Oh My Fraud

[00:00:00] Thanks to our sponsor, Avalara

Greg: A big thank you to our sponsor, Avalara. Avalara’s award-winning tax automation solutions help accounting practitioners and businesses of all sizes. Simplify sales tax compliance with real-time rates, automated return filing and more. Listen for a special offer later in the show.

Caleb: This is Oh My Fraud, a true crime podcast that features cooked books instead of cannibalism. I'm Caleb Newquist.

Greg: And I'm Greg Kyte.

[00:00:36] What do average people think of when people mention fraud?

Caleb: Greg, when average people think about fraud, what do you think they think about? I'm asking you to speculate a little bit, but just your regular schmo, when they think of fraud, what comes to mind, you think?

Greg: Just the schmo on the street, if you stopped somebody and said, “Hey, list the first fraud scheme that comes to mind,” that kind of thing?

Caleb: That's exactly right.

Greg: Well, they'd have to come up with what we're going to be talking about, which is Ponzi schemes.

Caleb: Precisely.

Greg: But absolutely. I think that's absolutely what they would say. Because most people, if you came up and said, “What's a lapping scheme?” they'd be like, “What are you talking about? You’re weird.”

Caleb: Or if they said, “What's check-” if I said to someone, “What's check kiting?” And they might say, “Well, that's Greg Kyte's favorite type of fraud, but I don't know what it is. Maybe it's a type of fraud named for Greg Kyte, I don't know.” So, why do you think it's Ponzi schemes? I think I know what you're going to say, but why do you think Ponzi schemes is so vivid in the cultural imagination?

[00:01:37] Ponzi Schemes

Caleb: Well, unquestionably, because of Bernie Madoff. And I have to admit, as someone who studied accounting, as someone who studied auditing, who even studied fraud a little bit, before Bernie Madoff though, I don't think I really understood what a Ponzi scheme was. That was the first time where I really sat up and took notice and be like, “Wait, what did he do? And what?” Because Ponzi schemes, it's an old type of fraud, right?

Greg: Oh, yeah.

Caleb: It goes back. People have been doing Ponzi schemes for a long time.

Greg: For a very long time. Again, I think I maybe knew what a Ponzi scheme was prior to Bernie Madoff breaking, but it was totally a textbook- I think they had a lunch and learn at my accounting firm, and talked about it, and I was like, “Oh, yeah, that makes sense.” But obviously, when Madoff came around, then it's like, “Oh, yeah. Now, I get it.”

Caleb: And now it just, it seems to looms- it looms large, and in the imagination, obviously.

Greg: And again, most people, I want to say- and again, it's probably just our little world we live in- but I'm confident that most people know what Ponzi schemes is because of Bernie Madoff.

Caleb: That little gassy from the Coke?

Greg: Little gassy got a little diet Coke. Got a little diet Coke coming up.

Caleb: I hate it when that happens.

Greg: I know. It's my choice. I choose to drink soda while recording my voice. I'm a pro. Shut up, what else we got?

Caleb: Well, I think what's so fascinating is, I suppose people are expecting us to talk about the Madoff episode. But no, we're not going into the Madoff saga. Mostly because it's been beaten to death, but also-

Greg: What do you think this is? Some basic podcast? No. Boom.

Caleb: Absolutely not. Absolutely not. Like Greg said, we're pros. But also, because there's been so many Ponzi schemes, there's plenty of fascinating cases to go around. And I think Greg, you get credit for this. I think Greg, you landed on one.

Greg: I love this case. The more that I dug into this case, the more I loved it. Because not only is it a Ponzi scheme, but it's an organic- it didn't start out as a Ponzi scheme, but it organically morphed into a Ponzi scheme. And even the original business that morphed into the Ponzi scheme is so cringy, it makes for a wonderful story.

Caleb: So, no. No Madoff for this episode; we're going to talk about one of the biggest Ponzi schemes in the 21st century. And it is the case of Mutual Benefits Corporation. So, when we'll come back, we'll get into it, and it is the mother of all Florida man frauds. So, stick around. It's going to be good.

So, before we went to break, we just said how everyone knows what Ponzi schemes are, and that it's what everyone thinks of when they think about fraud. But just to be sure all our bases are covered, we're going to go over what Ponzi schemes are, how they work.

Greg: Well, right before we went to break, we said that we were going to come back and talk about Mutual Benefits Corporation. And we're going to get there. We weren't fraudulent in that claim. We're getting there- just hold on and stick around because we're going to get to it.

[00:05:28] The basics of a Ponzi scheme

Greg: My understanding of the Madoff case that we're not talking about on this podcast is that it's a great example of how Ponzi schemes work, where you say, “Hey, you invest in this, you're going to get some amazing returns on it.” And you take the person's money, and you never actually invest it, but then, when the next guy invests, you take his money and pay off the first guy to go, “Hey, here's those returns I was telling you about.” And then the second guy, you go, “You're going to get some pretty great returns, so hang on.” And then you get another investor, and that guy's money, you pay the second guy.

So, every investor, instead of having their money invested in it, and it being an investment that earns its keep through growth and through well-managed companies and businesses and things like that, instead, you're just a funnel from one investor to the next investor.

Caleb: The critical piece of any Ponzi scheme is the ability to recruit new investors. Once money stops coming in, the mastermind can no longer pay the returns that they've been promised to the earlier investors. And then that's where things can start to unravel.

Greg: And a red flag for a Ponzi scheme is always, that the investment is always claiming these amazing returns for your money. Like they're saying, “You're going to get a 30 percent return, you're going to get a 40 percent return, you're going to get a 60 percent return on your money.” That should be what people go, “Yeah, if it sounds too good to be true, it is.” And actually, one of the genius reasons why the Madoff Ponzi scheme got so big is that he was promising people 14 percent, which is good, but it's not bonkers good.

