The subject of the investigation, hence the conversation, was drug trafficking. A low-flying business jet had landed and unloaded its illegal cargo one night on a short, unlighted runway at Flying Cloud Airport, a general-aviation facility on the bluffs of the Minnesota River southwest of Minneapolis. What the FBI wanted to know of Charles Aune -- an experienced flier himself -- was, what kind of plane, and what kind of pilot, could pull off a maneuver like that?

Aune, flattered, became the FBI's "aviation consultant." For several months in mid-1981, he brainstormed obligingly, if inconclusively, on the drug case. Then, in November, the pilot offhandedly suggested that "it might be worth looking into" Flight Transportation Corp. (FTC), his former employer.

In three years and two public offerings, FTC had gone from a moribund flight-training school to a full-service aviation company, with highly profitable sales, training, and executive- and group-charter operations. Its revenues, a scant $1.2 million just five years before, were skyrocketing toward a projected $85 million in fiscal 1982. But Aune -- who had been fired from his position as executive vice-president in charge of executive-charter operations for "personality conflicts" that seemed closely related to his inquisitiveness -- had reason to doubt the company's newfound wealth.

"No matter how I run those numbers in the prospectuses, they never match mine," Aune told the FBI agent. Could FTC be involved in drugs? the agent asked. Or money laundering? Aune hazarded no guesses. "All I know is, it's like there are two companies, and the one in the prospectuses isn't the one I worked for."

About seven months later, on Friday, June 18, 1982, FTC disappeared from the screens of the stock-quotation terminals scattered around the company's lavish headquarters. The Securities & Exchange Commission, acting on information from the FBI, had suspended trading of the over-the-counter stock just days after the closing of FTC's third -- and, at $25 million, its largest -- public offering. Citing "questions relating to the accuracy and adequacy of [FTC's] financial reporting," the agency had obtained a court order freezing the company's assets. A complaint filed that same day was more explicit, alleging securities fraud, check kiting, inflated revenues on nonexistent business, and diversion of corporate money for personal use. There was no mention of drugs.

The events came as a shock to much of the investment world. Until then, FTC had been one of Wall Street's most talked-about aviation stocks, reporting assets of more than $50 million, and earnings of $6 million on third-quarter revenues of $71 million. The company had grown 551% from 1976 to 1980, putting it 94th on INC.'s 1981 list of the 100 fastest-growing public companies in America; the following year, it rose to 31st place. The success of FTC's luxurious new executive-charter service heralded "the growing acceptance of the limousines-in-the-sky concept," Louis Ehrenkrantz, of the New York City brokerage firm of Rosenkrantz Ehrenkrantz Lyon & Ross, had declared. Financial World magazine had praised the "marvelously productive partnership" of FTC president William Rubin and executive vice-president Janet Karki. Other journalists and analysts had described them variously as "shrewd," "innovative," and "hard-working entrepreneurs."

Shrewd, innovative, and hard-working they may have been, but not -- it turned out -- at building a company. As the case against the pair unfolded, it quickly became apparent that FTC was a house of cards. The company's flight-training and executive-charter operations, investigators found, were break-even propositions at best. Accounts receivable had been inflated by more than 50%; cash was overstated by about $3 million; and assets proved to be worth about 25% of the $50 million claimed. But the most shocking revelation involved the group-charter service, which had supposedly accounted for the majority of FTC's revenue in fiscal 1981: As far as anyone could determine, the entire line of business was a figment of somebody's imagination.

All of this raised intriguing questions about Rubin and Karki, but the most intriguing question of all had less to do with the alleged masterminds of the fraud than with those who had failed to catch it. FTC was, after all, a highly visible company. It had been through half a dozen financial reviews, including two audits by its accountant, the growing national firm of Fox & Co. had lined up some $15 million worth of credit from Norwest Bank Minneapolis, one of the Midwest's leading lenders, and a Norwest affiliate. And it had raised an additional $33 million from the investing public over a period of 18 months, with the most recent offering having been underwritten by the prestigious New York City investment banking firm of Drexel Burnham Lambert Inc.

Now it appeared that FTC was a scam -- one that had been revealed, however, not through the due diligence of the underwriters, or the acuity of the accountants, but as the indirect result of inquiries made in the course of an unrelated drug investigation. The obvious question was: What had happened? How had FTC managed to slip undetected through the radar of the investment community? Why hadn't somebody, anybody, shot it down?

