Deceptions Used
By Stock Swindlers To Appear Legitimate
Corporate Entities
Fancy names, which do not make a stable or honest company, are
often just created to impress the simple-minded.
Listed below are some of the impressive-sounding stocks that were
traded in the NASDAQ, OTC and AMEX markets
and used to defraud investors out of approximately $106 million
over a three year period by a boiler room brokerage which used
fraudulent, deceptive and high-pressure sales tactics to induce
investors to purchase the speculative broker-recommended stocks.
Diamond Entertainment Corp.; First Chesapeake Financial Corp.;
Futurebiotics Inc; Immunotherapeutics Inc.; International Franchise
Systems Inc.; Las Vegas Entertainment Network Inc.; Officeland
Inc.; Red Hot Concepts Inc.; Sanyo Industries Inc.; U.S. Transportation
Systems Inc. and International Thoroughbred Breeders Inc.
Though it sounds stable and productive, the title of "Corporation" can
be acquired for a few hundred dollars and may represent a single
person with a phone and pen whose only assets are his sucker lists.
They are often set up just to allow for a planned corporate bankruptcy
which will not affect the individual scammer's credit rating.
Howdy Partner
Proceed with caution when you are encouraged to invest in a "general
partnership" or "limited liability company." Many
of the current crop of high-tech, real estate and exotic livestock
deals are packaged as "general partnership" or "limited
liability companies" in an attempt to evade the consumer protection
requirements of state and federal securities laws.
These laws are designed to require promoters to disclose all pertinent
facts about themselves and the investment. In attempting to skirt
these laws, the promoters may conceal personal bankruptcies, previous
securities law violations, risks (including lack of expertise and
competing technologies) and actual marketing costs (some of the
high-tech deals involve 40-60% commissions for sales people, leaving
little or nothing for the actual project).
The
More You Lose The Better
24 May 2001
I love your site. I haven't had a chance yet to thoroughly
digest it, but your writing is great.
I'm a CPA who, for the last eleven years, has worked with several
hundred people of the possibly 3,000 victims who were defrauded
by Walter J. Hoyt, III, using cattle partnerships as investments.
The brilliance of his scheme, however, was that the investors used
their tax money to fund his operations.
Mr. Hoyt was an affable man, dressed in cowboy attire, who was
general partner of all the partnerships as well as the tax matters
partner. He was also an Enrolled Agent and had a tax preparation
service. He controlled the preparation of the partnership returns
and the individuals' returns, allocating investors sufficient losses
to reduce or entirely eliminate their income tax liability. Then
they had to pay him 75% of the refunds.
His operations were audited continually by the IRS, who knew very
well that he did not have the cattle he claimed to have and neither
did the cattle have the value he claimed they had. Nonetheless,
for over twenty years, they made no effort to strip him of his
Enrolled Agent's status.
During all this time, Mr. Hoyt kept on extending the statute for
assessment of partnership taxes. After TEFRA passed in 1982, this
meant that effectively he extended each investor's return indefinitely.
The investors did not know this. Like most people, they assumed
that after three years passed, the IRS couldn't come back at them
any more. They couldn't have been more mistaken. Some continued
to receive refunds for over twenty years before they found out
the truth.
Mr. Hoyt targeted middle class taxpayers. Most of them very good,
church-going people. He sold what he called "retirement plans
for the middle class." Few investors made more than forty
to fifty thousand a year in their peak earning years. A lot of
utility company employees were involved because Hoyt got a strong
foothold in our local municipal power company, SMUD, through "satisfied" investors
selling to other people ("Hey, I get a refund every year.
I never pay income tax. I've been doing this for five, ten fifteen
years").
Most of them worked at our now-defunct Rancho Seco nuclear power
plant and subsequently moved elsewhere, where they would recruit
other investors. I don't think there is a single state without
a Hoyt investor in it. Even the Merchant Marine was infected with
the Hoyt virus.