So, A, that helped because it wasn't a red flag of people going, “45 percent return is unrealistic. I don't think you're for real.” So, he was underneath- he passed that red flag test, but the other thing, Caleb, that you don't think about is if you're only promising people 14 percent return, it takes a lot fewer new investors to pay off on a 14 percent return than it does the pay off on a 45 percent return.

So, he was stretching his Ponzi scheme dollars is what I'm saying. He was the frugal multi-billion-dollar Ponzi mastermind.

Caleb: And a lot of people, and because of that, that's what a lot of people believe is why he was able to carry on his particular Ponzi scheme for so long.

[00:08:00] SEC's red flags for a Ponzi scheme

Caleb: So, you mentioned one of the most important features of a- or a red flag of a Ponzi scheme is the promise of high returns, or a lot of times, people will say guaranteed returns. And so, the SEC, the Securities and Exchange Commission has a website, investor.gov, and it has all kinds of information for investors. But one of the pages they have is a laundry list of red flags for Ponzi schemes, and chief among them is like we said, high returns with little or no risk, overly consistent returns. So again, when you beat the market 40 years in a row, that should give you pause.

Greg: Or if you say you're going to get 20 percent return every year and every year, you hit exactly 20 percent, it's like, “Hmm, maybe-”

Caleb: It’s a little suspicious. And then also unregistered investments. So, a lot of times, Ponzi schemes involve instruments that are not registered with either federal or state regulators. And the registration is important because it provides investors access to information. So, a lot of times, Ponzi schemes will just- the investment will be something that isn’t available just to anybody. And then unlicensed sellers-

Greg: Will you clarify this to me? It's illegal to sell unregistered. That's just illegal, in and of itself.

Caleb: Yeah, unregistered securities. Well, it's happening a lot.

Greg: That’s just the basics.

Caleb: It's happening a lot right now. And again, not an expert, but that's what's happening a lot with cryptocurrencies, and tokens, and things like that. People are basically selling those. The Securities and Exchange Commission is saying, “That's a security, and you're not registered, so we're shutting you down.”

So, yeah, that's a good example of registering a security. Unlicensed sellers, I think I mentioned that. Let's see, oh, secretive, complex strategies. So, this is a favorite. So, if you're a rich person and you go in- or even just an average person- and you're meeting someone that is an investment guru, and you ask them to explain their investment strategy, and they either A, don't, or B, say, it's too complicated, maybe don't invest with that person.

Greg: Which, again, I love all these red flags that you're saying, because it makes me so horny for this case, because so many of them don't apply to the Mutual Benefits Corporation. So, I love it. Keep it going.

Caleb: Exciting.

Greg: Hit me with some more.

Caleb: And so, the last two, issues with paperwork. So, frequent errors on your account statements, which yeah, that should never happen.

Greg: Exactly. Any financial statement that you get of any kind that has errors in it, you should be like, “Maybe these guys aren't top notch.”

Caleb: Maybe not so tight on the bookkeeping. And then finally, difficulty receiving payments. So, this is what happened with Madoff, which is things start to go bad when you, as an investor, you ring up your guy and you say, “Hey, things are going bad right now. So, I'm going to call in my investment,” and the guy’s like- in a normal circumstance, you can redeem at any time, unless there's specific rules like hedge funds and stuff, we'll say, “Now, you're locked up for 10 years. You can't get your money.” And you know that going in.

If you're invested with somebody, and there's nothing like that, and you call them up and you're getting Nancy, and you want your money, and you call them up and like, “Ah, it might be a week or two,” that is not good. And in the case of Madoff, what happened was, it was late 2008, and things were going real bad at that time. And more redemptions were coming in than he could possibly pay. And so, it fell apart. And so, there she go. There's your Ponzi scheme red flags, Greg Kyte.

Greg: And that's the thing. And it's funny, ‘cause the last one, having to wait to- if you go and go, “Hey, I need my money back, my invested money back,” a red flag doesn't seem the right description for that. ‘Cause that's really an indication that they're at the tail end. You’re past red flag; red flags are supposed to say, “Hey, bad idea, bad idea.” And at that point, it's like, “Oh, you're screwed.” That’s more of a ‘you’re screwed.’

Caleb: Yeah, it's actually too late.

Greg: It’s too late. You’re screwed.

Caleb: Your money's gone.

Greg: Your money's gone. Sorry. Sorry about that, man.

[00:12:39] Ponzi schemes and pyramid schemes

Greg: And we talked about this, and we can't really- we know that this is outside the scope of this podcast, but pyramid schemes and Ponzi schemes are very, very closely related. And the thing that they have in common is, like you said, they're dependent on new money to keep them going. But it's not just new money, it's exponential growth of new money to keep the old money happy. So, it's not just that you need one new investor to take care of the one old investor.

You need to keep getting more and more and more investors to keep everyone happy. And eventually, the world is just going to run out of people that you could possibly even get in your scheme to keep it alive. So, there's always going to be some invisible line that you cross it, and then at that point, it's unsustainable and it'll fall apart.

And that's exactly what happens with pyramid schemes and people don't understand, is that the math is a little mind boggling how quickly that can add up. That’s another thing that makes the Madoff case so impressive, is that it kept going for so long, because you need so many investors to keep it going.

Caleb: But we're not talking about the Madoff case.

Greg: No, this isn't about the Madoff case.

Caleb: This isn't about the Madoff case.

Greg: ‘Cause we're not basic.

Caleb: We're not basic bitches. So, as we promised, we’re going to talk about the Mutual Benefits Corporation. We will, this time, promise, cross the heart.