In some ways, Karki and Rubin seemed an unlikely pair to pull off the scam with which they were charged. They had come from nowhere -- outrageous in style, short on substance, yet irritatingly confident of their ability to succeed. Bill Rubin, now 37, with his loud sport coats and tinted eyeglasses; Jan Karki, 50, with her blonde beehive and diamonds -- "tacky" was one of the more polite words used by Twin Cities' businesspeople to describe these big-talking upstarts. The investment community, for its part, regarded them as "rubes" and -- in the beginning, at least -- doubted their ability to survive the maelstrom of economic woes that had downed so many other aviation companies. But it wasn't put off by the pair's appearances. The prevailing view on Wall Street, as one stockbroker later put it, was "if they look that crooked, they gotta be legit."

As a matter of fact, there was nothing in the public record to indicate that they were anything but a pair of hard-driving entrepreneurs. Karki, who portrayed herself as a Stanford University-educated certified public accountant, had previously worked as an accountant for a suburban Minneapolis restaurant and as a financial adviser. She had joined FTC in 1976, when the company's acronym still stood for Flight Training Center Inc. The tiny aviation school, which had operated at a loss since the day it was founded in 1968, was in need of a controller, and Karki seemed right for the job. Her role didn't begin to expand until 1977, when Russell T. Lund Jr. and Wardwell Montgomery, the two businessmen-pilots who owned the company, brought in another businessman-pilot named Bill Rubin.

At Flying Cloud, Rubin had a reputation as a boy wonder. Most pilots could recount his story: how he had quit college to become a United Air Lines flight captain while still in his twenties, and then quit the airline to make a career of investing in small, often ailing companies.

But what especially caught everyone's attention was the apparent ease with which Rubin had subsequently returned to aviation. At a time when many other charter operations were being buffeted by both a fuel crisis and an economic recession, Rubin was boasting that -- between flying gamblers to Las Vegas and playing the stock market -- he was earning enough to buy himself a new Learjet every year. He was also leasing a trainer plane to FTC, which was defaulting on its payments. Even that situation offered an opportunity, however. He was willing to forgive the leasing debts, he said, in exchange for a small consultant's fee and a crack at making something of FTC. Once inside the company, he teamed up with Karki to sell the owners on a turnaround plan.

It was a bold plan that called for transforming the flight school into a full-service aviation company. It would include a charter operation positioned as the luxury alternative for business travelers and overseas vacationers. Unlike competitors, FTC would be vertically integrated, from its company-owned fuel and parts supplies to its mortgaged (instead of leased) planes and hangars. This, the pair argued, would help minimize the impact of fluctuating fuel prices and ever-rising interest rates.

But the operative word in the strategy was luxury: FTC's passengers would be picked up by limousine and flown to their destination in a sleek, new jet with a wellstocked bar. Should a layover be necessary, FTC would supply lodging and workout facilities at any one of eight convenient, fixed-base locations, none more than 800 miles from another. Convenience aside, these satellite locations would give FTC a potent pricing weapon. Whereas most charter companies have to charge one-way passengers at round-trip rates -- in order to cover the margin-eating "dead-haul" mileage -- FTC would be able to schedule the empty plane for another trip from the nearest airstrip. The system would thus allow FTC to charge one-way passengers at one-way rates and undercut competitors' prices by as much as 40%.

Obviously, the key to implementing the plan was capital -- something in short supply at FTC. With nearly $500,000 in short-term debt and only $100,000 or so in available credit, it appeared that FTC would have difficulty finding the money to stay afloat, much less to turn itself around. If the company were to reduce its debt, and go about the business of buying and building all the facilities the plan called for, FTC would have to begin winning friends and influencing people in the investment world -- or so Rubin and Karki argued.

The board of directors bought the strategy, and Rubin, the new president, began shopping for an underwriter in early 1979, with the goal of scheduling an initial public offering by the end of the year. After being turned down by several established Twin Cities firms, which considered the deal too risky, FTC wound up with an aggressive, local investment banker named Alstead, Strangis & Dempsey. Alstead took the company public on November 30, 1979, at $3.25 per share. FTC -- which now stood for Flight Transportation Corp. -- came away with about $1 million.

