When the Ponzi scheme collapses, receivers help clean up the mess
Gregory Hays planned to spend a peaceful Easter weekend with his family in 2007. That was before he was appointed as a receiver in a Ponzi scheme case in Charleston, S.C., just before Good Friday. Then the mayhem began.
Hays had to fly to Charleston to make sure none of the items from the Summerville home of the accused schemer, an economist named Al Parish, were removed by Parish or his family and friends. He said he found the house filled with valuable items: pens, Tiffany lamps and, he said, a watch on top of a closet with a price tag of $565,000 on it. But the thing that worried him the most was the state of the house.
“The locks on the house didn’t work, the burglar alarm didn’t work, nothing was insured, and I was responsible for all of it,” he said.
Parish, a former professor of economics at Charleston Southern University, was convicted and sentenced to 24 years in federal prison in June 2008 for defrauding nearly 600 investors of $66 million. The investors believed their money was invested in a commodity futures pool, but investigators showed that Parish actually misappropriated a significant part of the funds for his personal use.
Bernard Madoff has turned the phrase “Ponzi scheme” into one of the most talked-about topics in the country. Madoff’s case stands out because it spanned several years and cheated investors out of as much as $65 billion, but Ponzi schemes are not a new phenomenon. Experts like Hays are hired to untangle the mess they create. When the SEC or another agency persuade a court that a fraud occurred and defrauded investors need protection, the court appoints a receiver.
The receiver looks for every asset of the schemer that can be found and tries to collect as much money as possible to later distribute to investors, said Peter Henning, a professor at Wayne State University Law School. The receiver has to make sure the assets are frozen and locked down. There are no specific qualifications for the job, but financial expertise, experience and trustworthiness are important traits, said Henning.
Hays, 52, who has an MBA in finance from Georgia State University, has worked on about 15 Ponzi cases so far, first with his father William, and since 2001, in his own firm in Atlanta. The first thing he had to do in Parish’s case was to hire a security guard, call the locksmith to fix the locks and repair the burglar alarm.
“You gotta be quick,” said Hays. “If you don’t move quick, by the time you come back it will be gone.”
The next step involved collecting items from the house and other locations around Charleston. In addition to watches and lamps, Hays said he found expensive pieces of art, collectible cartoon pictures, rare coins, and a pen and watch collection, each worth more than $2 million. He hired a pen expert, art appraiser, and experts from Christie’s auction house to help. Afterward, he held a two-day summer auction in Charleston in which a large part of the collected items were sold.
By January 2009, Hays said he had managed to recover more than $9 million, which he plans to distribute to cheated investors.
Melanie Dease, 57, a middle-school teacher from Caspar, Calif., said she invested $40,000 in Pinnacle Development Partners, which promised 25 percent return in 60 days on real estate investments. Gene A. O’Neal, founder of the company, was sentenced to 12 years in prison by the U.S. District Court for the Northern District of Georgia in September of 2007. Dease said she has gotten back $14,800 so far from Hays’ company’s efforts and hopes the receivers will be able to recoup another part of what she says were her life savings.
The receiver’s efforts “are like the light at the end of the tunnel,” she said.
The SEC does not keep statistics on the number of Ponzi schemes in the U.S., according to spokesman John Heine. But after giving testimony before the Congress on January 27, Linda Chatman Thomsen, the former director of the SEC’s division of enforcement, estimated there have been 70 Ponzi scheme cases in recent years.
Each scheme is different. Michael Goldberg, 45, an attorney in Fort Lauderdale, Fla., who specializes in bankruptcy and creditors’ rights, has worked on about 30 Ponzi schemes since 1990. Goldberg was appointed as a receiver by the district court in the case of Worldwide Entertainment Inc. His job is to liquidate the diverse entertainment assets of the concert promoter, Jack Utsick, who is accused of defrauding investors of more than $300 million.
The SEC wants to take a deposition from Utsick, who currently lives in Brazil, on the assets he took personally. According to his lawyer Richard Kraut, Utsick claims that the money represented legitimate business expenses or compensation for running the company.
Since he has been appointed as the receiver, Goldberg has taken actions that don’t normally fall under the receiver’s normal job description. First, he organized concerts by artists with whom the company had contracts, like Coldplay and Robbie Williams. Goldberg says the company owed these and other artists about $3 million, and he estimates that he has generated around $5.5 million from the concerts.
He is also suing the heiress and sometime actress Paris Hilton. Utsick was involved with the production of the movie “National Lampoon’s Pledge This!” When Goldberg was appointed as the receiver, he said he authorized funds for the movie to be completed, and it was released in 2006. Goldberg now claims that Hilton did not properly promote the movie, and is suing her for breach of contract, seeking about $7 million from Hilton and her management company. The trial in that case is set to take place in May. Hilton’s representatives did not return calls for comment.
Though Goldberg says he enjoys the travel and responsibilities of the job, he admits there are some disadvantages, like dealing with enraged investors who sometimes take out their frustration on the receiver.
“You just have to understand” that anger, he said. “That’s human nature. Eventually they understand you are trying to help them.”