Greg: Totally.

Caleb: After the break, we'll get into the details of the Mutual Benefits Corporation Ponzi scheme. So, stick around.

[00:14:14] Thank you to our sponsor, Avalara
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Greg: So, we're back, and we're finally ready to talk about the Mutual Benefits Corporation.

[00:15:32] The case of the Mutual Benefits Corporation

Caleb: Oh, are we going to talk about Mutual Benefits Corporation?

Greg: We’re going to talk- we are. I know, it’s finally come.

Caleb: I'm excited. I'm excited.

Greg: It's here.

[00:15:40] Who is Joel Steinger?

Greg: It's like Christmas. So, this is a story primarily about a dude named Joel Steinger. And this dude, even before he gets to- so, yeah, I guess we're not quite at Mutual Benefits cause we're gonna talk about all the crap he did before he did before he started Mutual Benefits. So, in 1976, that was his first foray into bad behavior.

And he opened a boiler room where he was selling fraudulent commodities options. He was shut down and he was given his first felony conviction in 1976 for that. Then in the 1980s, he started selling securities. He started selling shares in a bogus oil well. And that time, the authorities found him, they shut him down, and he received a lifetime ban from selling securities.

So, Joel Steinger, now he can't sell securities, because I guess it's two strikes, you're out? ‘Cause the first one was the boiler room, the second one was the bogus oil well. And with the second one, my research, I didn't see that he was given another conviction, just that he was given a lifetime ban for selling securities for the bogus oil well. So, he had done enough bad stuff to where they just said, “Hey, you're done; you can't play this game anymore.”

But being the consummate entrepreneur, Joel Steinger, his third big business venture was selling diet pizza. That was his big money moneymaker. And apparently, this is what they say in the acclaimed documentary series, American Greed, was that Joel Steinger just somehow would buy Sbarro's pizza, and then repackage it with a label that says, ‘diet pizza,’ and then he'd sell normal pizza that says, ‘diet pizza’ to people who are like, “Diet pizza, that's got to-” And the crazy thing- and the thing I think is hilarious about that- is that Sbarro’s pizza is the shittiest pizza on the planet.

Caleb: That's mall food court crap, Greg.

Greg: It’s the worst, but then if you're going, “Oh, this is diet pizza, it's probably not going to taste very good,” and you eat Sbarro's, you're going to go, “Yeah, this tastes just how I’d imagine a diet pizza to taste.” So, that was the third one. He got shut down with that one as well.

[00:18:11] Galaxy Wholesale Corporation

Greg: And then in 1991, he started a company called Galaxy Wholesale Corporation where this was his business model there. Doesn't make a whole lot of sense to me, but this was the business model. He buys groceries, cheap, in Puerto Rico. He brings them to the United States, and he sells groceries for a profit. So, it was a grocery import business from Puerto Rico to the mainland, U.S. for a profit. Apparently, his sales pitch was very good because he had a lot of people invest in his groceries business.

And actually, it apparently, was somewhat successful during the first two of the three years that it was in existence. But then in 19- so, it opened in 1991. And by 1994, apparently, he just, it was one of those things where you hear about it, you see it in movies, where there's this company that it has offices and has employees one day, and then the next day, you show up, and everything's gone, all of the copper’s pulled out of the walls, there's no one in there. The toilet papers have been stolen out of the bathroom, and it's just, there's tumbleweeds blowing through the office.

And that's what happened, just all of a sudden, with the Galaxy Wholesale Corporation. And not only did he disappear, and not only did Galaxy Wholesale Corporation disappear, but $1 million of investor money just, poof, went away.

Caleb: I guess what I find myself wondering is, did Steinger, did he have a reputation by this point? If he had done these scams, how was he able to keep his- how was he so effective at keeping his history hidden from new people? Why were they not able to do some due diligence or something, and find out that this guy is a shady character? But be that as it may, Greg.

[00:20:11] Viatical Settlements

Greg: And that's where we get in the Mutual Benefits Corporation because this was a for-real money-making venture. And it had to do with what's called viatical settlements, which sounds like an erectile dysfunction scheme. But viatical settlements is not a ED treatment. Did you know what- had you ever- I'm sure you hadn't heard of what viatical settlements were before.

Caleb: I had not. I had not heard of viatical settlements. And at first, I just thought, “Well, it sounds made up.”

Greg: So, viatical settlement. Here’s how that [CROSSTALK].

[00:20:51] What is a viatical settlement?

Caleb: So, what's a viatical settlement, Greg?

Greg: I would love to explain it to you and to our listeners- the viatical settlement works this. You've got someone who's terminally ill, but they also have a life insurance policy. And generally speaking, this person, if they're going to be involved in a viatical settlement, they also have to have some sort of need for cash right now, and they've run out of other alternatives to get the cash, but they have a life insurance policy that will pay off after they're dead. They go, “That's too late for me. I need the money now.” So, what happens is, you have someone who comes in, who's going to say, “Hey, I will pay you some cash now, basically, if you make me the beneficiary of your life insurance policy once you pass away.”

So, the amount of cash that's given to the terminally ill person with the life insurance policy, it's going to be more than the cash surrender value of the policy, because most life insurance companies are like, “If you're really desperate for cash, come to us and we'll pay you a fraction of what we would have paid you when you're dead, and we already got all of your premiums over the years. So, we're going to make out like bandits, and if you're in a real tough spot, we'll do that for you.”

And that's always generally, spelled out in the boiler plate, deep into the fine print of the contract of the life insurance policy. So, a viatical settlement is always going to be greater than the cash surrender value, because otherwise, the person would just get the cash surrender value and not want to sell it to anybody else. [CROSSTALK].

