Desperate entrepreneurs are easy marks for con men posing as venture capitalists. Here's the story of one business owner who was duped by phony investors.
Business owners today have access to more capital sources than ever before--which is why, ironically, they're more likely than ever to be conned out of the last cash they have. Here is one victim's story
The man from Atlanta speaks quietly as he tells how desperately he wishes he could take back the last two years of his life. In those two years he lost $400,000, a 37-foot boat, a beach house, and the respect of his friends and colleagues. What's worst, though, is that his once-vivid dream of starting up a company to recycle rubber tires into carbon, oil, and steel--a dream into which he had already sunk $500,000--has faded into gray twilight. And the exuberance and entrepreneurial spirit he once brought to his work as the founder and owner of a successful surgical-devices company have been replaced by a cool circumspection.
"After getting burned so bad, my hand doesn't reach out to shake another's so fast anymore," he says. "It's been a humbling experience."
The experience he's referring to is fraud--a kind of fraud that targets capital-hungry entrepreneurs, variously referred to as advance-fee fraud, prime-bank-instrument fraud, or venture-capital fraud. Its victims pay up-front fees--ranging from $45,000 to $2 million--to supposed investors and syndicators in return for promises of capital infusions as large as $50 million. Art Wilson, owner of a gypsum-mining company in Carson City, Nev., ponied up $300,000 for a deal that was supposed to net him $10 million. Michael Crow, an Alabama lawyer seeking capital to invest in a U.K. real estate venture, paid $250,000 in advance fees. The business owner in Atlanta, who refuses to allow us to print his name while he attempts to rebuild his life and reputation, paid even more.
What those eventual victims have in common is that no capital ever materialized and their money is irretrievably gone--forfeited, the con artists would say, when the victims failed to honor their side of what turned out to be an illegal and impossible-to-meet bargain.
S. Lin Kuo, assistant director of the Commercial Crime Bureau of the International Chamber of Commerce, in London, says that although a precise figure is difficult to determine because victims are reluctant to report having been taken, such scams will rake in more than $1 billion globally this year alone. "It's proliferating," says Kuo, "and there's no end in sight." This past May, after three years of investigation, the U.S. Customs Service and the Federal Bureau of Investigation announced the indictment of 8 individuals allegedly involved in the con ring that snagged Art Wilson. The number indicted in that case now totals 12. (To get an idea of the reach of just one ring, consider this: federal agents say that one of the leaders of the ring with which Wilson dealt had a database of 3,502 "client" names in his computer when it was seized.)
Company builders have always been unusually vulnerable to advance-fee type fraud, notes Harvard Business School professor Josh Lerner. Hell-bent on moving their pet projects forward, he says, "they can get so caught up in emotions that they are blinded to these traps." But two features of the changing capital-distribution landscape are combining to make entrepreneurs more vulnerable than ever.
One, paradoxically, is the sheer profusion of moneyed investors and the legitimate capital channels through which their cash is moved (such as traditional venture funds, private placements, less-formal "angel" deals, banks, and "nonbank" banks such as credit-card companies and brokerage houses). "There's a huge amount of money sloshing around out there," says Wendell E. Dunn III, executive director of the Batten Center for Entrepreneurial Leadership at the Darden School of the University of Virginia. "More individuals are investing, pension funds are investing, and foreign investors and corporations have come into the market." The trouble is, with profusion comes confusion--especially where secretive private deals are concerned.
That fragmentation of capital sources and the understandable confusion about them has bred another feature that makes fraud easier to pull off than before: the proliferation of brokers who help capital seekers sort through the chaos and match up with investors. While it's important to note that no legitimate broker operates precisely as the fraud artists do (see "A Fool and His Money," below), the practices of each can seem disarmingly similar even to accomplished business veterans. And it's in the shadows of legitimate brokering that the fraud perpetrators find their marks.
So how does one spot the illegitimates? How, exactly, does the con game work?
