In the fall of 2009 I accepted an invitation to speak at DePaul University from Dr. Kelly Pope, professor of accounting. During my imprisonment, I had the privilege of contributing to the education of business students at DePaul. Dr. Pope sent Karen Chodzicki and her team to the prison where I was held in order to video record my descriptions about the pressures and character flaws that led to my downfall. I wrote that contributing was a privilege because I found that talking about what happened both cleansed my conscience and opened opportunities to begin a lifelong redemption process that I appreciated. Sometimes people fell of course, and when they did, the spirit of community could help them find their way back. I looked forward to my trip to Chicago so that I could address Dr. Pope’s audience in person.
Before I visited DePaul, I participated as a guest on a talk-radio program hosted by Michael Sweig, a law professor at Roosevelt University. Professor Sweig’s program discussed business issues, and by interviewing me he exposed his audience to the intricacies of white-collar crime. Then, as I rode in a cab from the radio station to DePaul, I received an email message from Arthur, a listener of Professor Sweig’s program. Arthur had listened to the interview and reached out because he was shook with recent news of his federal indictment. He faced numerous charges for wire fraud.
Remembering a lesson my beloved mother, Tallie, tried to install in me when I was a child (that in working to help others we simultaneously helped ourselves), and in recognizing the assistance that people like Kelly Pope and Michael Sweig gave me, I acknowledged my duty to help Arthur, even if I could only help by listening. I replied to his email, explaining that I was about to begin my presentation at DePaul, but assuring that I would contact him to listen a few hours later after I finished with the university.
I understood how criminal charges could cripple a person’s psyche. Although I would not speak to Arthur for a few hours, I empathized with the mental anguish that was crushing him. I knew it would feel as if the jaws of an iron vise were closing against his head, squeezing the sense of self, the dignity out of him. He was an educated man, a leader, and although I knew that he thought of himself as being good, the indictment shattered that image, obliterating his sense of self. I had struggled through the same anxieties before and knowledge of that pain troubled me as I stepped onto the stage of the auditorium at DePaul.
I didn’t know how many times I could speak about my crimes. With every discussion, flashes of humiliation whipped me again. I wondered whether continuing to talk about my complicity in a fraud would keep the wounds open, allowing them to fester rather than heal. In telling my story to the business school students, I saw them sitting attentively in the audience. I responded to their perspective questions and understood their curiosities about the forbidden world of prison. Yet I was sad because I knew that I had once been one of them. I listened to lessons on ethics as a student and as a stockbroker, but back then it would have been easier to imagine myself with leprosy than to imagine myself struggling through problems with the criminal justice system.
My challenge was to help as many people as possible understand that an inattention to ethics could lead anyone astray. I had to convince others on the need to remain attentive to their ethical cores so they could always enjoy the inner peace that came with good character rather than suffer through the turmoil and disgrace that troubled the consciences of Arthur and me.
When I returned to the hotel I met Arthur in a lounge near the lobby. I presumed that he was in his late 60s. Instead of standing straight he stooped and looked as if he had shrunk inside his clothes from the loose way they hung on his long frame. His face was gaunt with crevices in his right cheek and a smoker’s rasp. The grip of his handshake felt feeble.
Yet I was wrong about his age. When we sat to talk, Arthur told me that he was a married father of three and only 54. The stress load he was carrying, he said, had aged him. When I asked him to tell me what was going on, he said that everything he had worked for over the course of his life was falling apart because of criminal charges for fraud. They weren’t his fault, he insisted, but he didn’t know what to do. He didn’t think his marriage would survive a prison term, and his children were embarrassed because local newspapers and Internet Web sites had published stories about the accusations against him.
“When you say that you aren’t to blame for the charges you face”, I asked, “are you saying that crimes weren’t committed or that crimes were committed but that you’re not guilty?”
“I didn’t do anything wrong. My partner deceived me. He’s been perpetuating a fraud for more than two years, and now I’m trapped in the middle of it.”
“What kind of business were you in?”
“I’m not in any business now,” Arthur said. “The government has shut us down. I was in financial services.”
Arthur explained to me that after he graduated from the University of Illinois, he built a career as a commercial real estate broker. He worked with a national brokerage company that specialized in apartment buildings until a few years ago, when he left the firm to form his own business with Mark, an attorney with whom he had worked closely on several deals over the previous decade. Together Mark and Arthur formed a financial services company to take advantage of provisions in the tax code and their respective experiences.
