Lessons on investing came hard Affintiy scam story

Lessons on investing came hard
Copyright 2009 Houston Chronicle
Feb. 28, 2009, 12:59AM

Pete Edmonds has an idea how investors in Stanford Financial Group feel. He knows the cold chill of fear and the wave of desperation washing over them as they worry they might have entrusted their money to someone they shouldn’t have.
He knows the overwhelming disbelief and what comes later — denial, anger, frustration.
Edmonds didn’t have money with Stanford, and he didn’t do business with Bernie Madoff. He was a victim of an affinity scam that hit Houston in the mid-1990s.
The scheme was set up by Dwight Timothy Jackson in 1994, shortly after he was released from prison for forgery, the Chronicle reported in 1999. Jackson raised at least $2 million from about 100 investors in three years, promising to buy stock options with the money and guaranteeing a nice return.
Jackson used about $1.2 million to buy options, but he lost it because he didn’t make the purchases quickly enough, prosecutors said then. The remaining $800,000 he used to finance a lavish lifestyle — expensive meals, trips to Vegas, a Galveston condo, a house on Memorial Drive.
Jackson, who suffered from cirrhosis of the liver, pleaded guilty and was sentenced to 12 years in prison for securities fraud. He died soon after.
Edmonds, now retired and living in Sugar Land, got drawn into the scheme by a friend with whom he rode motorcycles on the weekends and who worked in the same office building as Jackson. His friend urged him to invest.
“I was very skeptical about it, but after about a year of this — he was telling me about all the gains he was making,” Edmonds said. “I’d known this guy for years. I couldn’t believe he’d try to sell me on this if he didn’t believe it himself.”
Edmonds saw Jackson’s fancy office, he met other investors who lauded Jackson’s financial wizardry and, ultimately, he invested what he described as “a small amount.”
In hindsight, he said: “I didn’t ask the right question: Have you seen the cash?”
It turned out his friend’s gains had mostly been on paper, on quarterly statements provided by Jackson. What’s more, Jackson paid many investors extra fees for recruiting others to the scheme.
While Madoff and Stanford are grabbing headlines, the recession is shaking out a litany of affinity schemes. Almost every week, regulators are bringing new cases.
Last week, for example, the Securities and Exchange Commission filed fraud charges against a New Jersey fund manager that the agency claims ran a $900 million scheme since 2004, and a California firm whose top executives may have taken almost $800 million from investors.
Cautionary tale
The Jackson case was far smaller, but Edmonds’ story serves as a cautionary tale for other investors.
Edmonds, who said he didn’t learn of Jackson’s criminal past until later, got sucked into the scheme because he didn’t want to miss a good deal, and he didn’t want to feel stupid later.
“The story sounds good,” he said. “This guy supposedly knows what he’s doing.”
At first, Edmonds said, he received some nice returns, but Jackson kept pressuring investors to put money in other deals.
Edmonds became suspicious and tried to withdraw his money. Jackson started stalling and making excuses, such as claiming a withdrawal would hurt other investors.
“You want to believe the excuses,” Edmonds said. “You start to question whether this can be real, and you look for every reason to prove that it is real and not a scam.”
Dealing with denial
Eventually, Edmonds confronted his own denial. He hired a lawyer and contacted the Harris County district attorney’s office. Even as this investor was threatening to sue, Jackson continued to promise that they all were on the cusp of a major payoff, and many believed him, Edmonds said.
Edmonds agreed to share his story because the Madoff scandal brought back bad memories, and he wanted other investors to learn from his mistake.
His conclusion, which has been said thousands of times, deserves repeating again:
“The message is that if a deal looks too good to be true, it probably is, and don’t place large amounts of money with anyone where you don’t know where it’s going to end up.”
Loren Steffy is the Chronicle’s business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at loren.steffy@chron.com. His blog is at http://blogs.chron.com/lorensteffy/.