Until now, the methods of the fraud artists have been hard to discover. Of the dozen scam victims contacted for this article, few were willing to speak on the record about their experience. Some hastily hung up; others, such as Wilson, provided only vague details. For these small-business owners and entrepreneurs, losing tens of thousands of dollars of both their own and other people's money in a fraud scheme was, in the words of one, "excruciatingly embarrassing and humiliating." They do not feel they can afford to be publicly identified as victims of a scam. But the recent arrests and the legal proceedings that followed have opened a window into the mechanics of this growing swindle. And one particular victim, a 51-year-old Texan whom we'll call Paul Shearer, agreed to give Inc. unlimited access to his tale--and the individuals and documents related to it--in return for the use of an alias in print. [Editor's note: Other facts in this article are unchanged and have been obtained in the course of three dozen interviews with law-enforcement and banking officials, other victims, prosecutors, perpetrators, and peripheral participants in the events described, as well as by reviewing legal records.] In a dozen conversations over two months, Shearer revealed just how easy it was to be duped for some $700,000.
What's more, the way the Shearer con unfolded illuminates something about the entrepreneurial mind-set, underscoring not only the creativity and the passion but also the sheer desperation that can blind even the most astute businessperson in the face of his or her last best chance of realizing a dream. As Dunn puts it, "When entrepreneurs abandon their judgment, they become allies of their victimizers."
For Lena Shearer, the fall from grace was terrifying. It took her husband, Paul, 15 years of hard work and tough deal making to build a small fortune and jump the family from middle-class to wealthy status. They bought a big house in one of Dallas's toniest neighborhoods and put their three kids into private schools. They had the Mercedes, the Ferrari, and the yacht, the travel abroad, and the expensive jewelry.
But after Paul Shearer lost close to $700,000 to venture-scam artists in 1996, the whole house of cards seemed to come tumbling down in a matter of months. By mid-1997, things were dire enough that the power company had shut off the Shearers' electricity three times. Their bills were months overdue. Lena developed a nervous tic in her hand. She hasn't bought clothes in two years. Last fall she sold off most of her jewelry, which had been insured for $62,000, for $15,000. By maxing out credit cards and borrowing from friends and family, the Shearers have managed to stay afloat. But their one main asset, their house, is on the block, and they're praying that it sells for close to its asking price.
"You're living in a mansion, but you can't afford to go grocery shopping," says Lena with a short laugh. "It's really tested our marriage and our faith. It's been a real roller-coaster life."
The roller-coaster began for Lena just a few years after she married Paul Shearer, in 1969. She says she has always been attracted to big, loquacious, outgoing men, and Shearer, an All-American high school football player from Ohio, fit the bill. After graduating from the U.S. Naval Academy in 1968 and serving a stint as a navy pilot, Shearer earned his M.B.A. at the University of Pennsylvania's Wharton school in 1976, and then went to work as a midlevel manager at a Fortune 100 manufacturer. Lena says she didn't know she'd married an entrepreneur until their pillow talk became a sounding board for his various schemes to make money. In the beginning his dreams took on the nautical theme of his youth: he hoped to run a big ship with a casino on board, or to manufacture concrete boats. The one constant was that Shearer wanted to run his own business. "He told me, 'My biggest fear in life is not having enough excitement," she says. "I said that my biggest fear was we'd have too much excitement. And that has come to pass."
In 1983, Shearer, who by that time was out on his own, began putting together leveraged buyouts of manufacturing companies, over the next nine years buying, managing, and selling each of his targets in succession. By the end of the 1980s, Shearer estimates, he was worth $14 million.
Still, he was restless. "We could have retired when we moved to this house," says Lena. "But my husband was too energetic, too driven. He wants to build things and do things. So it was never enough for him to be a millionaire. We had to be billionaires."
And if he could find the right investors, Shearer had thought up a way to become one.
When funding for his leveraged buyouts dried up, in the early 1990s, Shearer shifted his attention to a small company that had developed what he says is a "breakthrough" manufacturing technology to create an inexpensive car. (Still intent on closing a deal today, he declines to further describe the technology.) Shearer had already invested $2 million of his own money in the development of the technology when he gained control of the company and its patents in 1993. Over the next two years he poured another $5 million into the company, and beginning in 1995--confident in the technology and in his ability to run a larger company--he began trying to line up some capital to build a manufacturing plant. Shearer says he bought a couple of databases listing capital sources, hired a series of business brokers who purportedly could help raise funds, and began working his way through the 1995 edition of The Corporate Finance Sourcebook and Vankirk's Venture Capital Directory, which together list thousands of capital sources.