Caleb: So, if I can stop you for a second, but if I understand it right, it was still a discount from the total value of the policy, right?

Greg: A massive discount from the total value of the pol-

Caleb: So, then that means, so you're just saying- what I think you're trying to say is the surrender value is not very much money.

Greg: It's teeny. It's teeny, and this is double the teeny value, is what you'd get for this. So, it's like the cash surrender value is insulting, especially if you're terminally ill. And so, after you look at the insultingly low- it's an anchor pricing. So, these guys would anchor price with what the cash surrender value was for your life insurance policy.

And then they'll say, “We'll give you a double that,” which was still chump change. The example that I saw was a $1 million policy that would be bought out for $100,000, but we'll get to that in just a second, ‘cause there's some intricacies in terms of how it's priced.

But what you have to do then is, so, you give the sick person the cash, but then also, they're supposed to continue paying life insurance policy premiums until they pass away. That's how life insurance works. But obviously, after they get the cash, they're like, “I don't need to pay these premiums anymore.”

So, then the burden for paying the premiums is on the person who purchased the viatical settlement from the terminally ill person. So, in terms of- here's an example for you. And here's the other thing, I guess this is what we were getting at before. If you've got a $1 million life insurance policy, and your life expectancy is one year, people are willing to give you more money because you're going to die really soon, than if your life expectancy is 10 years. Does that make sense?

Caleb: It does.

Greg: Because if I have to wait 10 years to get my money back, then I'm going to need to see a whole lot of return, because it's not an annual where I'm looking for 10 years of return for what I put into it. But if I give you my money, and you're going to die next week, then I can give you a lot closer to that settlement value of your life insurance policy, ‘cause I'm going to get it just right around the corner.

Caleb: That all makes sense. And this was critical. This was a critical component-

Greg: Critical.

Caleb: Of MBC, Mutual Benefits Corporation. This was critical to their scam.

Greg: Absolutely.

[00:25:07] Example of how MBC works

Greg: So, here's a quick example of how this viatical stuff works. So, let's say I'm Mutual Benefits Corporation. I go to an AIDS patient, and that's actually very, very poignant to this case because they targeted people who were suffering from AIDS. We're talking early 90s, it's right in the middle of the massive scare for the AIDS epidemic. So, let's say they find someone who was just diagnosed with AIDS, and they have a life insurance policy, but these guys are going through just massively expensive treatments, especially at the time, because they were brand-new cutting-edge treatments back in the early 90s. So, they need money to continue getting the treatment.

They got $1 million life insurance policy. So, MBC, Mutual Benefits pays them $100,000 for their $1 million policy. So now, they have a $1 million payout that happens when this AIDS patient dies. And so, they take that $1 million policy, and they resell it to an investor for $600,000.

So, I just paid $100,000 for the policy, but I resell it to an investor for $600,000. That's the extent of the investor's investment in this viatical settlement, but it's still on MBC to continue paying the premiums on that life insurance policy until the person dies. So, they'll escrow the amount of the premiums for the estimated lifespan of that person who's going to die. They're supposed to escrow it and then they pay that money off during the number of years. So, let's say that person lives for four more years at $20,000 a year premium, that's $80,000. So, MBC is into this $180,000, but they got $600,000 from the investor.

So, their profit is $420,000. The investor was in it $1 million, they paid $600,000. So, their profit is $400,000. And so, you look at that and you go, “Oh, I spent $600,000, I got $400,000 of profit from that,” you go, “That's a 67 percent return on my money.” And I would go, “No, because it took you four years to get that money back.”

So, if you spread that 67 percent return over four years, you're getting about 17 percent, a little less than 17 percent every year on that. Which again, that's a good investment, but the eye-popping number is the 66 percent, which is funny because Mutual Benefits, when they would present these to potential investors, they wouldn't show the annual return.

They would just say, “Hey, you invested $600,000. You got a $400,000 profit. That's a 66, 67 percent return on your money. That sounds great. Doesn't it?” And people go, “Yeah, that sounds amazing. Here's all my money.” It creates a crazy thing where investors then start to have to root for the Grim Reaper to kill people so that they can get- ‘cause the sooner they die, the more money you make.

And that's true for both parties. That's true for MBC, because the earlier that somebody dies, the fewer policy premiums they have to pay. So, that's a benefit for MBC. And then for the investor, the sooner they die, that shortens the number of years. So, if you do get the 67 percent return, you get it in a shorter period of time, which increases your annual rate of return on that investment. And 100 percent legal. This is [CROSSTALK].

Caleb: Viatical settlements are as strange as it sounds. They are legal.

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[00:29:59] Recap on viatical settlements: MBC selling fractional shares of policies

Caleb: I want to ask one more question before we move on. But if I understand it correctly, and keep me honest here, but if I understand the case correctly, Mutual Benefits Corporation wasn't just selling one life insurance policy to one investor. They were breaking it up into essentially, fractional ownership of a single policy. Is that right?

Greg: Yes. They would do that.

Caleb: So, in other words, that allowed them to attract multiple investors for one, quote, unquote, security, even though it's not a security. Is that right?

Greg: Yep, absolutely. And even with that, they would often fractionalize multiple of these settlements. If you're just a single investor, you would say, “I've got $40,000,” and they'd say, “We've got a portfolio of a few different people who are terminally ill. And you're going to get a little bit of each of their- when any of these four people dies, that's a great day for you. That’s-

Caleb: Oh, God. So basically, a basket of terminally ill people.

Greg: A basket of death. So, you just bought a basket of death.

Caleb: Grim. Grim, folks.