To encourage real estate investment, the Internal Revenue Service offered a section in the tax code to ease some of the income-tax burdens on investors. The IRS certified the provision for real estate exchanged under Title 21 of the United States Code, sections 1030 and 1031. The codes allowed investors who sold commercial real estate investments at a profit to avoid paying capital-gains tax obligations on condition. To avoid paying taxes on the gain, the investors had to use all of the proceeds from the sale of their real estate deal to purchase a new property of equal or higher value. Other conditions required to qualify for the tax break necessitated the seller to purchase new property within 180 days of the original sale, and the seller could not take control of any proceeds from the sale during that interim 180-day period. Accordingly, commercial real estate investors typically entrusted their sales proceeds to a qualified intermediary until they purchased the replacement property that would complete the exchange.
“Over the years of my career in real estate, I built an extensive network of relationships with investors,” Arthur told me, “Mark, my partner, had a law practice that specialized in real estate transactions. Since we had a good working relationship, we agreed to form a trust company and facilitate the property exchanges. Mark and I were equal ownership partners in the company,” Arthur said, “but we each had specific duties. I was responsible for marketing the services of our firm while Mark had sole responsibility over the legal and financial aspects of the business.”
“So how did you market your firm’s services?”
“Really, it was all relationship based. When investors I knew sold properties, I spoke with them about opening a trust account with us so our firm could manage the proceeds from the sale of their property until they needed the funds to purchase their new property. If the clients choose to use our services, they would sign standard form agreements providing that property-sale proceeds be wired directly from the closing attorney’s account into one of our company’s accounts. The clients could choose between a money-market account, yielding a 3 percent return or they could choose an investment account that yielded a 6 percent return.”
I stopped Arthur, scratching my head. “I thought these funds had to stay in reserve for the purchase of or exchange of property.”
“They were,” Arthur answered. “When the clients were ready to close on their next property, our trust would wire the funds. The funds would never pass through the client’s hands and thus satisfied the IRS rules.”
“I get that the trust may satisfy the IRS for tax purposes—but how could your trust company offer choices of yields such as 3 percent or 6 percent?” I didn’t understand how Arthur’s company could both hold the proceeds from the real estate sale in reserve—supposedly available on call for the purchase of the exchange property—while simultaneously providing such high rates of return during the interim.
“If the clients chose the money market option,” Arthur said, “we would have 48 hours to return the client funds, but if they selected the higher 6 percent yield from the investment account, the client would have to agree to provide 30 days notice for a demand of the money.
“Arthur, you understand that I was a stockbroker before I went to prison?”
“And?” Arthur didn’t make the connection to what I was trying to point out.
“In my experience, a close connection exists between risk and return. If you’re promising to offer a 6 percent return on an investment, that return would have to come with a certain degree of risk. You understand that investors would consider a 6 percent yield relatively healthy—what kind of investments was your trust company selecting that would kick back investors 6 percent, allowing more for your trust company to profit and still offer the liquidity that would cause your clients to call for their funds within 30 days’ notice? In all my years as a stockbroker, I never saw such an investment return that wouldn’t bring a higher element of risk. “
“That’s the point,” Arthur claimed. “I didn’t have anything to do with the funds once they were wired to our company. As far as I knew they were kept in trust. It was my partner, Mark, who was in control of the administration of the business.”
“Yet you said you were equal partners in the ownership of the business, right?”
“But my responsibilities were marketing, simply bringing the clients in. Mark had sole authority over the financial business. I assumed he knew what he was doing since he was an attorney.”
“Okay. So how did Mark oversee the funds once they were wired to your company’s account?”
Arthur explained to me that his partner, Mark, had opened two separate accounts at a major brokerage firm. The first account existed solely as a depository to receive the funds that clients sent upon the closing of their real estate transaction. Once the funds were in hand, Mark transferred them immediately to the second account that he had opened. He used the client funds to trade aggressively in stock options. Over the two years of Arthur’s partnership with Mark, Mark’s trading of stock options resulted in $11 million in losses for the client funds. For a period of time, Mark succeeded in hiding losses. He sent money that the trust received from new clients to investors who needed their funds to close on their real estate exchange transactions. But in the end, Mark’s losses became too large and his scheme collapsed, resulting in criminal charges for 27 counts of wire fraud.
The crime of wire fraud fell under the United States criminal code, Title 18, Section 1343. To convict on charges of wire fraud, the government had to prove that a defendant intended to use communication lines to defraud others. The crime of wire fraud exposed people to sentences of up to 20 years for each conviction. In facing 27 counts, theoretically Arthur could spend the rest of his life in prison.