First Shearer tried U.S. and international venture-capital partnerships. "But we just didn't fit the profile of what they like to fund," he says, noting that his business wasn't high tech, nor was he willing to waste his time with the relatively small first and second rounds that typify such financings. "I wanted $30 million to $50 million right off the block," he says. He tried General Electric Credit Corp., investment banks, pension-fund managers, and foreign banks. Over 18 months, he estimates, he had "serious" conversations with 80 to 120 people. But he had no luck. Meanwhile, Shearer had been trying the capital source that began on page 791 of the 1995 edition of The Corporate Finance Sourcebook, "Business Intermediaries." These are financial consultants who claim to be able to hook up a project with an investor for a fee. As Shearer explains it, they usually ask for a fee simply for providing a list of capital sources and then negotiate an additional contingency fee based on the outcome of the introduction. A year and a half into his capital search, Shearer was feeling a little frustrated, particularly with the consultants he'd been using, to whom he had paid a total of approximately $80,000 to find capital. "I had put out money to a number of people, and none had come through for us," he says.
But the payoff was just around the corner. In mid-November of 1995, Shearer got a call from a Dallas broker who had a name for him: Robert Newman, a principal in the Florida office of an investment concern based in Antigua called Sterling International Guarantee Limited. The broker told Shearer that he had sent Newman a business plan, and then he briefed Shearer on the two-part offshore syndication deal Newman specialized in.
Within a day, Shearer recalls, Newman phoned. "He said he had reviewed the business plan with his board of investors, and then he went through a little Q&A as though he were doing some due diligence," says Shearer. "He always gave us a sense that he had to answer to a board of directors or investors." The review of the business plan, the ersatz due diligence, and the "answering to a board," cheaply but effectively mimicked the sequence followed by real venture capitalists seeking projects, and comported with the little Shearer knew about those deals. And Shearer recalls thinking that Newman, with his British-sounding accent and diction, was a glib, fast-talking salesman who seemed at home in the world of high finance.
The next day Shearer again spoke to Newman. This time, however, Newman was more subdued. He had presented Shearer's plan to his "board of investors" but told Shearer that their funds were committed for the remainder of the year and that it would probably be at least March before a deal could be done. Shearer told Newman how disappointed he was, and Newman promised to call if the situation changed. Two days later, near Thanksgiving, Newman did call again. "He said, 'A deal's been canceled and we have some money; you want it or not?" says Shearer. "And I said, 'What? Yeah, we want the money!" The only caveat was that the deal had to close soon, preferably by mid-December.
"We fell hook, line, and sinker," says Shearer. "It was exactly what we needed."
Here's the deal Newman offered Shearer: The "board of investors" he represented would lend Shearer $48 million for one year at 12% interest. Shearer was told that those investors might include governments of Third World nations who sought stable investments outside their countries--a credible explanation. The existence of those funds was to be verified by the escrow lawyer at closing. Eight million dollars of that amount would go to Sterling International as compensation for assembling the offshore investors; the remaining $40 million would be deposited in Shearer's bank until he needed to draw down upon it. In a year's time, a group of underwriters Newman worked with--the "takeout syndication"--would do an offshore private placement, and the proceeds would be used to take out the original board of investors and replace them with bondholders.
Additionally, Shearer would be required to wire a fee--called a "work payment obligation," or WPO--of $650,000 to Newman's escrow attorney at the closing of the deal, ostensibly to reserve the $48 million by covering the interest payments for the time period between the signing of the deal and the depositing of the money in Shearer's account. The WPO could not be paid from the funds provided by the investors, and Shearer was required to provide proof that he had such funds available. Last, Shearer was required to obtain from an acceptable bank a "payment guarantee" promising that once that bank had received the $48 million from the transaction on Shearer's behalf, it guaranteed to pay the $8-million closing compensation to Sterling International. Shearer had 30 days from the "closing" to obtain that pay order.
"It all seemed plausible," says Shearer. He thought the up-front WPO fee was unusual and high but didn't see it as unprecedented. When doing his LBOs, he had been pushed to put his own equity into projects to the extent that he could, and he saw the WPO as an extension of that requirement. And Shearer knew that investment banks sometimes collect fees up front as a retainer for services to be performed. So he faxed Newman a copy of a bank statement showing that he had enough cash to cover the WPO.