Greg: But it wasn't- listen. Here's the crazy thing. ‘Cause they put this awesome spin on it too, because to the investors, they say, “Listen, there's these terminally ill people, and they're fucked so hard by life. And they've got nothing. The only asset they got right now is a life insurance policy that doesn't help them at all,” which was especially true for a lot of the people. In the 1980s, a large percentage of the people who were suffering from AIDS was part of the LGBTQ community at that time.

And the LGBTQ, as a whole, have fewer children than the straight community. And so, because of that, you would have a lot of people who were not just in that position, but go, “I don't really have any- I don't have kids to be my beneficiaries. Maybe I have some nieces, some nephews, brother, something like that, but not any direct progeny to leave this money to.”

So, they would be going- maybe they had it through work or something like this, and they're going, “This is a useless thing that I have that's not going to benefit me in any way.”

[00:32:25] How MBC seemed like "good guys"

Greg: So, you come in and go, “You're going to be helping people who are suffering from AIDS.” And one of their target markets was actually, people who had loved ones who had died from AIDS, and they go, “Hey, that person that you loved, who died from AIDS, they could have totally used an extra $200,000 in their dying days and couldn't get it. If you do this, you're going to get money to people who need it.”

And then also, to the people selling them, again, this was the way for them to look good, is they're going, “We're giving you way more than your cash settlement from your insurance policy. And again, life insurance policy doesn't mature till you’re dead. “So, your life insurance policy helps you zero. We're going to help you more than zero.”

So, it's a good thing, right? So, even though, yes, you're buying a basket of death, it still can be framed in this incredibly altruistic thing, which they did, and Mutual Benefits company to make sure they didn't look like dicks for this horrible business that they were trading in.

They gave tons of money to charities, and especially, to charities like helping AIDS victims, things like that. So, they’re going, “We're helping them this way, and we're helping them that way. And we're donating tons of money that we got through this thing. So, we're the good guys. We're the good guys. Hey, over here, look at us. This is a weird business, but we're the good guys.” That's how they did it.

Caleb: If we keep things moving, my next two questions are, how does this thing go sideways? And how does it- well, and the follow-up to that is, is there something that happens that causes things to go sideways, and how does it become a Ponzi scheme then?

[00:34:16] How does MBC's business go sideways?

Greg: So, the biggest way that- so far, legit business. The main way that this goes sideways is that you- and actually, one of the people who was a spokesperson for Mutual Benefits Corporation was Greg Louganis, the Olympic swimmer, and his policy was- he was the recipient of funds.

He was the viator- which is the name of the person who sells their life insurance policy- because he was diagnosed with AIDS. Greg Louganis, he sold his life insurance policy. Greg Louganis is still alive. He still hasn't died. And that's what we're seeing, is that you started to have people- ‘cause back in the late 80s, early 90s, a diagnosis of AIDS was a death sentence.

It's like, you are going to die, and it's going to be horrible. So, everything sucks for you. But then they started seeing that people who were diagnosed with AIDS still lived a full life, much like Greg Louganis. That ruins the investment of a viatical settlement, when the person that you need to die to get your money back, doesn't fucking die. Why can't you just die? And they don't, and that's what ruins it.

[00:35:37] MBC starts Ponzi scheme

Greg: So, that's when the Ponzi scheme starts, is right there. So, because -surprise, surprise- Mutual Benefits Corporation did not keep the premiums that they needed to continue to pay on these life insurance, but they didn't keep them in escrow. They were living the high life on their super yachts, and with their prostitutes, and with their cigars, and with their liquor. So, they were blowing all their money like that instead of-

Caleb: And if I understand it right, the way they did it is they basically, set up these shell companies, and MBC-

Greg: Oh, yeah.

Caleb: -paid Joel Steinger, his brother, a couple of brothers, and some other dudes, they paid them consulting fees.

Greg: Huge.

Caleb: Millions in consulting fees, rather than, as you pointed out, putting that money into escrow where it needed be. Well, that's what they were telling their investors.

Greg: And again, legally, that's what they needed. That's the way this is the legal thing.

[00:36:47] Joel Steinger - Kingpin behind the scenes

Greg: And you bring up an interesting point, because as we brought up already, Joel Steinger, he was the kingpin behind this, but he had a lifetime ban from selling securities. So, he was not the president-CEO, he was just a consultant to this company. But in reality, he was 100 percent the man running the business. But on paper-

Caleb: He needed a front man. The president of MBC was this guy, Peter Lombardi.

Greg: Gotcha.

Caleb: And I knew that. so, Joel's not- he's not the man. And what's very interesting, so Mutual Benefits started in 1994.

[00:37:30] FBI Investigation

Greg: In 1998, they were starting to get tons of complaints about Mutual Benefits Corporation, because again, people weren't dying fast enough. And so, the complaints led to an investigation by the SEC and the FBI. And here's what the result was of the 1998 investigation, is the Steingers were enjoined from violating federal securities laws, which basically, means that the FBI and the SEC were just like, “Hey, knock it off.”

Caleb: Knock it off.

Greg: And that was the end of the investigation. That was it. And so, they're like, “Yeah, okay, we will,” and then they go back to not knocking it off.

Caleb: Going back to fraud.

Greg: And at this point, the fraud, they redouble their efforts. Things start going into hyperdrive, because again, there's this exponential need for new investors. And to slow down, like you were saying, to slow down the payments out to other people, they needed more money and they needed to pay it out slower. And really, they were killing themselves from both of these.

[00:38:41] How MBC got more money: Faking life expectancy

Greg: The way they got more money is they would fake the life expectancy of the people who were going to die. And typically, again, they would shorten the life expectancy. Because let's say, somebody really had a five-year life expectancy, and they say, “Oh, this guy only has a one-year life expectancy.” Remember, the shorter the life expectancy, the more valuable the policy. ‘Cause you'd have to wait less time to get your return on it. So, again, if they bought a policy for $100,000 and they say, “Oh, this guy's going to die next year,” they could maybe sell that for $800,000, as opposed to $600,000 if he was going to take a few years to die.

