Stenger Firm Cleans Up After Stings

May 3, 2004
Print
Text Size:
A A
GRAND RAPIDS — Phil Stenger was standing with associate Steven Buquicchio before their vast display of the Cash 4 Titles’ Ponzi scheme when asked if he ever felt a premonition when reading a junk e-mail or watching a cheesy get-rich-quick infomercial.

“All the time,” said the managing partner of Stenger & Stenger without any hesitation. “All the time.”

The rumor is that a junk e-mail to a Securities and Exchange Commission (SEC) investigator began the downfall of Cash 4 Titles. Stenger knew that it was only a matter of time until his firm was called to pick apart another fraud. Stenger & Stenger fills a unique niche as one the nation’s few SEC receivers, and the first Cayman Island liquidator.

When the SEC launches a fraud lawsuit, one of its first steps is to ask the court to freeze the company’s assets.

“When they slap the freeze orders on, it essentially shuts down the company,” Stenger explained.

“In a lot of fraud schemes, there is no company,” he said. “It is 100 percent a front. But in some there actually is some underlying business or company. In an instance like that, it is sometimes necessary to appoint a receiver to protect the value of the company to the extent there is value in the company.”

The SEC has been in the spotlight with its Enron, MCI-WorldCom and Martha Stewart cases.

“We all hear about the high-profile cases,” Stenger explained. “But in reality the majority of cases they investigate are much less high profile.

“Those are the ones that oftentimes we see involving outright fraud schemes, Ponzi schemes.”

So called for Charles Ponzi’s ironically named Securities Exchange Co. in 1920, a Ponzi scheme offers too-good-to-be-true returns on an initial investment, say 50 percent in the first year.

A Ponzi con artist will take an initial investment and put a small portion toward a company — or pocket the whole amount. He will then seek out a second investor, and will use a portion of that capital to pay off investor No. 1. Then money from a third investor will pay off investor No. 1 and No. 2, and then will come a fourth, fifth and so on.

“You have to raise more and more money every year just to pay back investors so they don’t squeal,” Stenger said. “Eventually these Ponzi schemes always implode. Sometimes it’ll take years.”

In 1994, Lewis Mosberg, one of the nation’s foremost attorneys specializing in oil and gas securities and later a principal at Stenger & Stenger, became involved in a Ponzi scheme in Detroit.

“They had this company that was one of these that actually did have a kernel of a business,” Stenger recalled. “They had oil and gas wells in Texas, Louisiana and Ohio. Somebody had to run those.”

Mosberg brought in Stenger to act as receiver. Stenger operated the oil and gas company for a short time, eventually selling its assets, then pursued third-party litigation to collect money from connected companies and individuals that may not have acted criminally, but still could be held accountable to the victims for the scheme’s losses.

Then his firm began screening claimants and distributing the liquidated funds to over 2,200 investors.

“It is fairly common for these receiverships to break down into three groups,” he explained. One, he said, is “the business you run, then sell for as good of money as you can. Two is to figure out where the money went, involving all kinds of forensic accounting exercises, and then try to get the money back. Three, once you get the money back, figure out who should get it, then distribute it to those people.”

In 1999, the SEC came back to Stenger & Stenger with one of the largest Ponzi schemes in history: the $300 million Cash 4 Titles scam.

Michael Gause’s C4T Management Inc., headquartered in Atlanta, Ga., offered an emergency loan business wherein a customer would hand over the title of his car for a loan. Considered a pawn transaction, the loans were not subject to usury agreements, allowing the company to charge interest of 25 percent and upward on the loan.

Although a tight market — the clientele were people who owned cars outright,t willing to pay 25 percent interest — the company had 36 stores in eight states. C4T also operated GMD Aviation, an airport with a small jet fleet — a Challenger and a Lear.

Stenger has Gause’s empire on display in his office. With Gause at the top, and his “marketing directors” below him, the pyramid scheme stretches across several poster boards marked with two types of companies. The companies starting with an “I” denoted incoming investment, while the “O” companies, like Opal and OTA, paid out dividends.