In the months that followed, Rubin and Karki set about rebuilding the company. They repaid some bank notes, bought some airplanes, and launched several major projects. They began construction of a corporate headquarters at Flying Cloud. They established a fixed-base operation in Santa Barbara, Calif. They purchased some property on Grand Cayman Island, which would serve as the destination for the group charters. But most of their time and effort went into publicizing FTC through a promotional blitz that included television commercials, full-page magazine ads, and billboards. Tooling around town in a maroon limousine, Rubin and Karki plied stockbrokers, analysts, and suppliers with invitations to elegant lunches -- often in Milwaukee or in Rochester, Minn., via Learjet. They even offered free vacations at the $400,000 beach house on Grand Cayman.

As it turned out, the continuing dog-and-pony show was a warm-up for a second public offering. FTC needed additional capital for a variety of reasons, Rubin and Karki said -- not least of all to develop the now-burgeoning group-charter operation. From the second half of 1979 to the second half of 1980, the number of flights were reported to have more than doubled, from 48 to 98, and revenue was up 189%. But because FTC lacked the necessary federal certification, it had to rely on planes and crews contracted from major airlines. The proceeds of the offering would allow the company to get that certification and begin flying its own Boeing 727s.

In preparation for their return to the public equity markets, Rubin and Karki courted several underwriters. Eventually, the Wall Street firm of Laidlaw Adams & Peck Inc. agreed to handle the issue but insisted that Rubin personally guarantee the offering with a promise to purchase, if necessary, up to 600,000 of the 1 million units. Rubin promised, and FTC came out with its second public offering, worth $7.2 million to the company, on March 2, 1981. When, as Laidlaw feared, the issue attracted only lukewarm interest, Rubin had to live up to his pledge.

Despite this unfortunate turn of events, Rubin and Karki appeared unfazed. Putting the group-charter certification effort on the back burner, they focused instead on executive charters -- adding, through acquisitions, fixed-base operations near Moline, Ill., and Olive Branch, Miss. They also crisscrossed the country, arguing to stockbrokers that, at $10 a share, FTC stock was significantly undervalued. To bolster their case, they began inviting investors and brokers to the Twin Cities, where they could view for themselves FTC's newly opened corporate headquarters, already nicknamed the Taj Mahal.

It was an obscenely opulent building. Outside, there was a spotless hangar containing more than 25 state-of-the-art flying machines; inside, there were mirrored walls and chandeliers. A section of the 67,000-square-foot structure housed the Jet Set Athletic Club, which boasted a pool, a steam room a running track, two racquetball courts, a weight room, and, supposedly, 350 members. Most tours included glimpses of Rubin's $350,000 collection of classic cars and Karki's elegantly appointed apartment -- which put a whirlpool and a $6,000 bedroom set within steps of both her office and that of Rubin, a married man. Visitors gaped. Rubin and Karki laughed.

"To be successful, you've got to look successful," was the pair's oft-stated philosophy. All the froufrou was necessary, they explained, not only to attract the high-class clientele that they were after, but to win the respect of "the big boys" of investment banking -- with whom they were discussing yet another public offering, this one for $25 million.

The offering, scheduled for early 1982, was to pave the way for Rubin and Karki's masterstroke -- the acquisition of Executive Jet Aviation Inc. (EJA), the Columbus, Ohio-based dean of the air-charter industry. They had already lined up a prominent Wall Street underwriter, Drexel Burnham Lambert, whose co-founder, I.W. "Tubby" Burnham, happened to be a friend of EJA chairman Bruce Sundlun. Meanwhile, they had requested their bankers -- Norwest, then known as Northwestern National Bank of Minneapolis, and its affiliate, Fifth Northwestern Bank of Minneapolis -- to more than double their lines of credit, from $15 million to $32 million. Rubin, who had recently been named to Fifth Northwestern's board of directors, had reason to feel confident the request would be granted.

Thus, in the spring of 1982, Rubin and Karki seemed to be sitting pretty. Their capital worries appeared to be over, and their turnaround plan was on track. Even when rumors of a federal investigation surfaced, the pair shrugged them off. "Everything we do," said Karki, patting the latest in a series of flush quarterly earnings statements, "is strictly by the numbers."