So, by shortening the life expectancy, they were able to increase the money they got from new investors. The more money they get from new investors, the easier it is to pay off the angry ones who are going, “Why won't my person die?” and to keep them placated and quiet. But then they put themselves between a rock and a hard place, because then in a year, those guys are saying, “Why isn't my guy dying?” And it's because they're not- because the life expectancy was forged.

[00:39:49] Fraud Doctor / Fake Signatures

Greg: The other crazy thing about that is that when they would get investors to come in, they would say that they had an independent doctor who was making the assessment of the life expectancy of the different life insurance policy- the people who were covered by the policy. And A, that doctor was 100 percent not independent, because they were absolutely in the back pocket of Mutual Benefits Corporation.

But beyond that, there was a lot of times where Joel Steinger was just like, “I don't have time for this bullshit,” and he would just write down the life expectancy that he wanted on the policies, so that he could get the money that he needed. So, completely circumventing- so, it's like he had crooked doctors on the books, but sometimes, he just didn't have the patience for that. And which is-

Caleb: They weren't crooked enough for his liking, basically.

Greg: Or their crookedness wasn't fast enough, or whatever it was. Or everybody just knew it was such bullshit that it's like, “Why are we even playing this game? Just give me the document and I'll write the life expectancy on it.” So, cut out the middleman.

Caleb: So, moving forward just a little bit, as you were talking about, things are starting to grow fast for these guys. And so, I'm just curious. And two of the important things here is that most of these policies that they were selling were still active, and most of them had surpassed- most of the viators had surpassed their life expectancy.

Greg: 90 percent of the viators were- they were beyond their life expectancy.

Caleb: And so, you had mentioned at one- I think you mentioned what triggered the initial investigation was that lots of people were complaining to authorities that this was going on. So then, my question is then, what was ultimately the thing? Because if the authorities are- if they just tell them to knock it off, and they say they don't do it, so then where does it go from there?

Like you say, they doubled down. At its peak, how big did it get? And then eventually, how did things start to unravel?

[00:41:54] Crumbled by sheer weight of operation

Greg: Well, and it crumbled because of the sheer weight of the fraudulent organization, because by the time that- because they were shut down in 2004, and at that point, they had over 29,000 investors at that point, with a total book of business of, I believe it was $1.25 billion of assets that they were managing. And again, 90 percent of these investors were not getting their money anywhere near as close to the amount of time as what they were promised. So, they're starting to go, “Wait a second, that you told me one year, it's been four. So, what's going on with this? I think something's wrong with this.” And it was, because there was the fraud, in terms of lying about the life expectancy, and there was the Ponzi scheme part of this as well.

So, all that stuff, once you get to 30,000 people who are being put off, and who aren't getting the returns that were promised to them, that ends up being a squeaky-enough wheel that ends up being enough straw on a camel's back to where the SEC had to come in and look at them again. And the FBI did, and they were like, “This is all crap. We're shutting it all down. Everybody goes to jail.”

[00:43:20] SEC Complaint

Caleb: So, a really interesting read is the SEC complaint, which you can dig up. It's pretty easy to find, but it's in our show notes. So, if you care to read that, you can click it in there. And from the show notes, I'll just read; it's very brief. As of September 30th, 2003, approximately 81 percent of the policies remained active and in force. And of the active policies, 90 percent have surpassed the life expectancy assigned by MBC. So, big problem. Really big problem.

Greg: Big problem.

Caleb: And so, maybe we should just run down. So, there's fraud all over the place, but I don’t think we've explicitly said what the wrongdoing is, so maybe we should do that.

Greg: Yeah.

Caleb: Cool.

Greg: And you've got that in the SEC report.

Caleb: I do. I've got it straight from- so, there was seven of them in the complaint and-

Greg: See, I read the fun stuff and watched the movie. You actually read the legal briefings.

Caleb: Yeah, I did.

Greg: I like the separation of duties we have here. This is what’s good for me.

Caleb: So, if you go to the complaint, and then you go to the- basically, where they outline each of the frauds, how they broke the law, there was seven of them. Number one, false and misleading life expectancy letters, and affidavits.

Greg: Clearly.

Caleb: Two, failure to disclose that the vast majority of MBC's policies are beyond their assigned life expectancy. Three, failure to disclose premium escrow deficiencies; we talked about that. Four, misrepresentations of guaranteed fixed rate of return, classic Ponzi scheme. Number five, failure to disclose the Steinger's involvement as principals in MBC, and the payments made to them.

Greg: ‘Cause they were lifetime banned.

Caleb: They had lifetime bans, and they were not telling the investors that they were being paid consulting fees, rather than that money being put into escrow, right?

Greg: Right.

Caleb: Six, failure to disclose the risks associated with MBC's purchase of group in term life policies. So, that one was a little bit- that was a little tough to understand, but the basic gist of it was group in term life policies are risky. These are risky investment products, and they basically, weren't honest about just how risky they were.

They undersold that aspect of it. And finally, failure to disclose state securities actions. I don't know if you picked up on this, Greg, but these guys were being investigated by at least five states, and they didn't tell the investors about that. They had been sent cease and desist letters and had things filed by states against them. And they didn't tell the investors about any of that stuff. And when you don't do that, that is against the law. You have to disclose all that stuff

Greg: Which is awesome, because again, it sounds like there was multiple cases of that 1998 thing where they were just like, “Hey. You guys, knock it off.”

