And the Cheat Goes On

Little has changed since Charles Ponzi dreamed up a postage stamp speculation scheme that made the businessman fairly rich and left thousands of New Englanders fairly angry. Lured by the promise of 40% returns when banks were offering a mere 5%, investors knocked greedily on Ponzi’s door -- dumping $1 million into his lap during a single three-hour session in 1921.

Robbing the last investor to pay the first investor, which is how a Ponzi scheme works, will never go out of fashion -- particularly in Southern California, where such schemes unfortunately are as common as Santa Ana winds. Perhaps it’s the proximity to the Hollywood dream machine, or a “why not me” mentality that festers after the sizzling real estate market turns a neighbor with a run-down, two-bedroom-one-bath bungalow into an overnight millionaire.

Why not, indeed. Consider the still-unraveling case of Orange County money manager James P. Lewis Jr., arrested last week for allegedly operating what federal investigators described as one of the nation’s longest-running Ponzi schemes. Lewis attracted 5,200 investors since 1983 with the promise of 40% returns on deals ranging from leasing medical equipment to buying and selling distressed properties.

Investigators say the $814-million scheme finally collapsed under its own weight as Lewis scrambled to find newcomers to pay off growing obligations to earlier investors. Lewis, who spent millions on houses, cars, jewelry and custom-tailored suits, was arrested at a low-priced hotel in Texas where he’d used a senior discount card to knock a further $6 off the room rate.

Samuel Taylor Coleridge was referring to poetic faith when he wrote about the “willing suspension of disbelief for the moment.” But the phrase as aptly describes the hothouse environment necessary for Ponzi operators to dupe gullible investors with their promises to turn the lead of worthless trust deeds, nonexistent oil wells and distressed properties into gold.

The best operators carefully nurture that trust by creating group loyalty. Lewis, for example, did business only with newcomers steered to him by satisfied customers. Earthlink co-founder Reed Slatkin, sentenced in September to 14 years in prison for a $240-million Ponzi scheme, used well-heeled investors to proselytize among their relatives and his fellow Scientologists. Ponzi operators are equal-opportunity takers. During the early 1990s, San Diego-based Pioneer Mortgage, a $230-million scheme, spread its good word through Jewish congregations. In November, authorities arrested an Inland Empire family on charges that it swindled $160 million from evangelical Christians.

When the pyramids eventually collapse, investors caught at the bottom lose everything. A San Diego businessman who poured his mother’s retirement funds into Pioneer Mortgage’s bottomless pit summed it up this way: “The bulls charge, the bears retreat, and the pigs get gored.”