The incident with the four typewriter balls -- it was just one of the things that prompted Glen Grambart, FTC's general manager, to resign in October 1981. Six months later, it influenced his decision to cooperate with the intensifying federal investigation.Charles Aune, the FTC-employee-turned-informant, was one of those who pressed Grambart to spill everything to the authorities. "It's for your own good," he told Grambart in a telephone conversation. "You know stuff."

Indeed, Grambart knew what the rest of the world did not: that FTC was in dire financial condition. Rubin and Karki, he told investigators, were draining the company of its assets. He himself had written corporate checks that had gone toward a variety of personal purchases for the pair. Grambart said he had been instructed to disguise the misappropriated funds by using a secret loan account, through which money was shuttled among FTC's 24 bank accounts and several others belonging to shell companies under Rubin's personal control. To stay ahead of mounting debts, the company had also taken to kiting checks -- a practice that eventually grew so frenzied that even the cleaning lady was called upon to help with the dizzying volume of deposits and withdrawals. And, if the story about the typewriter balls was any indication, there was forgery involved as well.

The incident had occurred the previous September, during the course of the bank's investigation of FTC's request for a credit increase. Norwest officials had asked FTC to produce material concerning its group-charter service, but "nothing came in from the Cayman Islands or anyplace else," said Grambart in his deposition. It was thus surprising when the necessary documents suddenly appeared on his desk one day. Surprising, that is, until Grambart recalled that Karki and FTC's controller, Brian Miller, had submitted an invoice for four different typewriter balls the day before, and then had worked late, behind the closed door of Karki's apartment.

If Grambart thus had reason to suspect a fraud, James McGovern, FTC's general counsel, apparently aided and abetted it, or so he has been charged. Formerly the company's outside attorney, he had caused a minor stir in the Twin Cities legal profession in 1981, when he had left his thriving law firm to go work for FTC full-time. As Grambart may have suspected (and as McGovern himself has admitted), he did so not out of any particular faith in FTC's future, but because Rubin had caught him with his hand in the till.

It turns out that, prior to the second offering (the one underwritten by Laidlaw Adams & Peck), McGovern had helped Rubin develop and then carry out a plan to use company funds to purchase unsold units from the issue. But instead of turning over all the stock to Rubin, as agreed, he had held on to a large block of securities, which he intended to use as collateral on a personal bank loan. Rubin had discovered the scheme and offered McGovern a deal. He could have the stock he needed, provided he came to work inside FTC, where his knowledge of securities law would be invaluable. McGovern assented.

So, according to the government's charges, McGovern knew what was going on, as did Miller, the controller. Grambart and Aune, for their part, had strong suspicions. But, oddly enough, the rest of the employees remained pretty much in the dark. "What they did, and why they did it, wasn't my concern," says one pilot, expressing a widely held view. "if I was asked to sign something, I did. When I was told the group charters were being run out of facilities other than Flying Cloud, I had no reason to disbelieve it."

Rubin, for his part, worked hard to encourage such attitudes, and -- by all accounts -- he had a knack for it. He was no tactical genius -- Karki was the strategic brains at FTC -- but Rubin had a boyish charm that he used to shore up morale and allay even the most nagging employee suspicions. When Aune, for example, asked him to explain the executive-charter numbers in the 1981 prospectus -- which were grossly inflated -- Rubin confided with a grin that he had "shifted in some money" from another operation. In a public offering, he said, "you can't have any part of a company that doesn't look good." Later, Aune would ask more questions, leading Rubin to chastise him for his lack of "faith in management," and to raise the "personality conflict" issue that eventually cost the division vice-president his job. But, initially, Aune found Rubin's explanation quite satisfactory.

"I thought, oh, OK, I see," says Aune. "Like everybody was saying, if the accountants were letting them do stuff like that, it had to be all right. They'd been audited, hadn't they?"

That was, of course, a thought that occurred to a lot of people -- not least of all the federal investigators who were trying to figure out how Rubin and Karki had gotten as far as they did. After all, FTC had been audited. Was it conceivable that none of the accountants had added up the truth about FTC? What about the numbers in the prospectuses? Hadn't anybody checked them out?