But there were a couple of hitches to going forward. First, Shearer had nearly expended his liquid funds. Years before, he had set up a trust fund for his wife, and he now found himself asking permission to borrow most of the principal, some $700,000.
"I told Paul after the LBO money began drying up that I didn't want to ever be in a position of losing all this money we'd made," recalls Lena Shearer. "But when he asked me about the trust money, I didn't question him. I thought that if Paul's so sure about this deal, it was OK with me. He was so anxious to get it."
"I slaughtered the sacred cow," intones Shearer.
The second drawback was that Shearer had few banking relationships and told Newman the pay-order guarantee would be difficult for him to obtain. Not to worry, Newman replied, he knew a "facilitator," Dennis McGregor, who located these banks all the time for a $25,000 fee, plus $3,500 in expenses.
With those obstacles removed, Shearer was prepared in principle to do the deal. Though the $8-million fee was, in his words, "bodacious," he believed, as most entrepreneurs do, that once the first plant was built, his idea would be phenomenally lucrative. The fee, indeed this whole first deal, would be a mere footnote in the history of his enterprise. "I had spent $7 million of my own money doing background and development work and had sent out over 200 business plans," he recalls. "This was my last best chance."
In the three weeks after Thanksgiving 1995, the deal moved swiftly to conclusion. Newman sent Shearer the standard forms of syndication agreement and the attorney-trust-account agreements he used. Shearer passed them along for review to his lawyer, a corporate partner at a large Dallas law firm (who, through Shearer, declined to be interviewed for this story).
Still, Shearer clearly was not comfortable with his new partners. When he had asked for references he could call about Newman and his corporation, he was told that because of the highly confidential nature of the offshore financing world and because the proceeds were being wired through Antigua, which has strict banking secrecy laws, no such references could be provided. Shearer was suspicious enough that within days of his first conversation with Newman he hired a private detective, former FBI agent Joseph G. Masterson, to dig up anything he could on Newman and his business. He also asked his lawyer to check on the lawyer who was holding the trust account into which Shearer's $650,000 would be wired. "I was concerned about the lack of references," he says.
On December 7, eight days before Shearer was to close the deal, Masterson reported that Newman had no criminal record and no civil or criminal suits pending in the United States. He also had turned up Newman's name in a St. Petersburg Times article in which he was identified as a principal involved in the purchase of George Steinbrenner's Tampa Shipyards company. Shearer saw that as a good sign: it seemed to prove that Newman was a player who had closed at least one major deal. Moreover, Shearer's lawyer verified that the escrow lawyer was a member in good standing of the Georgia bar, so Shearer concluded that if anything went wrong, he could recover his money from the escrow account.
In a memo to his working group dated December 7, Shearer announced that it was basically full speed ahead for the deal, crowing that "all in all, timing could not be better." Ironically, he closed the memo with this nave but hopeful observation: "If there is a scam in this transaction, recourse through the courts...is nonexistent. However, a tarnished reputation and implication of a scam virtually puts people out of business in the international markets. These markets work more on trust than on relying on documents or the courts. Unless some showstoppers appear, I would like to close this transaction."
As did Newman, who was now telling Shearer that if the deal did not close by Friday, December 15, it could not close until sometime in the New Year because he was leaving for a holiday in Greece. The following day, December 8, Newman revised that estimate to "several months into the new year," according to a memo Shearer wrote at the time. The pressure was on to close the deal.
The Warnings Unheeded
What Shearer couldn't have known was that he was being inexorably drawn into a fraud of massive proportions, a kind of fraud whose prevalence was growing, a high-end swindle designed to rip off similarly situated victims for as much money as they had.
Most of those victims, like Shearer, had already approached banks, venture funds, or investors and been rebuffed in their search for capital for a variety of reasons, including inexperience, bad ideas, and shaky finances. And the means used to suck victims into the scam are similar from case to case. Authorities investigating this particular scam say that business brokers working for Newman and the three or four other "syndicators" placed ads in mainstream publications such as the European edition of the Wall Street Journal, the New York Times, and this magazine, touting their ability to raise "venture capital." (See "Trolling for Marks," below.) Word of mouth and the con artists' own web of broker contacts--including brokers both aboveboard and below--also lured in potential marks like Shearer and gypsum miner Art Wilson.
