Wednesday, January 21, 2009

Losing Your Money to a Guy Named Ponzi

Tom Gilliam who lives here in Charlottesville is talking today about how he almost nearly lost everything in a Ponzi Scheme, “The Great Wine Caper.” Truthfully, I was skeptical about attending the event -- it's hosted by the Darden Christian Fellowship and part of me worries that it will turn into a preachy story of finding God in adverse circumstances. But, in the end, my curiousity got the better of me (postscript: and I am glad it did).

Gilliam gives the appearance of being a serious solid guy, not the type who would get caught up in a giant scam, and I wonder how he feels admitting openly that he was conned--though it happens all the time, most people prefer to keep that private. Let's find out.

He's going to take us back in time to 1971. Apparently he already talked to Darden about this very issue in 1984. I guess he's had a while to get over it.

Here's how it started for Gilliam -- on a tip from a friend/coworker at an Investment Advisor Firm Gilliam worked with, he invested $5K into an 'industrial wine' business. Back came a check for $7200, so he went in for another $10K. Everything was going well.

He met with the principal of the industrial wine business, Bob Johnson. His story was that his brother had been involved in international development and had gained some knowledge about working with wine crops. He kept investing more, getting paid off, getting paid off more. A bank agreed to lend 80% on the deal, then another bank offered to lend 100%. Gilliam got even more involved, he opened an SEC-only brokered dealership and begins raising money that he sends to Johnson. Johnson always returns it with a sweetner on top.

One day he is paid a visit from the SEC. Soon after, he gets a call from one of the banks that has traded $28MM of personal checks with Johnson. Earlier in the morning, Johnson put a $600,000 check into bank which bounced, and they can't find Johnson. In total, six people had $14M invested with Bob, and 5 Virginia bank presidents got caught up in the deal. Gilliam himself had invested the money of 14 different people into Johnson's wine business including money from his own family members. With the 30% returns the Ponzi scheme generated, Johnson had to have been generating $3-4 MM new money each month.

Gilliam started getting sued by everyone. In June 1976, he was tried in a civil suit. Thirty people got on the witness stand one by one to testify that he stole their money. Then Johnson got on the stand and said, "When you're doing a Ponzi scheme, you don't tell your wife, you don't tell your family, and least of all you don't tell the people who are raising money for you." Gilliam was acquitted.

Gilliam lost everything he had except his house through the ordeal. He owed $300K to banks (as culpable as him) who gratefully took 10 cents on the dollar. He moved to Cville. All three of his kids went through UVA and he comes out every 20-25 years to talk about it. Johnson got six years, served four. Then, he started another fraud with guys from Chase-Manhattan bank while he was at Allentown prison. Last Gilliam heard, Johnson was making his living as an accountant.

But how did it start for Johnson? It started simply. He was an accountant with C&P telephone company and had to pay a $600K debt on a margin account. He asked a friend to loan him $700K, paid off his debt, and began to look for someone to lend him the 700K to pay his friend.

Ponzi schemes are flagrantly fraudulent and deceptively simple. I asked Gilliam if there was any better way to spot a Ponzi scheme. The big one is consistent returns--returns too good to be true. Maddoff's returns were always consistent. He was also trading more than was available to trade in the market.

Gilliam did not spend a lot of time talking about his faith. He remembers that, at the time, he told the lord he was going to give him his fair share, and to some extent, inferred that some may (incorrectly) use Christ as an insurance policy. In the end, he says, whether or not you have accepted Jesus Christ as your savior, you have to pay the piper.

What I took away from the talk is one simple non-denominational truth -- do look gift horse in mouth. Both Maddoff and Johnson had this in common -- they were both great at getting a few people to trust them and then by word of mouth extending that trust to countless others.

1 comment:

Mandy said...

that's incredibly cool. thanks for sharing! i am also happy that you attended a dcf event. i think that the opportunity to interact with the diversity at our school is always there. we just need to grab it. so good on ya!
now, come to the g.l.a.d. movie screening ;-)