscious decision that he too would one day own a waterfront property in the exclusive enclave. Although he already owned a Hamptons vacation home at the time, it paled in comparison to this particular palatial estate.

Dreier became obsessed with obtaining the recognition and success which he felt was almost a birthright due to his intelligence, prestigious education and "golden boy" reputation throughout much of his life. He was particularly troubled by the greater financial and professional success of some of his peers who he felt were his intellectual inferiors. In his middle-age, Dreier's sizable ego had become completely unhinged.

He made the decision that he would achieve the recognition and outsized financial success he so desperately craved by drastically expanding his law practice. The only problem, however, was he had neither the cash nor credit to make this feasible.

In a seriously misguided moment it occurred to him that maybe he could borrow the money he needed using someone else's credit. With this thought, Dreier would launch one of the most outrageous Ponzi schemes in history.

He had previously done legal work for New York-based billionaire real-estate developer Shelden Solow and his company Solow Realty. Utilizing his knowledge of the business and his position as a legal representative of Shelden Solow, Dreier created fake promissory notes backed by fraudulent Solow audit reports which he sold to a number of hedge funds.

It was a particularly brazen fraud and it worked perfectly in the beginning. He recalled that in his first deal he was able to exchange the fake notes for $20 million in cash with few questions being asked. In all, between 2004 and 2008, Dreier "sold to funds and others approximately $700 million worth of Fake Developer Notes and Fake Pension Plan Notes" according to his indictment.

He used the money to build his firm, Dreier LLP, into a major legal powerhouse. Originally, his plan was to pay back the hedge funds with proceeds from his legal practice. This of course did not happen. The costs of running the firm were much higher than Dreier had anticipated and he needed to keep selling more notes to pay off the old ones. His out of control spending did not help matters either.

With the massive influx of cash from his Ponzi scheme he turned Dreier LLP into one of the city's most prominent law firms. Instead of structuring the firm as a traditional partnership, he employed a unique business model whereby he was the sole equity partner in the business. This allowed him to have complete control over the firm's finances.

Attorneys were hired on three-year contracts and paid a fixed salary and were eligible for bonuses based on the fees they brought in. Some lawyers received extremely lavish compensation at the firm, making as much as $50,000 every two weeks.

Dreier LLP's palatial headquarters at 499 Park Avenue was adorned with nearly $40 million in artwork. The firm also had satellite offices in four other cities and at its peak employed 250 attorneys and 500 total employees.

Dreier himself lived like a king. He owned an $18 million yacht called Seascape, a $10 million Manhattan apartment, two homes in the Hamptons worth a combined $12.5 million, a condo in the West Indies, and more than 100 pieces of artwork from the likes of Andy Warhol, Roy Lichtenstein, Picasso, and Matisse, among many others.

The most incredible part of the entire story, however, were the audacious things that Dreier did to keep his scam going. He once commandeered a conference room at the Solow Realty headquarters to hold a meeting with hedge fund representatives about their investment in the fake Solow promissory notes. An accomplice, Kosta Kovachev, impersonated an executive of the real estate firm in the meeting. Dreier also paid Kovachev to impersonate Solow's CEO Steven Cherniak in a phone conversation with investors.

On the day of his arrest, Marc Dreier was in Toronto, Canada impersonating an in-house lawyer at the Ontario Teachers' Pension Plan during a meeting with a hedge fund representative. In a desperate bid to raise more money during the financial crisis, Dreier was trying to sell Fortress Investment Group $44.7 million worth of bogus financial instruments purportedly backed by the pension plan.

The suspicious hedge fund executive, however, discovered that Dreier was not who he claimed to be and he was subsequently arrested. His legal empire collapsed within days and Dreier ended up pleading guilty to charges including conspiracy, securities and wire fraud and money laundering.

In exchange for his cooperation, he received a sentence of 20 years in prison. Total losses in the scheme amounted to $400 million, including money which Dreier embezzled from his own firm's client escrow accounts.

Scott Rothstein

If anyone could match Marc Dreier in terms of sheer audacity, it probably would be Florida-based attorney Scott Rothstein. Like Dreier, Rothstein financed his law firm, philanthropy, and extravagant lifestyle with a $1.2 billion Ponzi scheme.

He is currently serving a 50-year sentence in Federal prison after pleading guilty to five counts of racketeering, money laundering and fraud. He was arrested on December 1, 2009 and entered his guilty plea on January 27, 2010.

Rothstein's legal career started humbly enough with a degree from Nova Sotheastern University's law program, a fourth-tier school. Eventually, however, he would become one of South Florida's most prominent attorneys, heading a firm that had 70 lawyers, 150 employees and offices in Boca Raton, West Palm Beach, Fort Lauderdale, Miami, Tallahasse, Florida, New York and Caracas, Venezuela.

Rothstein cut a larger than life figure who enjoyed an opulent lifestyle funded by an almost endless supply of Ponzi-generated cash. Like most of the other notorious fraudsters that have been caught in recent years, Rothstein was motivated by an out of control ego and a desire for material possessions and recognition.

His collection of possessions included multiple mansions, a $5 million yacht, a fleet of exotic cars including Ferraris, Lamborghinis, a Bentley, a Rolls Royce, and a pair of $1.6 million Bugattis. Incredibly, one of Rothstein's properties was a $6 million condo in New York in the same building as Marc Dreier. He also had a watch collection valued at over $1 million and frequently traveled by chartered private jet. In addition to his law firm, Rothstein had numerous outside business interests in the South Florida area.

Rothstein's scam centered on selling fabricated structured settlements, purportedly negotiated by his firm on behalf of clients, to investors. He told the investors that the settlements were on behalf of workers who had asserted whistleblower, employment discrimination and sexual-harassment complaints.

On the surface, this appeared to be plausible since it is not uncommon for people who have received large settlements to be paid out over time, to sell them for upfront cash. Rothstein's investors would pay cash for the right to receive the full settlement amount at a later date. In making the deals, the attorney promised large returns, often to be paid out in a short amount of time.

He persuaded investors of the lucrative nature of the deals because "defendants place a high premium on keeping details of the cases confidential...to protect the image of the company and executives involved."

The Wall Street Journal offered an example of how the scheme worked in a November 2009 article. The paper detailed how "in September 2009, one potential investor was told he could pay Mr. Rothstein $375,000 in upfront cash to purchase a settlement valued at $450,000, which would be doled out to the investor over a three-month period, according to the government's civil suit. That investment, prosecutors allege, added up to an 80% annualized return."

Rothstein was able to gain investors' trust in part because of political connections and the facade of success he created for himself and his firm. The massive amount of money that he raised in the Ponzi scheme was due to the volume of deals he closed with a wide variety of different investors. Victims included individuals and hedge funds, among others.

The actions of people like Rod Blagoevich, Russell Wasendorf, Raj Rajaratnam, Marc Dreier, and Scott Rothstein are just a small microcosm of the greater landscape of white collar crime. For every case that makes headlines, there are dozens of instances of large-scale fraud that receive scant news coverage.

While these crimes often seem difficult to understand in hindsight, it is clear that ego, greed, and a delusional sense of invincibility are motivating factors. The frequency of these cases also underscores the fact that financial crime is as pervasive as ever in America. Unfortunately, it is just a matter of time before the successful facade of yet another prominent politician or businessperson crumbles before our eyes in shocking fashion.

Posted-In: News Wall Street Journal Hedge Funds Movers & Shakers Psychology Topics Legal Management Best of Benzinga

 

Related Articles

Around the Web, We're Loving...

Partner Network

Get Benzinga's Newsletters