David: Beverly Hills Consigliere
In the spring of 2010, nearly one year after I left the boundaries of Taft’s minimum-security prison camp, I appeared before California’s Department of Real Estate. After a disgraceful departure from my career as a stockbroker at UBS, and before I reported to serve my sentence, I supported myself by selling real estate for the Calabasas office of Sotheby’s. Upon my criminal conviction for securities fraud, the Department of Real Estate initiated action against my license to work as a real estate agent. My 2010 hearing represented an effort to persuade the Department of Real Estate that despite the bad decisions I had made as a stockbroker, I should not be precluded from the privilege of earning a living by selling real estate.
To testify on my behalf as character witnesses, I brought a team of three professionals. The team included Roger Ewing and Ernie Wish, who were partners in the Sotheby’s office, and Sam Pompeo, one of the office’s most respected agents. The team lauded efforts I had made to redeem the bad decisions that led to my troubles with the criminal justice system, and they moved me to tears with their willingness to vouch for my good character.
The lawyer who represented the Department of Real Estate, on the other hand, was less impressed. “I have no doubt that Mr. Paperny can earn a livable wage in many careers.” the lawyer said, “but selling real estate should not be one of those choices.” I didn’t go in to the meeting with high expectations of having my license to sell real estate reinstated, but the hearing gave me another wake up call to the lasting consequences that plagued those who violated the codes of ethics and professional conduct.
In failing to make honesty, integrity, and the other virtues that constituted good character a part of my every decision, I invited lifelong consequences. Regardless of how many good deeds I tried to sow in society, daily reminders would keep my criminal conviction as an indelible blemish on my life. I was living with that reality despite my having been released from prison for longer than a full year, and I expected to live with it forever.
When I engaged in deceptions as a stockbroker, I did not anticipate all the lingering influences of my shortsightedness. I did not consider how it would victimize others. I did not consider how it would wipe out every penny I had ever made, both legally and illegally. I did not consider how those who loved me would suffer. And I certainly did not consider the fatal blow the deception would bring to the professional career I had worked so hard to build.
Dr. Bob Scharlach, a professor of tax and accounting at USC, was one of my mentors and baseball coaches when I was university student. After my release from federal prison, Professor Scharlach extended the privilege of allowing me to share my story with his students. As I had once done, I understood how diligently they were preparing for professional careers; as I stood before them in disgrace, I revered my admiration for them, telling the students how I wished that I could have a do-over and join them as a student with so much promise ahead. But life did not offer do-overs. Once we crossed ethical lines we had to live with the consequences. To empathize my point, I not only shared my story, but I also told them about David, a client I was working with who was about to begin serving a five-year term in federal prison.
Like the students in Professor Scharlach’s class were working toward, David had earned his undergraduate degree in accounting. He graduated from UC Berkley in the early 1980’s, then continued his education at the University of San Francisco, where he earned an MBA with a specialty in tax. From USF David enrolled in the law school at Stanford, concluding his formal education with a JD in 1987.
Armed with such stellar academic credentials and promise, the recruiters at what was then one of the big-eight accounting firms were eager to bring David on board. He sharpened his skills by working 100-hour work weeks on audit teams for global corporations, but after seven years, David opted ought to open a niche practice in Beverly Hills as a personal business manager for successful artists and executives in the entertainment industry.
Beginning his practice in 1994, David shifted his expertise from directly handling accounting, tax, or legal affairs to becoming more of a consigliere to his clients. He served as a personal counselor, overseeing all of his clients’ financial and business decisions. By outsourcing their needs for professional services, David minimized his firm’s staffing requirements. The accountants, lawyers, tax specialists, estate advisors, stock brokers, real estate agents, and anyone else who provided professional services on behalf of David’s clients reported directly to him. David’s clients relied upon him to ensure all of their bills were paid and needs were met. They expected him to coordinate their purchases for automobiles, real estate, and in some cases, private jets. David took care of more modest requests as well, including reservations for dinners, hotels, or special events.
The stars who David represented earned substantial incomes. They did not want to be bothered with anything that was not directly related to their work or image, so they paid David well to oversee all business-related decisions, including their investments. David’s problems with the law had their roots in one investment that he poured millions of his clients’ dollars into.
David was in his mid 40’s and for the time being—he still lived in a magnificent Beverly Hills home with his wife, Laura. He was under pressure because part of his sanction required that he pay more than $18 million in restitution. While David reported to prison, Laura would bear the burden of selling the family home, settling a complicated bankruptcy, finding employment, and moving into affordable housing. David and I met at his house before the downsizing began, and I admired scores of gold-framed photographs that decorated the mahogany paneled walls of his home office. Those pictures were clearly taken in happier times, with David dressed in an elegant tuxedo, smiling with his arms embracing people whose face would be recognized around the world.
