The Kenneth Casey Ponzi Scheme

ponzi-scheme

Won’t Get Fooled Again (and Again)?

It always saddens me when trusting investors get scammed. No matter how many Ponzi schemes and investment frauds occur, people still get taken advantage of, most of the time unnecessarily.

I find that most people are basically honest and work hard to save and invest to create a secure financial future. To have that taken away by someone else’s fraudulent actions is a tragedy in my book.

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This Post is a Cautionary Tale

Recently (this past May) the owner of a long time, highly regarded investment fund called “Professional Financial Investors, Inc.” (PFI) died.

Ken Casey was on many boards, had a reputation for being philanthropic and was well known around Marin county. The newspaper was filled with stories about how much he would be missed by charities and even the mayor of his town was quoted.

Shortly after his death, his wife hired an accounting firm to assess the company’s current situation and they quickly discovered irregularities and contacted the SEC. The investigation alleges that investor money was being used to support the lifestyles of Mr. Casey and the CEO of the company, Lewis Wallach. While the company has assets, it appears that for a number of years, money raised was allegedly being used to pay investors, not to purchase property.

My Connection to Casey

A couple of years ago, a tax adviser that I work with referred a client of hers to me. After going through our planning process, we started to look at investment strategies. A few weeks later, the tax adviser sent me an email saying that the client had decided to invest with PFI as they were offering double digit returns. She asked me what I thought and indicated that she was considering an investment as well. I told her that Mr. Casey had been a CPA and I recalled that he was convicted back in the 1990’s if it was the same Ken Casey. She said she didn’t think so as he had this great reputation.

I gave her a list of questions to ask before investing. A couple of weeks later, she forwarded me his response. That he was not going to answer these questions and she didn’t have to invest as he had many people waiting to invest with him. I told her that was a red flag and to proceed with extreme caution. The tax adviser didn’t invest, but her client did and is now in a very bad spot.

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This Wasn’t The First Time

What is so amazing to me, is that the first time I encountered this guy was back in the mid 1990’s. I was doing a financial plan for someone I knew through mutual friends. He was a doctor and when we went to look at his investment portfolio, he reached in a drawer and pulled out a stack of statements. He said “my CPA has me invest in one of these every year. When he does my taxes, he tells me how much I should invest, and I write a check”.

When I looked at the statements they were for limited partnerships in buildings around the county and the statements showed double digit returns. When I looked closer, most of the reported “gains” were tax savings and write offs. I told him that he was unable to use these write offs against his income and he got very defensive.

About 6 months later, I was watching the evening news and there was Ken Casey and another man being led from their office in handcuffs. He was tried and found guilty of a number of felony counts and spent some time in jail. He also had his CPA designation revoked. The client was found to owe hundreds of thousands in taxes, penalties and interest.

Since this surfaced in our local papers, I did a little digging and it was, in fact, the same person! Somehow, everyone ignored his conviction, and he was able to establish himself credibly into the community. When you get into the details, it is reads like he was Bernie Madoff lite.

What Can You Do to Make Sure This Doesn’t Happen To You?

Well a good place to start is with what I call the “Smell Test”. If something seems too good to be true, it usually is. If everyone else is paying 5% and you are offered 11%, your antennae should start to buzz and it is time to ask many questions.

Here are the questions I suggested to the tax adviser:

  1. Is the investment registered with the SEC? There are many great opportunities that are private placements, but SEC registration gives you a level of protection as they had to review the details prior to approval. There are good nonregistered investments, but you have to work harder to vet them as you don’t have that SEC standard and review. They require a lot of disclosures which you often don’t get without the SEC.
  2. Are there outside auditors? One of the serious red flags for me was that PFI did their own audits!
  3. Who do you write the check to? Bernie Madoff’s investors wrote checks to him. I tell my clients if I ever ask you to put my name on a check, run, don’t walk, out of the office. I imagine the PFI investors wrote checks to that name, but it should be a registered entity.
  4. Who owns the investment? PFI invested client money in real estate. It is pretty easy to look up who holds title on a property. If it is a startup, who are the principals and what is their background? Do they have the expertise to be successful in this endeavor?
  5. Do some research. After all, it is your money. Nobody will care about it as much as you. Take time to understand what it is you are about to invest in. Many people spend more time planning a vacation that understanding their investments.
  6. Ask, “how and when do I get my money back?” There is a famous quote that has been falsely credited to Will Rogers, “The most important thing in any investment is the return OF my money, not the return ON my money”.
  7. Listen to your gut. I have said many times that your gut is one of the best advisers you have, if you listen. Often, we want something to really be good, so we override the gut and talk ourselves into it.

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Don’t Get Scammed

You’ve worked hard for your money and made sacrifices in order to save and build financial security.

Which is why I would like to leave you with this thought: “Price is what you pay at the beginning of a decision or transaction, Cost is the long-term consequence of your decisions”.