“But I didn‘t do anything wrong,” Arthur insisted. “Our partnership agreement clearly identified my responsibilities as marketing. Mark was in charge of all administrative responsibilities, including setting up the accounts and presiding over all financial transactions. I’m not the one who lost the clients’ money.”
Whether the government would prove that Arthur was complicit in fraud was a legal matter, one that a competent defense attorney would have to help him resolve. As I sat listening to him in that hotel lobby, I explained that I couldn’t have any role in offering advice on legal matters. Yet through my work, I explained, I learned of a concept that existed in criminal law called “willful blindness.” Under the theory of willful blindness, courts could deem statements or representations fraudulent if they were made in a conscious indifference to the truth.
Arthur had a long and costly legal battle ahead of him, one for which he was not prepared. An unfortunate reality of my work put me into conflict with many people who were at the lowest moments of their lives. They stood to lose their families, their assets, their reputations, their careers, and their liberty. As I reflected on Arthur’s repeated insistence that he hadn’t done anything wrong, my mind wandered back to those business school students I had addressed only hours before at DePaul. How many of them would venture into careers with the misunderstanding that they could protect themselves from legal complications with simple claims of ignorance of the wrongdoing around them?
Arthur may cling to his claims that he limited his responsibility to marketing but I wondered how plausible such claims would be in light of his ownership interest in the trust company. He had graduated from college and had built a long career related to investments. Such experience might suggest that he bore some legal responsibility for understanding how his company intended to deliver the yields his marketing efforts promised clients while the trust company simultaneously promised liquidity. Arthur may claim that he didn’t know anything about the inherent risk of trading stock options and the inconsistency of his partner’s using clients’ funds for such trades while promising security, but those claims would not excuse him from exposure to decades in prison if he were convicted on 27 counts of wire fraud that resulted in $11 million in losses.
It saddened me to know that the only service I could offer Arthur was to listen. Nothing I said was going to reverse the reality that he had offered a service to investors that, in the end, turned out to be a Ponzi scheme. His partner may have acted alone in squandering client funds through imprudent market speculations but Arthur had presented those investors with documents offering an unreasonably high rate of return on funds that were supposed to be held in trust. He should have known more about how his company was going to provide such yields—especially since he was a principal of the trust company.
My experience might help Arthur prepare for the adversity awaiting him. But my real challenge was to offer suggestions to prevent others from making decisions that could lead them into similar difficulties. Arthur was but one of millions of people who convinced themselves that they were merely businessmen or someone who delivered a product or service. I hoped to reach more before bad decisions derailed their lives. The truth was—as I had learned—when we made representations that others replied upon, we had an ethical responsibility to act honestly and with integrity—regardless of our legal obligations. Acting honestly and with integrity would not only ensure that we avoided troubles with the criminal justice system, such behavior would keep us on track for happiness and inner peace.
As my brother Todd and I were growing up, Tallie admonished us to make all decisions as if someone we loved and respected was watching us. Could we feel proud of the choices we made and defend them? Had I used my mother’s guidance for all of my decisions I would not have become enmeshed in the kinds of deceitful behavior that later led to my imprisonment, It took significant strength for me to see the wisdom and long-term benefit of making values-based decisions. As I listened to Arthur, he sounded lost in those same clouds of denial that once blinded me.
From the writings of Professor Jana Craft, I developed a series of questions that I would rely upon to guide me like a compass through the quagmires of life. I wrote about them in my book, Lessons from Prison:
1) Would my decisions mislead anyone or obscure truth?
2) Could I justify my decisions to my unborn child whom I would want to consider me as a man of honor?
3) Would others judge my motivations and actions as being consistent with the concepts of integrity and good citizenship?
Those were not the questions that guided my decisions or my conscience once I became a stockbroker. As a consequence I lost my way through detours I misperceived as shortcuts, and they resulted in my becoming disgraced with the label of a convicted felon. It may have been too late to steer Arthur away from legal troubles similar to those that had cost me so much. His insistence that he did not know about his partner’s misappropriation of client funds might suspend some of the pain as he proceeded through the judicial system. But a grand jury and a prosecutor wanted to hold Arthur accountable for $11 million of client funds.
We all could learn from the troubles Arthur faced. Regardless of his legal outcome, as a person others trusted and relied upon, he had an ethical duty to represent his clients fairly. Had Arthur prefaced his representations with a question like, “Would my actions mislead anyone or obscure truth?” perhaps he would not have been struggling through the anxieties that so paralyzed him when we met in that hotel lobby.
Chapter Five Questions
1. What role does trust have in careers of sales executives?
2. How should executives balance allegiances to company with allegiances with clients?
3. Compare and contrast duties to legal and ethical codes.