A beginner's guide to accounting fraud (and how to get away with it): Part V

Who do

Enough talking. We’re doing this already. But who are we? I’m not asking in a pretentious, existential French way. I mean what kind of people do we need to be to pull this off?

One quality we’re going to need is bouncebackability. And if we can be half as rubbery as the guy I’m going to tell you about now then we’ll do well.

The personal webpage of the man I have in mind starts with a banner asserting that he’s been dubbed the “Zelig of Wall Street”. Zelig, for those who don’t recognise the reference, is a 1983 Woody Allen movie set in the interwar period, about a non-descript man who transforms his appearance to blend in with the people around him. In the film the character keeps turning up at key events of the time - from a party with F. Scott Fitzgerald in the roaring twenties,  to Depression-era Nazi Germany. I don’t think the comparison was meant as a compliment, but there’s no such thing as bad publicity.

Our real life Zelig first features in a later period of history, the era of financial deregulation in the 1980s. He got himself hired by American investment bank Drexel Burnham Lambert, which in those days was one of the most powerful forces in US capital markets. Drexel had almost unparalleled capacity to raise money to fund M&A deals,  backed by its junk bond sales team in Beverly Hills (a few captive savings and loans clients might have helped too).

Drexel’s junk operations were led by Michael Milken. In 1990, at the end of a long chain of legal and regulatory actions that began years earlier, Milken pled guilty to six felony charges of securities fraud and conspiracy. He agreed to pay $600m in fines and penalties and was sentenced to 10 years in prison (Drexel had already collapsed into bankruptcy after settling with the Department of Justice and SEC).

The man who sat to the left of Milken on Drexel’s infamous X-shaped trading desk was a key prosecution witness. Milken had hired him to handle just one account, Solomon Asset Management and a related junk bond fund, Finsbury. Drexel and Finsbury conspired to inflate bond prices paid by the fund, to funnel extra commission to Milken, and to generate phony tax losses for its principal. Our man kept records of these transactions in a blue book. In return for immunity from prosecution he testified that Milken had instructed him to get rid of it and detailed the entire scheme with Solomon, one of the six felonies Milken later pled guilty to (Milken was pardoned by Donald Trump in 2020).

A lot was acceptable in the ‘80s, but times change right?

In 1993 the SEC charged the receivables factoring business Towers Financial Corporation, alleging it operated a $500m Ponzi scheme - one of the largest in US history. The Towers story was in the news again more recently because its principal, Steven Hoffenberg, claimed Jeffrey Epstein was his co-conspirator in the fraud.

Few assets were recovered from the collapsed firm, but about $20m in cash and a similar amount of receivables got injected into a new entity, Qualis Care. The hope was that could collect more for creditors than a liquidation. Qualis was a joint venture with an entity controlled by John Hall, who proceeded to systematically strip it of its assets. The resulting lawsuit brought by creditors alleged that a certain former Drexel salesman sold Qualis nearly worthless securities for $10m, with Hall (who pled guilty) the ultimate beneficiary. As best I can tell the case against our man was dismissed.

Between May and October 1996 Michael Wachs sold 3 DC-8s, 485 railroad cars and 338 barges for about $26m. The only problem was the assets weren’t his to sell, they belonged to his employer Chase Manhattan. Wachs went to prison and was barred from the banking and brokerage industries.

Wachs re-appeared in the early 2000s running CEOcast, a website promoting penny stocks. One of these was Hythiam, which was marketing a treatment for methamphetamine addiction. There hadn’t been any controlled study of the product and, because it was just a cocktail of existing off-label prescription drugs, it didn’t need FDA approval. Hythiam’s CEO (our Zelig again) said he felt compelled to improve addiction treatment after seeing his half-brother struggle with cocaine and alcohol dependence, and his company made big claims about Prometa’s effectiveness. The only problem was it didn’t really work. Double blind tests later showed no benefit compared to a placebo.

By 2010 Wachs was a partner in our man’s venture capital firm, Socius. CEOcast continued operating as a related entity. Also working for both firms was Richard Josephburg, who had been jailed for tax evasion in 2007. He was jailed again in 2019, this time apparently relating to his work for CEOcast and Socius. In May and July 2012 Socius had used Halcyon Cabot Partners, a broker-dealer employing Josephburg’s son, to conceal kick-backs from investments it made in shares and warrants of biotech company Cell Therapeutics. The Financial Industry Regulatory Authority barred Halcyon and Josephburg junior as a result.