"We suspected that when they answered the ads these people had already tried their banks and other legitimate sources and had been turned down," says Larry Sangaree, the scam's "field operations manager," who is incarcerated and awaiting sentencing for his part in the ring. "You know these people have a liability."
Unbeknownst to Shearer, the request for a copy of his bank statement--"prequalification," as the perpetrators refer to it--is a simple ploy to determine how much a potential victim can be fleeced for. But by the time Shearer had supplied the statement, there were already other signs that something was amiss.
The deal structure itself is plausible, according to Richard Prins, a corporate partner at Skadden, Arps, Slate, Meagher & Flom who reviewed the documentation used in the scam. Even the exorbitant compensation fee of $8 million is not out of the realm of the possible, says Prins, because offshore deals are not registered under U.S. security laws, which normally cap such fees at 10% or 11% of the deal value. "Offshore brokers in theory can charge whatever they can get away with," he says.
But Prins and other experts point out several other troubling aspects:
First, the refusal to provide references. That should have been a real warning sign, says Prins. "No one should do business with anyone who doesn't want references checked. As a business principle, those people are always hiding something."
Another red flag was the very cursory due diligence Newman did on Shearer and the project. He never met with Shearer until the day before the closing, he never asked for or independently checked Shearer's references, and he conducted only a 15-minute-long question-and-answer session on the project by phone. And after that, he was willing to commit $48 million to a man he had met by phone just three weeks earlier? "Most venture capitalists won't invest until they've made between 75 and 100 phone calls about a project and the person proposing it," says Josh Lerner.
Next, the work payment obligation: Prins says that occasionally on a $100-million-to-$500-million deal, underwriters may be paid "$100,000 or $200,000" up front as a fee for structuring something unusual. But these fees are being paid to large, well-established U.S. firms, not to a foreign expat with an Antigua address. "You don't pay money up front to someone you don't know," says Prins. "And you don't put up your money until you see their money. And if you have to get your bank to do something, then you don't put up your money until your bank has agreed to take the next step."
Still, in early December 1995, Paul Shearer, while wary, thought he was on solid ground. "The whole thing with these con artists is keeping you on the bubble, making you think that everything's fine and you're old friends and this deal's gonna close and then we'll do another one and another one after that," says Shearer. "Newman did a good job of keeping us on the bubble."
The Lawyers Weigh In
Shearer was scheduled to close his deal with Newman on Friday, December 15, 1995. In the week before the closing, according to Shearer's recollection and to correspondence he provided to Inc., he continued to press his private eye for more details on Newman and had his lawyers pore over the deal documentation. Joseph Masterson, the detective, began digging into Newman's business dealings involving the Tampa shipyard. He confirmed that a deal closed but says he got a sense from some members of the Florida law-enforcement fraternity that "this wasn't someone you wanted to do business with." It was nothing concrete, Masterson says, "but I told Shearer that this guy wasn't right, and I advised him not to do it."
The lawyers, while conceding that the documents basically tracked the deal, turned up some of the same inconsistencies that Skadden's Prins noted. They wanted some language changed, but Newman would have none of it. "Newman came unglued and told me that he had no authority to change the documents, that it if we couldn't get comfortable, the deal was off," Shearer says.
"Then my attorneys did say, 'We're uncomfortable with this, maybe you shouldn't do this," says Shearer. "I said, 'But this is a chance to get $40 million, and I do not have another single live opportunity. None. Zero. Zippo.' I admit, everybody was a little ill at ease. There was the lack of references, and Newman played the hotshot--he wasn't calm and deliberate. And I thought that maybe Newman was a little flip, but I would become a multibillionaire if we got this."
Shearer's lawyers weren't alone in their reluctance to endorse the Sterling International documents. Four of the five victims who spoke to Inc. about these scams had lawyers review the deal before closing; the fifth is a lawyer. In fact, the documents themselves counsel the clients to review the terms of the deal with legal counsel. Three of the other victims' lawyers advised their clients to walk away. And in each case, that advice was ignored. In the end, brash salesmanship, a little greed, and blind desperation proved to be too volatile a combination to resist.
