Susan Tompor Detroit Free Press
Published 7:53 AM EDT May 2, 2019
One of the more brazen billion-dollar financial frauds in history, complete with celebrity names and fancy cars, quietly snaked its way into hundreds of retirement nest eggs across Michigan.
Often, the sales pitch started innocently enough after a retirement seminar and a free meal at a pleasant restaurant, maybe Andiamo or Maggiano’s Little Italy.
Nearly two dozen insurance agents and other sellers hooked about 230 Michigan retirees and investors with what seemed like a low-risk, short-term investment in mortgage-related notes connected to the Woodbridge Group, according to a Detroit Free Press analysis.
The Michigan investors handed over more than $14 million, according to state regulators. Many never saw that money again.
Unlike the Bernie Madoff scandal that unfolded 10 years ago, Woodbridge, based in Sherman Oaks, California, never became a household name in Michigan or most other states. Instead, its story has unraveled mainly behind the scenes in sporadic developments, according to a Free Press review of court records, state and federal regulatory actions and interviews.
Many retirees and other small investors continue to try to recoup some of their money that was lost in the intricate $1.3 billion Ponzi scheme, which was first unfolded by the Securities and Exchange Commission in 2017.
There’s an ongoing tangle of regulatory action, lawsuits and bankruptcy claims.
And the big question for many Michigan retirees is: Will I ever see my money again?
Money went to homes, luxury vehicles
The Woodbridge saga bilked about 8,400 unsuspecting investors nationwide — including big names such as ABC’s George Stephanopoulos.
Of that group, regulators said, at least 2,600 investors nationwide used their retirement savings to invest nearly $400 million in what turned out to be a scam.
According to the SEC complaint, Woodbridge told investors they would get paid out of the proceeds from high-interest loans made to third party borrowers. But the SEC said that nearly all of the loans were to a web of LLCs, “which had no revenue, no bank accounts and never paid any interest on the loans.”
Investors’ funds were used to buy almost 200 residential and commercial properties, primarily in Los Angeles and Aspen.
But, as with other Ponzi schemes — named for Charles Ponzi, a swindler who ripped off investors in Boston in 1920 — regulators said the Woodbridge promoters used money from new investors to pay returns owed to existing investors as part of the massive scheme that ran from July 2012 through December 2017.
The SEC said money from investors and retirees was also used to finance the lavish lifestyle of mastermind and owner of Woodbridge Group of Companies, Robert H. Shapiro.
Shapiro allegedly siphoned off $35 million for his personal use, according to charges filed by the feds. Misappropriated spending reportedly included $600,000 in political contributions, $400,000 in jewelry, $308,000 in wine, $672,000 in luxury cars and $1.4 million in payments to Shapiro’s ex-wife, according to a U.S. Department of Justice criminal charge issued in April and the SEC complaint filed in December 2017.
The Owlwood estate in Holmby Hills, California, once owned by actor Tony Curtis and later by Sonny and Cher, was bought for $90 million in a Woodbridge-related deal.
Investigation spans months and states
Federal officials have ratcheted up the pressure on Woodbridge in the past few months.
In January, the SEC announced that a federal court in Florida ordered Woodbridge and Shapiro to pay $1 billion in penalties and repayment of ill-gotten gains.
In February, Woodbridge, which had filed for Chapter 11 bankruptcy in late 2017, announced that it would make an initial cash distribution to harmed investors on or before March 31. Assets, including property owned by Woodbridge entities, are being sold, including single-family homes in the Aspen area and high-end properties in California.
In April, Shapiro was arrested, along with two company executives, on federal criminal charges. Shapiro denies charges in the criminal indictment.
Payout so far is ‘piddly’
But so far, investors are only seeing pennies on the dollar out of the bankruptcy payout. As properties continue to be sold, experts say, investors may continue to see payments.
A retired teacher told me she received a check in early April related to the bankruptcy payout for about $1,380. It’s supposed to be the first of other payments.
“It’s just piddly,” the 68-year-old woman said.
The woman, who once taught school in Oakland County, asked that her name not be used because she doesn’t want her friends or family to know that she is a victim of financial fraud.
She had invested $30,000 and the initial check amounts to roughly 4.5% of her original investment about three years ago.