Caleb: Knock it off

Greg: And then there was states coming to go, “Hey, didn't we tell you to knock that off?” And then another state’s like, “Hey, how many times we got to tell you to knock that off?” And eventually, they-

Caleb: And they didn't knock it off.

Greg: -they had to be sent to their room, which was a small jail cell that they have. All that I remember is that Joel Steinger, he was able to delay his sentencing for a massive amount of time, because he said he had spinal stenosis and as a result, couldn't control his bowels. So, he was like, “I could come to court, but I'm going to shit all over the place. Is that what you want? Or maybe we can delay the case till my adult diapers come in, buddy.”

Caleb: “I don't think that's what you want, your honor.” So, you're right. The DOJ press release upon his sentencing, I believe, again, in the show notes, if you want to check it out. That was only 2014. So, he was able to delay his trial, conviction and sentencing for over a decade. Whereas a lot of the other players, they were sentenced early on, and a lot of them got long sentences, 10 years, 20 years. There was, I think, a Baker's dozen in total, who were ultimately found or pleaded guilty. So, quite the conspiracy.

Greg: Fact check me on this. My understanding is that Leslie Steinger didn't actually- was never convicted because he died of cancer in 2008, right?

Caleb: You are correct, yes.

Greg: And that seems so crazy, where it's like the guys who were betting that other people are going to die, that they died before they had a chance to get convicted. There's something strangely- there's a Mobius strip in there somewhere that's breaking the time-space continuum because of that.

Caleb: A what-dious strip?

Greg: A Mobius strip. You don't even know what that is?

Caleb: No. [CROSSTALK].

Greg: I'll put a diagram in the show notes that you can look at.

Caleb: I think we need a glossary in the show notes. So, anyway, so, Greg-

Greg: Wait, there's somebody listening right now that feels so smug because they know what a Mobius strip is.

Caleb: 100 percent. 100 percent.

Greg: And you, I salute you Blake, our producer’s like, “I do, I do, mofo.” So, Caleb, you're the smartest one here. And right now, we both get a feel smug that we know one-

Caleb: Smug away.

Greg: -we know one thing that you don't know. That’s amazing.

Caleb: Smug away, smug away.

Greg: I’m going to feel great for two weeks because of that.

Caleb: Hey, I'm here to help. I'm here to help. So, look, so, that's Mutual Benefits Corporation and-

Greg: That's the story.

Caleb: -that’s the story. And so, after the break, we're gonna talk about some lessons learned for our accountant friends. So, stick around and we'll be right back to talk about that.

[00:49:25] Thank you to our sponsor, Avalara (special offer)

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[00:49:57] Accountants’ place in Ponzi schemes

Caleb: We're back. Our final segment is, so what? This is where we relish in our hindsight and remind everyone not to have anything to do with Florida. Greg, there's lots of accountants listening, and we are accountants. I'm an erstwhile accountant, but I think a good question that I think a lot of people might be asking is, why should accountants care about Ponzi schemes? Are they a little bit out of scope for the average trusted advisor, or what are your thoughts on that?

Greg: Absolutely not that they're out of scope for the average trusted advisor. The easiest thing to point out why accountants need to be aware of Ponzi schemes is that there's lots and lots of accounting firms where one of the services they offer their clients is retirement investment.

And there were people who were investing their IRA savings into these viatical settlements through Mutual Benefits Corporation. And so, if the accountants are able to see the red flags that we talked about for Ponzi schemes, they will be able to help their clients not get bilked out of their hard-earned money in their retirement.

So, that's the easiest way to say why accountants need to be aware of it, but then also- and again, these guys, the Mutual Benefits folks, they were taken down by the Securities Exchange Commission. And in my mind, when I first saw that, I was like, “Oh, so, they were a publicly-traded company.” Because when I think of the SEC, I think of the PCBOA, I think of why auditors have jobs, and things like that. But these guys were not- it was securities, but it wasn't publicly traded securities. It was privately placed securities. And so, they didn't have as much of the reporting requirements.

So, likely, these guys didn't have to have an annual audit for their stuff, but there are other Ponzi schemes that are audited, and auditors need to be able to see into that. For instance, you need to at least know your industry well enough to know in this case, that they needed to escrow the funds to pay the insurance premiums until the viator died, and the insurance policy proceeds were released. So, there's a lot too, that needs to be known by accountants about Ponzi schemes. What are your thoughts? Why do you think this is important to accountants?

Caleb: I guess what I would add to your comments is that because of the nature of Ponzi schemes and how they work, and that they're always recruiting new investors, because that's how they keep the scheme going, it only makes sense that word gets out about an investment opportunity that people are going to talk, they're like, “Oh, you gotta go with my guy. He's the best. These returns, this and that, and whatever.” And if they're talking- and if these people have money to invest like this, they certainly have a tax professional that does their- that prepares their tax returns.

And so, to the extent that those people have awareness in the general community that they are- in this case, it was in Florida- you have to believe that there were CPAs around Florida that knew about Mutual Benefits Corporation. And they probably looked at it and thought, “This doesn't smell right.” And when you have 30,000- ultimately, at the end of it, you had 30,000 investors, word's going to get around. A secret is only safe with two people, and one of them is dead, right?

Greg: Right.

Caleb: So, there has to be the scuttlebutt of an investment opportunity too good to be true, to the extent that anyone has awareness of that. I think you owe it to yourself, and your peers, and your clients, of course, to be like, “Let's maybe not go that way. Let's maybe not do business with those people.”

Greg: But I don't think that's how human nature works.

Caleb: Oh, go on. Go on.

Greg: Because you're right, there's going to be people who- ‘cause the early investors- the later investors that they are able to get, they’re using their funds to pay so the early investors can actually get the returns that they were promised.