The short answer, it turned out, was no.

John M. Cracraft is the Minneapolis sole practitioner who served as FTC's accountant through the initial public offering in 1979. He acknowledges that he relied largely on Karki's books and records in preparing the pre-IPO financial papers, and that he received documentation only for the few income items he specifically requested to spot-check. Ignoring what would have seemed a good indicator of Rubin's character, he admits to having signed off on a personal financial statement in which Rubin declared a salary of $121,000 -- which Cracraft knew was at least $70,000 higher than the truth. In his deposition, the accountant offered no explanation for ignoring the discrepancy.

Inadequate as Cracraft's work may have been, it became the foundation on which FTC built its case to the investment community. When Fox & Co. took over from Cracraft in 1980, the new auditors used his figures as the basis for their own. Fox "didn't test [the figures] at all," he said in his deposition.

FTC was a plum engagement for Fox & Co.'s Minneapolis practice. The account meant not only a hefty fee, but important visibility. The account manager, or "engagement partner," was an experienced auditor named John E. Harrington. He soon began spending a lot of time at the Taj Mahal. While his presence was no doubt intended to forge a close working relationship with FTC, Harrington's auditors found themselves at odds with Rubin and Karki.

"They would give you a sheet of paper full of projections, tell you they wanted the stuff in three days, and leave town," says one former Fox & Co. accountant who had several confrontations with Rubin, Karki, and controller Miller during the firm's two-year engagement with FTC. Even when Rubin and Karki were around, they tended to be vague about the source of their figures, he adds.

In depositions, accountants who participated in the audits said that they had difficulty nailing down the size and scope of FTC's group-charter business. During the 1980 audit, when Fox accountants asked Rubin to verify flight-revenue figures, he allegedly refused access to the necessary ledgers -- saying the bookings had been handled by International Air Systems Inc., a separate company that he controlled. Fox, ignoring generally accepted auditing standards that require such related-party transactions to be scrutinized, nevertheless signed off on the audit. Investigators have since learned that many of the documents Fox did receive, including airplane appraisals and the affidavits of purported tour operators, had first passed through FTC offices. Some of these documents have proven to be either inadequate or bogus.

There are those who believe Rubin and Karki had help in deceiving the accountants -- from Harrington. At least one member of his team complained of Rubin and Karki's obstructionist tactics, and suggested that Fox needed more substantiation of the 1980 revenues. It was Harrington who assured the accountant that everything was, or would soon be, in order. Another Fox accountant was so appalled by Rubin and Karki's role in the process that he documented his frustration in a memorandum that remains part of the company's audit file.

The SEC has initiated proceedings to determine whether Harrington "should be denied temporarily or permanently the privilege of appearing or practicing before the Commission." The agency is considering allegations that he not only engaged in improper professional conduct, but "willfully violated, or willfully aided and abetted the violation of . . . federal securities laws. . . ." SEC officials charge that, as supervisor of the FTC audits, Harrington "knew or was reckless in not knowing that [FTC's balance sheets and income statements] did not accurately reflect the financial condition of [the company]."

Harrington, nevertheless, characterizes himself as just another of Rubin and Karki's dupes. "They were the slimiest, crookedest people on earth," he says from his office at Osmonics Inc., a publicly held, Minneapolis-based manufacturer of water-purification and pollution-control systems, where he is vice-president and chief financial officer. "But until June 18, 1982, I thought they were the most respectable, honest people on earth." He allows as how he plans to tell the whole story in a book, to be called The Cayman Caper.

Harrington and the other accountants were certainly not the only ones whose deligence via-a-vis FTC left something to be desired. Under the law, after all, "due diligence" is the ultimate obligation of the underwriter, who is responsible for verifying the information contained in a prospectus. In FTC's case, that was a duty at least three different underwriters apparently let slide.

The first was Alstead, Strangis & Dempsey, the Minneapolis brokerage firm that took FTC public in 1979. It is unclear exactly what sort of due-diligence investigation the firm conducted: Alstead closed its doors after being found guilty of taking excessive markups on stock transactions. In any case, the prospectus Alstead produced was rife with red flags. Then 11 years old, FTC was reported to have lost money in 8 of its first 9 years and to have operated at a profit only in the previous 2 1/2 years. According to the prospectus, the turnaround had come as the company "gradually" expanded from a flight-training school into an aviation company with a variety of different operations.