She decided to set that money aside to use it, plus any money made on the investment, to eventually remodel a kitchen. That plan went out the window.
“My kitchen is still 1957,” she said.
Before the feds came knocking, Michigan retirees and others would invest anywhere from $25,000 to more than $100,000 at a time in Woodbridge notes or securities, according to documents filed by state regulators against individual sales agents.
One investor was listed as buying a note for $345,000 in early 2017.
The Michigan Department of Licensing and Regulatory Affairs said 22 sellers were involved in pitching Woodbridge investments to Michigan investors. The state issued a cease and desist order against Woodbridge entities in August 2017. Other regulatory actions took place late in 2018 and continue.
State regulators declined requests for an interview because of “ongoing investigations related to this matter,” according to Jeannie Vogel, public information officer for the state Department of Licensing and Regulatory Affairs.
Rich commissions drove sales
In Michigan, a network of insurance agents and others ended up pitching what regulators said were unregistered Woodbridge securities. Regulators said that often sellers were not registered to sell securities. Administrative consent agreements were reached with several sellers.
For their part, some sellers maintain that they got scammed by the scammers. Or they argued that the investments they were selling weren’t securities and didn’t fall under the stringent regulatory rules.
But victims’ attorneys say the insurance agents and other advisers were blinded by hefty commissions and greed — enough so that they didn’t do their due diligence.
“The sellers by and large didn’t know it was a fraudulent deal but clearly they get paid to kick the tires and look under the hood,” said Andrew Stoltmann, a Chicago-based attorney who represents 15 investors across the country who lost money to the Woodbridge scam.
Stoltmann maintains that major brokerage houses — which sell all sorts of alternative investments — didn’t touch this stuff. Instead, it was peddled in many cases by smaller offices and independent advisers.
Lawyers representing investors also noted that sellers received incentives to encourage initial investors to renew their investments upon maturity of the short-term notes. At some points, federal regulators began to question the legitimacy of the securities offerings but sellers continued renewing notes, according to claims made in court cases.
Stoltmann said he expects that more cases will be settled, as many are good cases when it comes to liability.
“The biggest issue is the collectibility,” he said. Some firms who peddled it, he said, might not be able to pay off arbitration claims against them.
Small-time Michigan investors targeted?
The story is yet another example of how small-time investors can lose their hard-earned money to what the SEC called a “business model built on lies.” It is a reminder of how some financial advisers can put their own interests ahead of clients.
Michigan retirees tend to be particularly vulnerable, as they’re often in the Top 10 among claims filed in Ponzi schemes, according to legal experts. The state’s well-paid auto industry employees and others can have sizable savings that con artists willingly target.
The SEC alleged that Woodbridge employed hundreds of sales agents to advertise unregistered securities, which were pitched as low-risk, through television, radio, newspapers, cold calls, social media, websites, seminars, and in-person presentations.
In a complaint filed April 11, the SEC found that Woodbridge was manning its own boiler room operation with 30 in-house sales agents who engaged in day-to-day cold calling of investors.
Many times, savers in their 50s, 60s and 70s were caught in the trap.
Long list of Michigan sellers who profited
Michigan records show sellers who took in commissions of $30,000 or so relating to nine sales. One seller, Jack Holman, received $46,000 in commissions on 11 sales involving nearly $884,000 in savings from investors. One seller had two sales involving loan participation agreements that triggered nearly $20,000 in commissions.
The Michigan Department of Licensing and Regulatory Affairs said sellers named in Michigan actions include:
- Tamara Christians, who lives in Michigan.
- Bender Wallace “Wally” Mackey, who lives in Florida.
- Daniel Orfin, who lives in Michigan.
- David Knuth, who lives in Indiana.
- Drayson Doyle, who lives in Michigan.
- Gary Forrest, who lives in Michigan.
- Orville Thamer, who lives in Michigan.
- Jack Holman, who lives in Michigan.
- Mark Zayti, who lives in Michigan.
- Richard Burman, who lives in Michigan.
- George Movsesian, who lives in Michigan.
- William Saoud, who lives in Michigan.
- Ronald Neubauer, who lives in Michigan.
- Preston Titus, who lives in Michigan.
- Sandra Ferwerda, who lives in Michigan.
- Kenneth Feyers, who lives in Florida.
- Robin Reading, who lives in Michigan.