This year it was the turn of the SEC, the DoJ and our man, Terren Peizer. He’s been charged with insider trading in another pump and dump, Ontrak. The cases are ongoing but my money is on our Zelig coming out on top again.

You might be thinking this isn’t the kind of track record we want to emulate at all. But there’s something magical about the way financial markets keeping giving chances to anyone that’s already in the game, no matter how many times they go bust (see e.g. John Meriwether). For people like us, the stock market washes away ours sins. It’s a morality car wash. It does for us what Lourdes does for humpbacks and cripples. We can be born again. It’s not magic, I guess, or mystical. Just greed.

There’s a Forbes article from the late ‘90s describing Peizer’s exit from another collapsed penny stock - this one was biotech Hollis-Eden Pharmaceuticals, where he evangelised a treatment for AIDS (which of course never came). It ends with the line:

He hints at big upcoming deals that will redeem his career, much as Global Crossing has reinvented Gary Winnick, another former Drexelite granted immunity from prosecution in the Milken case.

Hope springs eternal. I mean Global Crossing filed for bankruptcy in January 2002, and it didn’t exactly salvage Winnick’s reputation. It did make him very rich though. Meanwhile our man is still promising redemption tomorrow - and some investors go on buying today. How good is that?

If, after all that, you still think there’s something about you that we need to hide to pull this off, well don’t worry. We can do something about that.

Back in 2017 I ran a job ad that read:

“In 2016 a police investigation of the collapse of a business closed with a public prosecutor recommending more than a dozen individuals be charged with fraud. One of those named as a suspect is the CEO of a UK PLC with a current market capitalisation of several hundred million. A formal indictment could be handed down any day. Name the company.”

The answer was internet of everything stock Telit Communications. In 2015 Avigdor Kelner, founder and former Chairman, had been sentenced to two years in jail for bribing politicians in Israel. He’d previously been arrested in 2007 in relation to alleged insider trading involving several investments made by Polar Investments, including Telit, although no charges were brought.

But that wasn’t the cat I had in mind in the ad, it was then current CEO Oozi Cats. And the 2016 investigation wasn’t his biggest problem. Italian newspaper Il Fatto Quotidiano reported later in 2017 that he was a fugitive from US justice, having done a runner from the country after being indicted for wire fraud in the 1990s!

Oozi and his wife had allegedly been charged for their part in a land flipping scam. Co-conspirators Wayne Weisler and Susan Taylor pled guilty to operating a scheme designed to defraud mortgage companies by inflating the apparent value of a property through a series of related party transactions, and then borrowing against this artificially high value. The scheme used a Massachusetts entity named Dolphinvest. The company’s Articles of Organization show it was incorporated by Weisler, Taylor and one Uzi Katz.

Now I’m guessing Oozi (or is it Uzi again now?) would probably say he was wrongly charged. That may be so. I’m not casting any aspersions here. I don’t know and I don’t care. What matters for us is that this particular story from his past wasn’t easy to find, even though there were details available online. Partly that was because he had changed how he spelt the anglicized version of his name (from Uzi to Oozi, which was obviously odd to an Israeli friend). But mostly because searching for Uzi Katz on Google brought up dozens of websites about people in Boston. There were sites with titles like “Professor of English Literature from Boston - Uzi Katz”, “Uzi Katz, civil engineer from Boston” and just plain “Uzi Katz of Boston”. My own favourite was “Uzi Katz, Boston Dancer”.

The websites seemed like pretty obvious fakes. As in, they did not appear to be about real people. I mean the blogspot for one linked to a Google+ profile with a photo - which Google Images showed was a picture of Ravi Ramamoorthi, Professor of Computer Science at the University of California.

Maybe, just maybe, these websites were designed to create a smokescreen. The fact that the registered contact for one had the email address reputation@seo-properties.com (seo being short for search engine optimisation) didn’t exactly dispel this impression. Or perhaps it was all just a coincidence and there really are a lot Uzis in Boston. Whatever way it happened, the result was the same. Stories about the Uzi Katz in Boston that got charged with wire fraud were buried way down the search rankings, behind all the dancing professors.

So if you aren’t sure you have what it takes to do this, it’s all good. You can identify as whoever you want these days.