There was nothing gradual, however, about the changes reported in the comparative income statements, which showed FTC developing a booming charter operation virtually overnight. For the fiscal year that ended February 28, 1978, aircraft charters brought in $102,993, representing about 6% of total revenues.Over the next 16 months -- during which period the company changed its fiscal year-end to June 30 -- the charter business exploded, accounting for $1,924,147 (or 61% of total revenues) for the fiscal year that ended June 30, 1979. Charter revenues for the 12 months that ended September 30, 1979, totaled a whopping $2,765,280.

The same prospectus also reported that FTC was running an air-ambulance service, which -- it turns out -- wasn't even licensed at the time. In addition, three pages of the prospectus are devoted to chronicling the ways in which Rubin, Karki, and members of the board of directors were doing business with their own company -- entering into various agreements with FTC involving the purchase and leasing of planes and other property. Such practices are generally frowned upon by investors because of the opportunity for abuse.

These insider transactions were especially worrisome for Laidlaw Adams & Peck, the underwriter of the second public offering. Anticipating investor concerns, the firm went out of its way to reassure stockbrokers that there was nothing shady about the deals. "We've checked them out, and they're all at arm's length, at market prices," Edward B. Simmons, then a Laidlaw vice-president, told at least one broker. He also observed that, in the new prospectus, Rubin had vowed to restrict such practices in the future.

In point of fact, however, Rubin's promise was a fairly lame one. Yes, he agreed to refrain from doing insider deals -- but only if he couldn't offer FTC terms that were "more favorable than the company otherwise could obtain from independent third parties." Laidlaw knew, moreover, as did anyone who read the prospectus, that a major purpose of the second offering was "purchase of aircraft from officers, directors, and major shareholders."

For all its efforts to increase the appeal of the FTC stock issue, Laidlaw was undeniably lax in its due-diligence investigation of the company itself.Simmons has admitted ignoring discrepancies between the personal net worth profiles that FTC provided on its principals and those developed by independent personnel-reporting services.He has also admitted telling Bishop's Service Inc., one of the reporting services, that it needn't look into International Air Systems, the, Rubin-controlled company that was supposedly handling FTC's group-charter business. When, in the course of taking Simmons's deposition, an SEC attorney asked the Laidlaw vice-president why he didn't investigate the source of such a large portion of FTC's revenue, Simmons replied, "Because Mr. Rubin asked that we not."

When the offering flopped, Rubin had to come up with some $4 million to pay for nearly 600,000 unsold units. That obligation was fulfilled in a highly unusual manner. According to Simmons, Laidlaw gave FTC the proceeds of the offering, not in one lump sum, but in a series of checks written in odd amounts, so that they could immediately be used to buy planes, as stated in the prospectus. The transaction was carried out in the offices of Reavis & McGrath, the underwriter's New York City law firm. With representatives of Laidlaw and Reavis looking on, Karki endorsed the checks to a handful of Rubin-controlled companies. Rubin reendorsed the checks and handed them back to the Laidlaw officials. In this way, Rubin used investor funds to live up to his pledge.

This was the culmination of the complicated scheme that Rubin had cooked up with McGovern -- the one that led to the latter's "appointment" as full-time counsel. Although the money came from FTC, Rubin kept most of the securities for himself (minus, of course, the units that he let McGovern keep to guarantee the personal loan). Within a year, Rubin had sold off all of the misappropriated shares and warrants at a profit, mainly through the investment banking firm of Moseley, Hallgarten, Estabrook & Weeden Inc.

Mosely, Hallgarten became the co-underwriter of FTC's third offering. (Technically, the third offering was two separate offerings, which closed within days of each other, but, in discussing the case, most observers treat them as one.) Rubin, who had selected Drexel Burnham Lambert as lead underwriter, specifically requested that Reavis & McGrath be retained as outside counsel -- explaining that the firm had handled the second offering and understood FTC's business. Drexel officials apparently did not object.