“They were all like family to Laura and me,” David said as I stood in front of the picture wall. “Now they wouldn’t even take my calls.”
“Tell me how it all fell apart. What was it that brought you down?”
“I selected investments for my clients,” David said. “I considered them my responsibility, as my reputation was on the line. When one of them turned out to be an embarrassment, I stepped in, thinking I could salvage the investment. That decision only make matters worse. It’s been a downward spiral ever since.”
“What kind of investment was it?”
“Several years ago, in the late 1990s, I came across and investment opportunity through Tom, a colleague of mine.” David leaned back in chair and took of his glasses as he told me the story. “The investment was in funding a factoring company. Internet and telephone companies were racking up sales, tens of millions of dollars each month worth of credit card sales by selling sex. They operated adult-themed entertainment sites, 1-900 telephone numbers, that sort of thing. But once the bills came due, the customers tried to stop payment, stiffing the telephone and Internet companies that provided the service. Tom’s factoring company offered a solution to the service providers. His company bought the receivables for pennies on the dollar, then went about collecting the funds.”
“Okay, I understand.”
“You say that as if I’m talking about a buck and half.” David chuckled. “Tom was offering investors a fixed rate of return, a flat 15 percent, payable every month. I did the due diligence on behalf of my clients. The investment checked out. For 10 cents on the dollar the factoring company could purchase receivables in tranches of $10 million, $20 million, $50 million—whatever. Through my clients, I could provide the funds and bank on that steady fixed-income stream of 15 percent.”
“Was Tom steady in disbursing the interest payments on the debt?”
“Like a Swiss clock,” David said. “For years my clients could count on that attractive yield. But then Tom had a personal problem and I made the bad decision of stepping in to help.”
“What was that?”
“Drugs. He got strung out. I don’t know what kind of poison he was on…cocaine, meth, heroin, maybe all three. All I know was that he came to my office one day pleading for me to take over. Tom said his addictions were destroying his life and he was getting out, going on Safari, to Africa, India, Egypt, anywhere that he thought he could make a new start. Either I could take over the business or he was abandoning it.”
David told me that he had acted rashly, foolishly. He had too much of his clients’ money invested to let Tom simply abandon collections. Besides the millions of dollars on the line, David said his business was built on trust and discretion. His clients expected David to ensure their investments were sound and that their names were never tarnished by scandal. If word would have gotten out that David had entrusted millions of dollars to a drug addict who presided over a business of questionable morality, his reputation would have suffered, regardless of the yield the investment had been generating.
“I couldn’t consider the failure option,” David said. “I made a snap decision to take over.”
“Did you confide in anyone?”
“I couldn’t,” David said. “There wasn’t any time. I had to act. The only choice was either to take the reins completely or trust Tom to unravel the mess that I was suddenly and unexpectedly tangled up in. I drafted the necessary documents we both signed, I transferred accounts, and just like that,” David snapped his fingers, “I was CEO of a factoring company. For the next few weeks I conducted an audit of the entire operation.”
“So you took over ownership of the business without having to compensate Tom at all?”
“Tom took care of himself, and he did it through fraud. My audit revealed that he had absconded with $2 million dollars that I was suddenly on the hook to repay.”
“What do you mean? Are you saying he simply took cash out?”
“The other way around,” David said. “He never put the cash in, but he issued notes obligating the company to pay the fixed amount in interest every month.”
“How? Who received the notes?”
“You see, I wasn’t the only client who fed the factoring company with capital to invest. Tom had a network of professionals who either invested on behalf of their clients, as I did, or advised their clients of the returns or suggested they invest on their own. During the year prior to my taking control of the company, Tom accepted $2 million on behalf of the company and he issued notes to the investors. Those notes promised to pay a 15-percent annual interest rate. Supposedly,” David went on to explain, “The company would use that $2 million to purchase a bundle of $20 million worth of receivables from a telephone company or Internet company. The factoring company’s collection service would aggressively pursue settlements with customers, using the income from those settlements to pay the 15 percent yield and to bank a profit. But instead of using the $2 million to purchase the bundle of receivables, Tom instructed the investors to wire the funds to a separate offshore account that didn’t have any ties to the factoring company. My audit revealed that the company I took responsibility for was obligated to pay the interest on the $2 million—and it carried the debt—but it didn’t have the offsetting receivables.”
When I asked how he responded to his discovery of the purloined funds, he told me that he transferred $2 million from his personal account to the factoring company. He purchased the receivables and allowed the factoring company to continue operations.
“I take it that you made a determination that the factoring company was a good investment,” I said.
“It was a headache,” David said, “a problem that I didn’t need but one that I was trying to resolve, foolishly thinking I could unwind it quietly.”
“So why did you put your own money into it?”
