When constabulary duty’s to be done, I thought to myself the other day, recalling the immortal words of the Gilbert and Sullivan comic opera The Pirates of Penzance, “the policeman’s lot is not a happy one.”
These lines came to me as I discussed the ethical challenges of exposing Ponzi scams with a law enforcement officer who is picking through the ruins of a multi-million- dollar Calgary scheme for evidence of wrongdoing in the fleecing of hundreds of investors.
Ponzi schemes have existed through the ages, but these rob-Peter-to-pay-Paul frauds were perfected by Boston’s Charles Ponzi who, in 1919, told investors that he would work his financial magic to double their money.
True to his word, Ponzi did so – by using money from new investors to pay the original investors. It took only a few such payouts to whip the market into a frenzy. Thousands of investors flocked to his offices and the flim-flamming Midas became an instant millionaire.
But the law of gravity prevailed in Boston in 1920, after which Ponzi found himself a guest at Plymouth Prison. And it prevailed in Calgary last year with the collapse of the latter-day Ponzi scheme in which the mastermind promised interest of as high as 120 per cent per annum.
The true nature of the enterprise became apparent when investors began calling me at the Better Business Bureau of Southern Alberta to inquire about the reliability of “Paracelsus Investments” (not the company’s real name).
As is typical in such cases, I was faced with an age-old dilemma: Whose interests should prevail – those of the current investors or future investors?
If you sound the alarm, the bubble bursts and the investors lose their money. If you do nothing, the scheme gets bigger and bigger as more investors are drawn in until the inevitable collapse eventually occurs, in which case everyone loses their money anyway.
“To me,” I told the young detective upon reciting these unhappy scenarios, “the answer is simple.
“The well-being of future investors comes first.”
The copper gave me a surprised look and it was apparent that he had never had to confront this issue. “That’s a difficult ethical dilemma,” he said. “Why should the existing investors come second?”
Being colour-blind to shades of grey, I replied that a Ponzi scheme is a crime in progress. The role of police and regulatory agencies is to uphold the law. Their first duty is to the public and not to those already caught in a criminal scheme through their own cupidity.
I came to this conclusion decades ago during my years as a newspaper reporter in Kitchener, Ont., where I uncovered a $20-million mortgage and real estate Ponzi swindle.
By that time, Gustav Ruder and his associate J. J. Munk were struggling desperately to keep their scheme afloat. Physicians, lawyers, dentists, accountants, businesspersons – all sorts of smart people – had fallen for the lure of high interest and quick returns.
The one person to get her money out was a housewife. She had smelled a rat shortly before the collapse. The promoters opened the door to the vault when she uttered the magic word: “Publicity.”
Lesson No. 1: Smarts don’t come from a book.
Lesson No. 2: I saw how the authorities freeze with inertia when such schemes occur right under their noses. “A civil matter,” the local constabulary harrumphed after I began writing about this criminal fraud. (Ruder later was given a prison sentence, and Munk vanished).
The authorities were keenly aware that investors are protective of any scheme in which their savings are tied up. They were also afraid of the political fallout and the possible legal liability that would arise if any action they took was seen to trigger a collapse.
To me, this was a cowardly dereliction of duty – and I still feel this way.
Better Business Bureaus in B.C. and Alberta sounded the alarm in 2001 when they discovered that Alberta hustler Alyn Richard Waage, 56, had set up shop in the Central American country of Belize under the name Tri-West Investment Club and was reeling in tens of millions of dollars from suckers around the world via the Internet.
The BBBs, which received calls from dozens of investors throughout the two provinces, issued public alerts that Tri-West was a fraud.
Tri-West’s investors were furious. “You may be right, you may be wrong!” an anonymous person wrote the BBB of Southern Alberta. “In Canada, it is still true that we are innocent until proven guilty. Or have the laws changed and we are guilty until proven innocent? Which is it?”
Two days later, Mexican federales caught Waage and an accomplice at Guadalajara Airport carrying suitcases stuffed with $4.5 million US in cashiers’ and travellers’ cheques and money orders.
The scheme collapsed and, lo and behold, the nasty phone calls and letters abated.
“What is common with all these Ponzi schemes is the reluctance on the part of consumers to go public,” says Valerie MacLean of the BBB of Mainland B.C., Vancouver. “They don’t want the government to kill it.
“They call government agencies ‘dream-killers.’ ” MacLean says investors should be skeptical when someone offers an investment with stratospheric rates of interest – especially when your putative guru has set up shop in an overseas locale where you have no hope of recovering your money.
“If you could be getting that kind of interest, then the banks would be paying it,” she says, adding that investors should check with their bank, a trusted financial adviser, provincial securities commission and local BBB office.
I’ll conclude with a fair warning: If you telephone me at the BBB for information about the reliability of some half-baked scheme you have invested in, I’ll be happy to enlighten you.
But if it smells fishy, I’ll ask you for copies of your documentation, with the intent of issuing a public alert.
(Brock Ketcham is the director of trade practices for the Better Business Bureau of Southern Alberta. He can be reached at brock@businessedge.ca)