Everything went haywire in February 1982, however, when Executive Jet Aviation abruptly scotched its $10-million merger with FTC, which the offering was intended to finance. EJA chairman Bruce Sundlun had lost his taste for the deal in a half-day visit to FTC headquarters. He recalls thinking that, in an industry that thrives on standardization, FTC seemed to be running its charter service with too wide a variety of aircraft -- everything from tiny Cessnas to a Lockheed JetStar, which was too big to land legally at Flying Cloud.There had also been a tiff with Rubin and Karki over -- what else? -- access to the books. In a slander-conscious telephone conversation, Sundlun advised his friend Burnham that there was more to the falling-out than Rubin and Karki were letting on. Sundlun urged that Drexel "take a long hard look" at FTC, and -- indeed -- the due-diligencers were soon redispatched. This time, moreover, the itinerary included a trip to Grand Cayman.

The investigator who made the trip was a recent MBA graduate named Edward Sun. He spent a weekend with Rubin, Karki, and members of their entourage, partying, boating, and touring FTC's offices and supposed landholdings. The express purpose of his visit was to inspect FTC's property and judge its potential for development, but Sun had also agreed to pick up some documents for Reavis & McGrath. Before jetting off to Montserrat, FTC's next proposed target for airport and resort development, Sun did try to check on FTC's accounts at Barclays Bank, but found the institution closed. He also called on FTC's local lawyer, and stopped in at the property registrar's office to pick up the documents for Reavis. At either place, he could have learned that FTC held title only on the house, and had nothing but an option and contracts on the other parcels of land. But he didn't inquire into these matters, he later told investigators, because he viewed the actual document inspection to be the responsibility of the lawyers. Sun returned to New York City and filed a favorable report. The offering closed on schedule, on June 14, 1982.

That wasn't the end of it, however. Within days, Drexel was tipped off to the federal investigation underway. The firm had also received an anonymous letter saying, "[Drexel] had to be out f its mind to underwrite FTC." Drexel was in the midst of one last flurry of checking when the SEC shut FTC down.

"There's no question that Drexel did a lot of due diligence," says New York City attorney Jeffrey G. Smith, two represented shareholders in a lawsuit that Drexel and co-underwriter Moseley, Hallgarten settled for $3.8 million. "The question is how quickly they did it and what red flags they ignored. Like a lot of other underwriters at that time, Drexel was hungry for business. Clearly, they had trouble getting information, the wool was pulled over their eyes, and they were relying heavily on Reavis & McGrath. But their eagerness to do the deal and get the fee helped in the hoodwinking."

In the entire FTC saga, there has proven to be but one small group of people in the financial community who actually dug up evidence of a possible fraud -- the commercial loan officers at Norwest Bank Minneapolis and its affiliate. They, however, weren't telling.

Subpoenaed documents indicate that, in the fall of 1981, when FTC asked Norwest and its affiliate to increase its line of credit, the banks sent in a pair of investigators, called "collateral review personnel." When the investigators came out, they had strong reason to beieve that there was far less to FTC than met the eye -- and the internal memos that are now part of the court record reflect Norwest's shock and anger at the discovery. They accuse FTC of "grossly distorting" revenues, through "deliberate misstatements" and bookkeeping methods that are characterized as "deceiving and inconsistent." According to the memos, Norwest believed FTC to be in violation of the cash-flow covenant of its existing revolving-credit agreements. The bank, moreover, was unable to verify the existence of funds said to be deposited in a Grand Cayman bank. One Norwest official also raised questions about Rubin and Karki's backgrounds, but his suggestion to hire a private investigator wasn't followed.

As a result of the findings, the banks turned down the request for additional credit and accepted FTC's offer to repay its outstanding loans ahead of schedule. They kept that information to themselves, however. Weeks later, when the prospectus for the third offering appeared, investors found no hint of the company's problems with its banks. Nor was Continental Illinois Bank told about the results of the investigation when the Chicago bank agreed to join Norwest's affiliate in advancing some $6 million in loans made to FTC. On the contrary, Continental officials allege, representatives of the affiliate (which negotiated the deal) couldn't praise FTC highly enough.