“I just wasn’t thinking everything through.” David sat shaking his head, combing fingers through thinning hair, defeated. “Clients relied on my discretion to protect them from scandal. The factoring Venture had promise, but I wasn’t set up to oversee its operations, not while simultaneously responding to clients with the personal attention they were entitled to receiving from me. I should have leveled with my clients from the outset, been honest about my being duped by Tom and worked to liquidate the factoring company. I lacked the courage, I guess, to own my mistake. Instead I kept it running, providing clients with monthly statements and interest payments that mischaracterized the company’s balance sheet and financial health.”
“If you were overseeing the financial affairs of your clients, and you were overseeing the affairs of the factoring company, how did your acts come to the attention of the authorities?”
“David scratched his scalp.” I called the district attorney myself.
“What motivated you to make the call? Guilty conscience?”
“I suppose you’re right,” David said. “It was my guilty conscience. It began because I didn’t feel right about my having transferred $2 million to shore up the factoring company without discussing the situation with Laura. We had been married for 12 years and what was mine was hers. If she had blown through $2 million without telling me about it I would have felt betrayed. I owed her the truth about what the mess I’d created and what I had to done to solve it, so I told her.”
“What was her response?”
“Laura wasn’t upset about the money,” David shrugged. “But when she asked whether I had done anything illegal, I had to tell her the truth. In altering financial records and covering up the ruse by creating inaccurate statements, my actions were fraudulent. Laura and I discussed it and agreed that I should contact authorities to come clean completely.”
“And your clients,” I asked, “what did you say to them?”
“I came clean with them also. The problems exploded, tearing my business apart in a matter of days. Clients hired new attorneys to represent them, and the prosecutors began their investigation. I cooperated completely, but the disruption froze the income stream from debt collections, causing the factoring company to fail. I’ve lose everything.”
“So you pleaded guilty?”
David nodded. “I agreed to plead guilty to a single count of mail fraud. In exchange for my cooperation, the prosecutors agreed to a five-year sentence, but the judge also slammed me with an $18 million restitution order. We’re in bankruptcy now, and the trustee is liquidating assets. My only hope is that once this ends, my cooperation in the investigation will help convince authorities to reinstate my licenses so I can work again.”
David’s guilty plea required him to declare in open court the had committed the crime of mail fraud. He admitted to having used the mail “to send financial statements with the intent to convey false or misleading information.”—It was somewhat similar to the crime of securities fraud that I pleaded guilty to committing.
In working with David, my job was to help him prepare for the consequences that would follow his conviction. When David told me that he hoped his convictions for fraud would not preclude his ability to work as a lawyer or accountant again, it sounded as if he wanted a do-over. But as I told the students in Professor Scharlach’s tax and accounting classes at USC, professionals who crossed ethical lines rarely received do-overs. I shared with David what I had learned through my preparations to persuade the California Department of Real Estate to reinstate my license.
Licensing agencies that governed such professions as real estate sales, securities, law, accounting, and so forth, considered an individual’s character when determining whether the individual was fit to serve. A key question was whether the applicant for license had ever been convicted of a crime of “moral turpitude.” Not being clear on what that term meant, I researched legal findings. The courts of California (as elsewhere) I was saddened to learn, held that any action taken with the intent to defraud involved moral turpitude.
I did not consider the consequences of those actions that led to my problems with the criminal justice system. But as I was trying to build an argument that might allow me to retain my license to sell real estate, I had to come to terms with what courts had ruled. I couldn’t undo my past. The courts concluded that if an individual’s conduct ever involved “deceit, graft, trickery, or dishonest means,” it involved moral turpitude and thus rendered a person unfit to hold a professional license.
“But you still put yourself through the trouble and expense of making a case before the Department of Real Estate,” David was clinging to hope. “You must have thought that there was something you could do to get your license back.”
“I went through the motions,” I agreed. “Yet I know what I was up against. I had committed a crime as a stockbroker, not a real estate agent. And I’ve worked hard to redeem myself through honesty, transparency, and community service as many character witnesses testified. Despite the good deeds I tried to contribute, I understood that the Department of Real Estate would be unlikely to ignore the character blemishes that led to my troubles with the law. I had hopes, but I went into my hearing with the understanding that my criminal conviction was going to present a hurdle that might prove insurmountable.”
David continued making arguments suggesting that he wasn’t yet willing to accept the lifelong consequences that accompanied convictions for any kind of fraud. My role was to remove the ostrich-like delusions, to prepare him in the best way I could for the challenges ahead. But part of my ongoing redemption was to share experiences like those of David’s and mine with students and professionals who kept their licenses in good standing. Such experiences, I was convinced, would provide solid reasons to respect the value of an honest reputation.
Chapter Eight Exercises
What can a person convicted of a white collar crime do to restore good character?
In what ways does serving a prison term equate with justice?
How should society respond to white collar offenders who satisfied the justice system?