- David Scholl, who lives in Michigan.
- Richard Schroeder, who lives in Michigan.
- Ron Weller, who lives in Michigan.
- Albert Klager, who lives in Florida.
- Kim Butler, who lives in Texas.
‘Better solution for your money’
Teresa Williams, a retired postal worker who lives in Sterling Heights, attended a free dinner as part of a complimentary retirement planning seminar offered by Daniel Orfin and Troy-based Orfin & Associates.
The company’s mission statement, according to its website: “Leave You Better Off or Leave You Alone.”
Williams emphasized in discussions with Orfin that she did not want to expose her money to significant risk, according to court documents filed in Macomb County.
She was convinced by Orfin to invest $40,000 in 2016 in an emerging real estate opportunity through Woodbridge Wealth. The short-term investment was for 12 months with a “guaranteed 5% income yield.”
The Woodbridge brochure promised a “better solution for your money,” as well as “peace of mind” and a “secured product.”
She didn’t receive her monthly payment in December 2017 in the midst of the Chapter 11 bankruptcy filing and went to court to get her $40,000 back.
In all, the state’s investigation claimed that Orfin sold $2.4 million in Woodbridge securities in a bit more than a year. The state found 46 instances where Orfin offered or sold Woodbridge securities in the form of notes beginning in May 2016 through August 2017.
Woodbridge paid Orfin $87,489 in commissions to represent it in “marketing, offering and selling the securities,” according to state regulators.
Orfin paid a $10,000 fine to the state and reached an administrative consent agreement with the state.
Berkley attorney John T. Hermann, who represented Williams, said he believes that Woodbridge targeted sales agents who already had an established business in the state by offering better than typical commissions.
In some cases, he said, insurance agents may not have intended to cheat anyone.
“I just think the commissions were good,” Hermann told me in an interview last November.
The Woodbridge investments initially may have looked legitimate. The promised returns ranged in the 5% to 10% area, according to regulators. Initially, the payments kept coming to investors. So when a one-year note matured, some investors took out another note — generating more commissions for the sellers.
If the deal offered double-digit rates, maybe 20%, it might have raised more initial red flags. But the rates being offered to investors didn’t seem out of line to many.
“Five percent sounds like a legitimate investment,” Hermann said. “It’s a pretty reasonable sounding concept.”
Hermann said in many cases investors didn’t want to take legal action on their own. Victims may not want to come forward, he said, because they’re embarrassed.
Trading on trust
For retirees and others, it seemed reasonable to believe that their advisers who had offices in Michigan were pitching a solid product.
Linda Parmantier, a metro Detroit widow with little investment experience, had attended an investment seminar given by Daniel Orfin. She had success with the first investment she bought through him.
Her original investment was returned to her, according to a complaint filed on her behalf in Macomb County Circuit Court.
But she later invested $100,000 in Woodbridge through Orfin, according to the complaint.
And that investment “turned out to be a disaster when the company offering the investment securities went bankrupt,” the filing said. The second investment was in a security offered by the Woodbridge Mortgage Investment Fund, part of the group that filed for bankruptcy.
Both Williams and Parmantier reached settlements early in 2019 in their cases against Orfin.
Orfin’s attorney Brian J. Masternak said Orfin had sought opinions and had been told by others that the Woodbridge investments were not securities so he should be able to sell them. The state, though, has said the products were unregistered securities and Orfin was not licensed to sell securities.
Orfin did not know that the Woodbridge products were connected to a Ponzi scheme, said Masternak, an attorney at Warner Norcoss + Judd in Grand Rapids.
“He certainly was never doing anything intentionally wrong,” Masternak said.
Masternak said he believes the bankruptcy process involving Woodbridge is working in this case to help clients get money back.
“Funds certainly are on the way,” he said.
Other advisers faced challenges from regulators, too.
Flint’s Gary Forrest, for example, consented in April to sanctions by the Financial Industry Regulatory Authority and has been suspended for 10 months from associating with any FINRA member in any capacity.
According to regulators, Forrest sold $826,986 in Woodbridge promissory notes to investors. Michigan’s cease and desist order, dated January 2018, lists 12 sales.
Forrest, who formerly worked for American Portfolios Financial Services, received $32,900 in commissions, according to state regulators. Forrest did not admit guilt or deny the findings.