Is Norwest guilty of a cover-up? Shareholders' attorney Karl Cambronne, of Minneapolis, says the chain of events speaks for itself. "There was an extensive audit and a recommendation to pull the plug on FTC. The bank knew it had its rear end hanging out, with $12 million outstanding, and they knew there was a public offering coming in six months that would raise $25 million. What could they do with a set of facts like that? They could pull the plug, declare a default, blow the offering, bankrupt FTC, and take the loss. Or, they could opt not to say anything, pass on some of the debt to Continental Illinois, and by letting the investing public put millions into FTC's coffers, hope to get paid off. They did it, and they almost got away with it."

Norwest, in its own defense, says it had no legal duty to disclose what it knew about FTC -- to Continental Illinois, the company's investors, or anyone else. In court documents, the bank concedes that the results of the collateral review made it "uncomfortable in having future dealings with FTC," but the bank maintains that it did not "have knowledge of fraudulent activity." Operating on the advice of counsel, the bank concluded that it would be courting a lawsuit if it breached the confidentiality of its relationship with FTC, and that it "could not, without great and unacceptable risk, take steps to protect itself by declaring a default and calling the loan."

The bank further points out that others, notably Fox & Co. and Drexel, had access to important information, which they failed to share with Norwest. That failure, the bank argues, makes it as much a victim in this case as any shareholder. Cambronne, for one, finds this reasoning hard to swallow.

"If you look, you'll see that the bank -- knowing everything it knew about FTC -- nevertheless loaned the company some $3 million, just weeks before the final public offering, to buy an airplane that never existed. Now why would they do something like that? To keep the company solvent until the offering went through, perhaps?"

At the mention of the Taj Mahal, Tom Bartsh lights yet another cigarette. "I'd like to dynamite the place," he says, sending the lighter skittering. As FTC's receiver, Bartsh has the unenviable task of disposing of FTC's assets. That means the Taj Mahal, the hangar, and everything in and around the two structures -- even the boxes of sex manuals (entitled How We Can Make It Last Longer) left over from one of Rubin's enterpreneurial ventures. All he has sold so far is Karki's old bedroom set and various of FTC's executive toys.

The way it looks, the entire case may be sewn up before Bartsh manages to unload much more of the $1.7-million property. Indications are that shareholders will get back a substantial portion of their investments. The last of the civil suits was wrapped up in July, when Fox and Norwest agreed to a multiparty settlement that is expected to receive the judicial stamp of approval in September. Rubin, Karki, and Miller, the controller, are awaiting criminal trial on charges that could put them in jail for 132, 112, and 75 years, respectively. McGovern, no longer practicing law, accepted the prosecutor's offer to plead guilty to a lesser fraud charge, in exchange for a one-year prison term, a $10,000 fine, and his testimony on the witness stand. He had already begun cooperating with authorities when a judge rejected the plea bargain, ruling that it was not in the public's interest.

Still the Taj Mahal sits, its chandeliers lit, its sign peeling, the hulk of a business that never was -- but, in Bartsh's opinion, might have been.

"The company wasn't all air," he says. "The case would be easier to understand if it was." There were indeed an executive-charter business and a flight school, and plans to build houses in the Caymans. "If they had managed to buy Executive Jet," Bartsh opines, "it would have been an entirely different company."

That may seem farfetched, given the backgrounds of the alleged perpetrators. It turns out that -- so far as anyone can tell -- Rubin never did work for United Air Lines, and Karki isn't a CPA. In fact, Karki hasn't always been Karki, according to Twin Cities' reporters who traced her back to her native Iowa. Under her maiden name, Eva Lou Wagoner, she carries an arrest record that includes forgery, petty larceny, and a variety of lesser charges. Nevertheless, Bartsh -- like others who have been eating and sleeping FTC for the better part of three years -- thinks Rubin and Karki wanted to build a successful company. "They lied in the first offering, and it worked," he shrugs. "From there, it just snowballed."

And yet it took more than a few lies to keep the ball rolling from one offering to the next. It took, in some cases, the active collusion and, in others, the passive cooperation of accountants, underwriters, lawyers, and bankers. Every time one of them signed off on a prospectus, it was that much easier for those who followed to put their hands to the next and collect their fee. As in a game of hot potato, even those who knew (or suspected) the truth about the company found it preferable to keep the game going, rather than stop it and get burned. "The more Rubin and Karki b.s.'ed, the more people wanted to believe them," says Bartsh.

Why? He smiles at the question and exhales a puff of smoke. "Greed."