So, the early investors are going, “Oh my God, this is an amazing investment.” And they go out and say, “Hey, everybody should be investing in this, because it's fantastic.” But then, what you have is you have the nerds, the horrible, killjoy accountants that we are, who come and say, “Ah, I don't think this feels right.” And everybody's like, “Oh, shut up. You're so risk averse.
You're so lame. You don't even have any friends. You don't know good music. So, leave us alone. We're too busy making money to listen to you throw a wet blanket on our cash machine that we just found over here.”

So, as soon as people see, “Oh my gosh, this guy got rich by this. I need to get in as soon as I can, so I can get rich like that guy did. And anybody who's trying to tell me different is just- they don't want me to have fun. They're jealous,” or something like that. I think that's the real interpersonal dynamics that happened with that.

Caleb: So, let me put it this way. So, do you think there's a chance that even though people might even have their suspicions or doubts about a venture like this, they might think, “Huh? Some people say he's a con artist, but I don't think so. I'm having too much fun earning these awesome returns, and screw Vanguard, because I don't want 7 percent a year; I want 70 percent.” So, I guess what I'm saying is, yeah, you think that's a part of it. You think that's part of the psychology.

Greg: Absolutely.

Caleb: If you're a CPA and you have people, and you've got clients and say, you don't manage their wealth, you don't advise them in that area. And a lot of CPAs don't- you mentioned that. Many do, but most don't. But they do still- they certainly look at a tax return and they see people's investments. They have to report, income from investments. And so, they have a general sense of where people have their money.

So, in a professional context like that, do you think the dynamic is the same? Or do you think that people say, “Well, this is my CPA. He's a pretty smart guy or smart gal, and eh, eh,” or they just say, “Eh, that pencil neck, I don't want to listen to him. He's not fun. He tells me that I have to pay the government money and I don't want pay the government.” Is that the sense- do you think that's the dynamic?

Greg: I think that there’s a different dynamic between clients and their CPAs, but at the same time, if someone's got their mindset going, “This is going to make me a butt ton of money,” and their CPA goes, “Hey, there's a lot of red flags making this look iffy,” they'll go, “But I got a friend who he got money out of this, and it was a lot. So, thanks for giving me the heads up on that, but I'm going to go ahead with it.” And even if you're 100 percent convinced that it's a shady deal-

[00:57:37] How much should accountants push clients out of making bad decisions

Greg: -how far are accountants gonna push? They're going to go, “Hey. Listen. I'm going to fire you as a client if you continue to invest in this company.” No, they're not going to do that. They're going to go, “It's a bad idea.” And then when it goes to shit, they're going to say, “Yeah, I tried to warn you and you wouldn't listen.” And that's what it's going to be. Do you think it would be- do you know accountants who are going to push harder than that with their clients?

Caleb: There might be some, but you're right. I think the majority of them probably will; they'll raise their concerns, they'll make their concerns known and then they will sit back and twiddle their thumbs or munch the popcorn as the thing falls apart. So, then I guess-

Greg: It’s like, but it's your money, it's your neck on the line. That’s what’s going to end with the accountants.

[00:58:24] What should a CPA do if their client is falling for a scam?

Caleb: So then, I think last thing I'll ask you is, then what's a CPA to do, Greg? What's a CPA to do?

Greg: Well, a CPA really- even with that, at some point- again, and this almost goes back to a risk management standpoint where if you're very convinced that an investment is a bad idea, and that your client's going to lose their shirts, maybe you have them sign something that says, “Yeah, my CPA said this was a bad idea.” And you go, “Yeah, I'll account for this, and I'll keep you as a client, and we'll do this, but this is how strongly I feel against this. Please sign the [INAUDIBLE] that releases me from any sort of liability if you go down the toilet, just because.” So, legit, that's not a bad idea.

The other thing is ethically, I think we have a responsibility to beat that drum as loud as we can with our clients, if you really care about them, and you're convinced that it's something that's a bad idea that your client has been invested in. That you need to do that, because again, you're supposed to be their damn trusted business advisor.

And if you're not the guy, how are you a trusted business advisor if eventually, you just go, “Well, I can tell you're going to get your head chopped off, but you're a big boy and you made the decision. So, I'll just sit back here and watch the guillotine fall.” That's not where we should be.

Caleb: So, some fun lessons. Greg, great show. This was a fun one. And I think the audience would maybe like to- maybe they want to chat with us on Twitter about it, maybe they want to drop us a LinkedIn message. How can people get ahold of you?

Greg: You can get ahold of me on Twitter. It's very easy. I'm at Greg Kyte, except for the fact that my ancestors were poor spellers. So, Kyte is spelled with a Y instead of an I. And on LinkedIn, just search for Greg Kyte, again, with a Y, not an I, and if you see a bald guy with glasses and a beard, shaved head, that's gonna be me. So, follow me on there. And I love to engage with [INAUDIBLE], and I got some cool cartoons that I put on both of those platforms that you can check out as well. What about you, Caleb? How can people find you?

Caleb: I'm also on Twitter sometimes, at C Newquist, as opposed to Old Quist. I'm also on LinkedIn, and I'm easy to find on there. I think my LinkedIn is my full name, Caleb Newquist, and drop us a line on there. And again, this was a fun show. Thanks for listening.

Greg: And we can't wait to give you some more frauds next time on, Oh My Fraud.

Caleb: This episode of Oh My Fraud was written by Caleb Newquist and Greg Kyte, sound design, editing, and mixing by Blake Oliver. Be sure to subscribe to the show on Apple podcasts, Google podcasts, Spotify, or wherever you listen. Join us next time for more averse swindlers and scams from stories that will make you say, “Oh, My Fraud.”