When C4T collapsed, Stenger had a monumental task. First, he turned around a company that had operated at a $1.5 million loss over the last nine months — in the three months he operated it, the company lost only $14,000.

“Only a fraction of the money went to the stores, and they weren’t operating properly at all,” he explained. “They were just spending so much money on advertising. The idea being that when you saw it on TV, you’d think, ‘Oh, here’s Cash 4 Titles. It must be real if it’s on TV.’”

Stenger originally left the management in place at the stores and the airport, but quickly had to replace the store manageers when he discovered that the SEC investigation didn’t stop middle management’s embezzling. He fired the managers and moved all company operations to his office in Grand Rapids.

While selling the company and the airport, Stenger and his staff began tracking down Gause and C4T’s assets. He found and sold multi-million dollar homes in Florida, Georgia and the Cayman Islands. Most of the scheme’s cash was carefully hidden.

A well-known John Grisham book and Tom Cruise movie, “The Firm,” details a Memphis law firm that hides the mob’s money in Cayman Island banks.

“The flavor of the Cayman Islands in the book is more or less true,” Stenger explained of his investigation’s next stop. “People go there for their banking secrecy. Not just the Cayman Islands either. The Bahamas, Bermuda — all those islands are a constant challenge for regulators like the SEC when investigating fraud schemes.”

These countries all share a rule that they will not enforce the penal law of another country, and as such, don’t recognize an SEC receivership. But Stenger found a way take over the Cayman companies and seize money in the Cayman accounts.

Rather than act as an SEC representative, Stenger persuaded Gause — serving a 10-year prison sentence — and his underlings, also in prison, to sign over the companies and accounts to him personally.

Stenger went back to the Caymans, not as an SEC receiver, but as attorney Phil Stenger, and despite some legal challenges, managed to liquidate 57 Cayman companies in connection with the Ponzi scheme. He later attacked C4T companies in Bermuda, the Bahamas and other Caribbean islands.

After that, he began to seek out parties that profited from the Ponzi scheme, such as Florida Hospital and Bank of Bermuda. He received a $67.5 million judgment against a bank, and is waiting on another for $5.6 million. The case is still active, and still unraveling to this day.

Next came distributing the money to just under 2,400 investors.

“We do all the claims processing on site, all the distribution on site,” Buquicchio explained. “We take them from soup to nuts. We’ve developed efficiencies, learn as you go, get better.”

That experience, along with advances in information technology, has allowed the 10-attorney firm to develop an untraditional creditors’ rights practice. With clients generally from the medical industry, they utilize the same claimant system to collect unpaid debts.

The streamlined system allows them to officially handle smaller cases, while the addition of onsite collection agents and skip tracers — investigators trained to track down money and assets — allow the firm to act as a full-service collection agency that, unlike traditional agencies, can sue debtors.

“There are a lot of synergies between the different areas of our practice,” Stenger said. “The expertise we’ve gained in information management has a lot of crossover benefits. In the receivership cases we’re dealing with thousands of investors and hundreds of claims, while we get three to four hundred cases from the hospital in a month.”

The SEC has called on Stenger a number of times in recent years. The collapse of the $2 billion Beacon Hill hedge fund sent him back to the Caymans last year, while scams at Enterprise Solutions Inc., and Basic Affiliated Resources Inc., have drawn Stenger & Stenger receivership.

“Some (of the victims) are sophisticated investors,” Buquicchio said. “But most are salt-of-the-earth type people. They trusted people and invested their money and got burned. We lend a sympathetic ear, and it’s rewarding to know that you’re helping them.”

“When its all said and done, they get back about 50 percent of their investment,” Stenger said. “It’s still a major haircut. But that’s a lot better than where they were before.”

As a result of the new practice of Cayman Island liquidation, “most crooks have moved on to another jurisdiction.”

The other Stenger in Stenger & Stenger is Phil’s wife. An attorney herself, the intention in naming the firm was that after their second child, she would join the practice. They are now expecting their fifth child, however, and only one Stenger is currently practicing law.

Recent Articles by Daniel Schoonmaker

Editor's Picks

Comments powered by Disqus