Concerned about the offshore aspect of his proposed deal, for instance, the Atlanta entrepreneur who'd hoped to create a tire-recycling company had sought advice from an English barrister who also practiced in the United States. The barrister sat in on the first meeting with Newman and his sidekick and then immediately advised his client to "get up and walk out on these people," recalls the victim. Newman, sensing the conflict, put the hard sell on. "He said, 'You want it or not?' and then got up and started to walk out," says the Atlanta entrepreneur. "I said, 'Hold on there." He ended up losing nearly $400,000 to Newman and his cronies.
"I got wrapped up in the deal," explains the victim. "I wanted it to happen so bad."
So did Shearer.
On Thursday afternoon, December 14, Newman arrived in Dallas with a "partner." Shearer says the two--hulking men, both of them more than six-foot-two and 250-plus pounds--put on quite a show: they (supposedly) had flown in on a private jet and were well-dressed, sporting Rolexes and alligator briefcases as well as a confident, rapid-fire spiel.
That evening Lena Shearer joined them for dinner ("to do some hand-holding," says Shearer), along with both of Shearer's lawyers. At that point, "I was a little fed up with the whole project and was like, 'OK, show me the money," says Lena Shearer. Nonetheless, she immediately took a shine to Newman. "I like outgoing, flamboyant people, and he hit the top of the charts," she says. Newman dominated the conversation for much of the evening, bragging about his $30-million worth and his financial acumen. "He told us his parents were real rich and had a huge spread in Rhodesia," recalls Lena. "He made you think you were connecting up with a real jet-setter."
The "deal" closed, and on Monday, December 18, Shearer wired the $650,000 to Sterling and the $28,500 to Dennis McGregor, the supposed bank locator, at Curney & Associates. The first wire transfer went from NationsBank, through Privat Kredit Bank in Switzerland, and then to the Caribbean American Bank in St. Johns, Antigua. The second transfer went through Toronto Dominion Bank to another account at Caribbean American. If all went according to plan, within 30 days, McGregor would locate a bank to receive the syndication funds and issue the pay order, at which point Sterling would fund the deal.
A new car company was on the verge of conception. "There wasn't a party or anything," Shearer recalls. "There was still no money in my hot little hand. There was a little 'Hallelujah, we've done it,' kind of thing."
Of course, there was no money.
The Caribbean bank accounts, alas, were all too real.
It was not until January 11, Shearer says, that McGregor announced that he was ready to open an account to accommodate a pay order at an Antiguan bank. But he insisted that Shearer provide him with written notification from Newman that the syndication agreement was still in effect. Shearer was painfully aware that the 30 days in which he was supposed to have obtained a guaranteed pay order from a bank would elapse in 4 days, on January 15. Under the terms of the agreement, he would be in default and would forfeit his WPO.
Shearer had spoken to Newman around January 8, and Newman said he would take care of it, though he was leaving shortly for London. On Friday, January 12, Shearer left a voice-mail message for Newman and also faxed him, asking him to provide the written notice to McGregor. "If at all possible, I would like it to happen today!" he ended.
On Monday, January 15, he again faxed Newman, who was now proving very difficult to reach by phone. "I would very much like to have the money transferred," he wrote.
On Tuesday, increasingly desperate, Shearer placed a call to Newman's unlisted home number, which Shearer's private eye had obtained. When Newman realized it was Shearer, he exploded. "He starts screaming and cussing and says he's going to sue me because I owe him $8 million," says Shearer. "I was shocked. Normal people just don't act that way."
It didn't matter. At that point Shearer had been thoroughly scammed. He will never recover the $650,000. If the group followed the normal sting pattern outlined by authorities, that money was never held in escrow as promised. Instead, it was promptly divvied up among the various players in the scam, according to a set formula.
Newman normally took the lion's share, but smaller cuts would go to, among others, "facilitator" Dennis McGregor, an alias for postal employee Peter Barnum, who also occasionally served as a courier for the trust lawyers and syndicators; the trust lawyer; and possibly several brokers, if there were any in on the scheme that snagged Shearer, which seems likely.
