Ponzi schemers can detect testing by wary investors

Just about everything that many careful investors do when they put money into businesses that turn out to be Ponzi schemes is exactly wrong.

And not just wrong, but worse: They do exactly what Ponzi operators expect and want them to do, said Pat Huddleston, an enforcement-branch chief for the Securities and Exchange commission from 1992 to 1996 and now an attorney and investigator who operates http://www.investorswatchdog.com.

State and federal officials are looking into the operations of now-shuttered Valley Investments, 1445 N. Seventh St. in Grand Junction. The attorney appointed as the receiver in the case said in court papers that Valley appeared to have been operated as a Ponzi scheme, a charge that attorneys for the company deny.

The investigation of Valley Investments is ongoing, and no charges have been filed or arrests made.

Ponzi schemes seek out investors and use the money from new investors to pay the often exorbitant returns promised early investors.

In the case of Valley Investments, the receiver said the company had assets in the form of manufactured-housing subdivisions in Colorado, Idaho and Utah, but none reflecting the $30 million that had been put into the company by at least 200 investors.

Many of those investors said they entered Valley Investments with great care.

One investor and his friends did “lots of due diligence,” including Web searches, interviews with other investors, meetings with the Valley ownership, inquiries about sales results.

“Further, some of us invested very slowly to ‘test’ the trustworthiness” of Valley, an investor wrote to The Daily Sentinel.

The idea of investing a small amount of money to determine whether an investment is safe is a time-tested technique — for the scam artist, Huddleston said.

“They call it a ‘test drive,’” Huddleston said. “What you don’t know and can’t know is that all you’re receiving back is your own money or somebody else’s money. The scammer will steal from whoever he has to to convince you. He knows that eventually you’ll go full-body in.”

Due diligence is one thing, Huddleston said, but it can’t be done in a vacuum, especially with promised high returns.

“You just can’t believe your eyes,” Huddleston said, urging investors to seek out another view. “You cannot possibly be objective, because you have that return in mind. It’s impossible to divorce yourself from that possibility.”

Linda Jackson, whose mother, Fran Paiva, had invested her life savings in Valley Investments, said in retrospect, “I would have acted on the words of my attorney,”  who questioned some things about the company, Jackson said.

Jackson even flew from New York to Grand Junction to check out Valley Investments, but never was told of Valley owner Philip Rand Lochmiller’s felony conviction for securities fraud in California.

Most investors in Ponzi schemes think they can spot frauds “because they’re intelligent and highly educated and that they’ll be able to see the truth,” Huddleston said. “They fail to realize that they don’t know what is significant or insignificant.”

One tip-off of a scam, Huddleston said, is extravagant spending by the company owner.

As a receiver of collapsed Ponzi schemes, he has frequently sold off airplanes, enormous houses and the like, Huddleston said. When he takes on cases of possible schemes, “We’ll drive by the house and look at the cars,” he said. Careful managers “ought to exercise some prudence in how they spend.”

Billionaire Warren Buffett “is not a big spender,” Huddleston said. Scam artists, however, seem to spend differently.

“If you’re spending someone else’s money, why not live big on it?” he said.

Most people think of Ponzi schemes as “lightning strikes,” when in fact, “There are hundreds of them operating right now,” he said.


There is one thing wrong with the axiom that if something sounds too good to be true, it probably is, Huddleston said.

“The most dangerous word is ‘probably,’” he said. “If it sounds too good, it’s a scam, and he’s lying. Walk away and call the SEC.”


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