The FINRA report noted that “although Forrest sought approval to sell the Woodbridge promissory notes, his firm denied his request.” He sold the notes anyway.
David Scholl of Grand Rapids was another big seller of the Woodbridge products, according to complaints issued by Michigan regulators. Scholl was paid $86,500 in commissions, according to the Department of Licensing and Regulatory Affairs.
The state documents listed 43 sales of Woodbridge notes.
Scholl, 53, said that many of those sales involved rollovers where the funds invested came due and investors had the option to roll the money over into another short-term Woodbridge investment product.
Scholl, who is a real estate agent, said the Woodbridge team stressed that the investment product was a short-term note of 12 months or less. And he was told repeatedly by Woodbridge that he would not need a securities license to sell it, he said.
“It seemed like it was fairly safe at the time,” Scholl said. “I had no idea that they were cooking the books.”
Scholl said all the literature indicated that the loans were backed by a property. He thought the business model made sense and could have worked if the company was run legitimately. Borrowers would pay a decent rate; investors would receive a decent rate.
“I wish I never got involved with them,” he said in a phone interview in late April. “I had no idea they were ever doing anything illegal.”
Scholl, who is not currently registered as a broker, had other issues involving troubled, short-term, real-estate related promissory notes back in 2013, according to the Financial Industry Regulatory Authority or FINRA’s BrokerCheck.
Nothing is a sure deal in retirement
The latest round of Ponzi schemes to hit Michigan investors offers yet another reminder of how easily seniors can lose their savings to what’s cleverly crafted as a sure deal.
Retiring with dignity — and some financial peace of mind — is not as easy as it should be after a lifetime of hard work.
Increasingly, people rely less on professionally managed pensions. As a result, more retirees who aren’t financially savvy are stuck managing their money on their own and turning to outside advisers.
“Consumers do rightfully think when someone is giving them advice, it’s advice, not a sales pitch,” said Betsey Stevenson, associate professor of public policy for the Gerald R. Ford School of Public Policy at the University of Michigan in Ann Arbor.
Even when outright fraud isn’t involved, middle class retirees can be hurt when the adviser has conflicts — costing America’s families an estimated $17 billion a year, according to a U.S. Department of Labor report issued under the Obama administration as part of an effort to crack down on conflicts of interest.
There’s an ongoing concern that people are steered into inappropriate products, which can cut into their savings.
“The middle class increasingly rely on their retirement savings to fund their retirement,” Stevenson said at a U-M conference in late March called “Consumer protection in an age of uncertainty.”
Yet are retirees and others getting the best advice if sizable commissions motivate sellers to steer their retirees and other investors into specific products?
The SEC complaint charged that Woodbridge paid $64.5 million in commissions to sales agents who pitched the investments as “low risk” and “conservative.”
They often had a financial incentive to push the investment products.
Orfin neither admitted nor denied allegations in the cease and desist order. The state ordered Orfin to cease and desist from selling unregistered securities and from acting as an unregistered agent for Woodbridge in January 2018, shortly after Woodbridge filed for bankruptcy.
Orfin continued holding seminars, including one scheduled for Ruth’s Chris Steak House in Troy on Sept. 24, 2018, and Sept. 25, 2018. Orfin’s presentation called “Understanding Different Retirement Strategies” was to discuss topics such as: “Products that keep your principal safe from market declines” and “How our clients have kept their money safe from market declines.”
Some investors feel like they dodged a financial bullet.
Kirk Chubka, 62, invested $25,000 about two years ago in Woodbridge through Orfin, received the 5% as promised and then got his money back in September 2017 — shortly before all the trouble began unfolding.
Chubka, who lives in Warren, said he didn’t reinvest the money because he was told that there were no more options to invest. The SEC had already begun investigating Woodbridge that summer.
“They didn’t need the so-called loan anymore,” he said, noting that he was told that they had paid the property off.
Chubka, who retired after years of working as a general accountant for the old GMAC and H&R Block, said he couldn’t help but be shocked once he heard that other Woodbridge investors were caught in a massive Ponzi scheme.
“I was grateful that it didn’t affect me,” Chubka said.
Contact Susan Tompor: 313-222-8876 or [email protected] Follow her on Twitter @tompor. Read more on business and sign up for our business newsletter.
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