But what of the pay order Shearer was looking for? That order, in fact, was the trigger for bringing the scam to an end. No bank will issue such an order unless the client can pledge collateral to cover such a payment. And by conducting their "due diligence," Newman and his associates had already ascertained that the client could not raise that kind of collateral. (Indeed, if clients had that kind of money, they probably wouldn't be scraping the bottom of the barrel for capital.) The failure to obtain the pay order within 30 days of closing puts the client in default, and under the terms of the agreement, the fee that client has already paid, the WPO, "shall be deemed earned, due and owing and...not be refunded." "This agreement is calculated to make it impossible for the client to meet the conditions for receiving a letter of credit or payment order," says banking lawyer George Hisert, a partner of Brobeck Phleger & Harrison, in San Francisco.
In an internal memo seized during a search of Sangaree's home, which law-enforcement agents view as the smoking gun, members of the ring were reminded that "The payment guarantee must be collateralized. That means it must be cash backed or no bank will issue it. But you do not call any attention to that until you have been paid. Period. No exceptions."
So why would the perpetrators even communicate with the victims after the scam was essentially complete? In fact, Newman and others in the scam did become difficult to contact as the window was closing on the pay-order default. When the victims did get through, they were told that the banks that said it couldn't be done didn't know what they were talking about. "I'd get Newman on the phone and tell him the banks said it was illegal, and he'd chew me out and say those banks don't know what they're talking about," says the Atlanta victim.
Shearer and Michael Crow recount calls in which Newman or other players exploded over the phone, chiding them for being amateurs, for embarrassing them in front of the "investors" (who, of course, do not exist), and for costing them millions of dollars in lost fees (which also never existed). It is a finely calibrated performance; it is the victims of the crime who begin to feel guilty, even as they're being informed that they are in default and have forfeited the fee they paid.
Part of the rationale for scam perpetrators to have continued contact with their victims is so that they can paint themselves as victims of the client's foolish navetÉ and thus forestall any notions victims may have of suing or reporting the scam to authorities. But the more insidious reason is that the scammers are preparing to "save" these victims, to give them one last chance to make the deal happen, one last chance to be scammed again.
Having lost a major chunk of change, seemingly for their own failure to find a bank to issue them a pay order, clients want nothing more than to salvage the deal. The con artists are only too happy to oblige. How they approach the chagrined client all depends on how much they think is still in the till. The standard approach is to agree to give the client another several days to find a bank to issue the pay order. There may be a fee of another several thousand dollars for such an extension. (Ka-ching!) At the same time, Newman, or any of the other "syndicators" involved in this particular ring, might offhandedly mention that he knows someone, a banking consultant, who, for $10,000 to $50,000, will help the victim find a bank to issue a pay order. (Ka-ching!)
On February 5 Shearer received the official notice from Sterling International that he was in default under the syndication agreement and that it had expired.
Shearer asked for a meeting, and Newman flew into Dallas for lunch on February 7. Shearer wanted to talk about getting the deal back on track, and Newman hinted that if Shearer could get a pay order, he would pull some strings and reopen the syndication. But Newman spent most of the conversation, says Shearer, talking about his background as a trained assassin in the Rhodesian military, how cheap it was to have someone killed in the United States, and the high level of security he lived under back in Miami. Shearer says that it was only after he got back to the office that it dawned on him what Newman's real message was: "I thought, 'Whoa, that was a message for me."
Shearer spoke to Newman a few more times over the next month, but eventually, Newman's number was disconnected and Shearer was left to pick up the pieces. Apparently, Newman moved on to greener pastures. Authorities claim that in July 1996 he took a North Carolina mortgage broker for $62,500, and in February 1997 he extracted $248,500 from a Payson, Utah, company called Young Essential Oils LLC. Shortly after that he disappeared as the FBI and U.S. Customs began closing in on the scam ring. Indicted last spring on money-laundering charges, Robert Ian Newman is a fugitive from justice, currently believed by law-enforcement officials to be operating in Thailand.
The trust lawyer was also indicted and denies any knowledge that a scam was in progress. (Two of the lawyers employed by the Florida ring have been convicted and are serving time for money laundering and wire fraud.)
Peter Barnum, also known as Dennis McGregor, never did deliver a single pay order for his $25,000 fee. Indicted for money laundering, he pled guilty and is cooperating with authorities in their continuing investigation.
While the Florida scam involving Newman was vast, smaller versions of the same confidence scheme continue to spring up throughout the world. In 1996, for example, an English solicitor and one of his compatriots was convicted of carrying out an advance-fee fraud that scammed some $32 million from a variety of businesses over five years. In May of this year the Dallas Morning News reported that a local man was being charged with conspiracy, mail fraud, and wire fraud in connection with an advance-fee scheme that defrauded some 200 people of more than $850,000.
Law-enforcement agencies are zeroing in on these frauds, but with con artists inventing new financial scams every month, the sad truth is that as long as there are business owners and entrepreneurs who are willing to throw caution to the wind and ignore their advisers and their gut instincts, the swindles will just keep happening.
"You could put an ad in the paper today saying, 'One million dollars in verified funds available for venture projects,' and I guarantee that within 24 hours you'd have a couple hundred calls," says Larry Sangaree. "And within 30 days, you'd have made $300,000."
Lena and Paul Shearer, meanwhile, have started putting their lives back together. "I'm not going to cry about it," says Shearer. "I just view it as part of the game. I know I'll beat the odds and come out on top."
William W. Horne is a writer based in Leesburg, Va.
The Usual Suspects
Newman, the alleged point man in the swindle of Paul Shearer, is under indictment and is currently a fugitive from justice.
The ring's 'field operations manager,' Sangaree pled guilty and is awaiting sentencing.
Peter Barnum a.k.a. Dennis McGregor
Postal worker Barnum, known to Shearer as the bank locator 'McGregor,' has admitted guilt.
Trolling For Marks
Con artists use word of mouth, direct mail, phone calls, and faxes to solicit clients. According to the investigating authorities, they also place ads in publications such as the New York Times, the Wall Street Journal, and USA Today, as well as this magazine. Officials say that the same people who fooled Paul Shearer and were indicted this past May ran this ad, which appeared in the October 1996 issue of the Robb Report: "Verified Private Funding. United States treasuries, cash, CDs or equivalent available for qualified international business projects and bank trading programs. Serious inquiries only. Extremely attractive package for proven and professional financial intermediaries. $1,000,000 U.S. and up. Contact [phone number]."
Contrast that with this ad placed in Inc. by a legitimate venture-capital business consultancy: "Venture Capital Company is seeking new projects. [phone number]."
The bottom line is that there is no way to distinguish the real from the sham based upon marketing methods. The only way to do that is to assess the people you're dealing with and the services being offered. (See "A Fool and His Money," below.)
A Fool And His Money
Some precautions to protect capital seekers from being victimized by a scam:
Don't act out of desperation. The victims of scams tend to be those who have convinced themselves that their project is worthy and that this is their last chance to make it happen. "Entrepreneurs who have been turned down by their banks or other investors need to step back and ask why," says Paul Wythes, a partner in the Silicon Valley venture-capital firm Sutter Hill Ventures.
Check references and stories. Venture capitalists make an average of 75 to 100 phone calls when performing due diligence on a prospective investment. Why shouldn't business owners do the same? Any legitimate capital outfit should be more than happy to provide a list of projects, with the names and phone numbers of references. If the claim is made that "confidentiality" prohibits that, walk away.
Pay no big up-front fees. Paying a fee for someone to find or raise money is standard, and the fee may be substantial. But anytime a fee of more than a couple thousand dollars is requested before the delivery of services by an investor, beware. Remember, too, that up-front fees are often disguised as something else, such as a "good-faith deposit" that will be applied against the balance of a loan upon closing.
Don't go offshore. Most offshore and overseas banks are located in countries with strict secrecy laws. As the International Chamber of Commerce warned in its 1996 report, "Banking secrecy laws provide the fraudsters with the ultimate protection as soon as the money is deposited into a bank account." Be wary of sending any fees offshore or dealing with any salesperson who claims to be backed by overseas or foreign investors.
Rely on advisers. Advance-fee scams invariably involve some sort of phony documentation or contracts. Just as you would with any other complex deal, rely on your lawyer, banker, and accountant to ferret out the real from the fake.
Don't use an unknown escrow agent. In any deal, agree in advance on a mutually acceptable third party--not an agent of the investor's choosing--to serve as an escrow agent. And remember that wiring funds is like handing over cash. In deals with legitimate venture funds, according to Craig Johnson, chairman of Venture Law Group, in Menlo Park, Calif., "people just write checks, and the checks are held by investor counsel until the deal closes."