In the early nineties, the scheme began to fall apart. Investors
began to receive tax bills that required they repay not only the
initial tax refund but also penalties and interest. Since years
from the late seventies and early eighties were involved, it was
not uncommon for the interest to total four to five times what
the initial tax bill was.
Multiple years were involved and, in addition, Hoyt had filed
for net operating loss carry-backs in the investors' first year
of partnership involvement - which went back and refunded tax for
the three years prior. I had clients with bills in the hundreds
of thousands of dollars.
They were the lucky ones.
Roughly twelve hundred of the investors were die-hards and even
though the IRS made several settlement offers (each of which had
terms that rendered bankruptcy the only viable option for most
investors), these people went on fighting.
They still have over 700 docketed cases and when those decisions
are rendered, these people will not only have disallowed losses,
they will have income attributed to them. I know this because some
of the cases have been decided and the court will follow the precedent
established.
The IRS was careless in the audit adjustments they did, most of
which were upheld by the court. If cash came in, they treated it
as income, even if it was a contribution from a partner. So these
people will be paying taxes on money they contributed, plus interest
at a tax-motivated rate. Many of the bills will exceed a million
dollars.
Earlier this year, Mr. Hoyt was convicted of fifty-something counts
of mail fraud and assorted other charges in Oregon. Tax fraud was
not amongst them. The IRS stayed out of the case which was investigated
by the United States Postmaster and the Federal Bureau of Investigation.
The "Oregonian" newspaper has, I believe, archived some
articles covering the trial under the heading "Bull Market" that
you might like to glance over.
One of the die-hard investors sponsors a web-site with some interesting,
if occasionally suspect, information on the scam. Their address
is www.mindconnection.com/hoyt/.
This site has links to articles in newspapers.
I thank you for your site and will come back when I have more
time. I'm still doing tax returns.
Lynn Anderson
Note: For more info on Tax-Related Investments hit
the link.
Cattle scam victims still targeted by the IRS
By James Sinks - The Bulletin bendbulletin.com Bend, Oregon 12/07/03
Roger Carter invested for almost 20 years in an Eastern Oregon
ranching empire with the expectation he'd have a tidy nest egg
to help pay for retirement or the kids' college expenses.
But today, that money is gone, and that's just the start of it.
His ill-fated involvement with Burns-based Hoyt & Sons leaves
him facing a debt that could exceed $250,000 —courtesy of
the Internal Revenue Service.
That number is so scary to his family, said Carter, 53, that he
survives day-to-day by not thinking about it.
"It's devastating," he says. "But for our emotional
health, we can't dwell on it."
Carter, an electrician from the community of Corbett at the western
end of the Columbia Gorge, is one of an estimated 3,500 people
in 41 states who bought into a multilayered tax shelter scheme
run by smooth-talking cattleman Walter J. Hoyt III.
Hoyt was convicted in 2001 of fraud and money laundering in a
case called the biggest agricultural scam in U.S. history.
According to court documents, the 20-year scam bilked more than
$100 million from investors who didn't realize they were sinking
money into overvalued ranchland and livestock that existed only
on paper.
Hoyt, now 63, is at a low-security federal prison southeast of
Phoenix, Ariz. He is scheduled for release in 2018.
For investors, the headaches didn't end when Hoyt went to prison —and
there's no end in sight.
They now must deal with the Internal Revenue Service, which continues
to assert that investors weren't actually victims of a scam but
willing accomplices and tax cheats, even in spite of the guilty
verdict.
"There's no change in the IRS position," said Wendy
Pearson, a Seattle attorney who is representing a coalition of
investors.
The stakes are huge: The IRS is seeking massive penalties and
interest worth tens of millions from victims. Those penalties in
many cases dwarf their actual investment in the Hoyt & Sons
venture.
About one third of the investors have yet to settle with the IRS.
Most owe between $50,000 and $500,000, Pearson said.
The ongoing pursuit of Hoyt's victims flies in the face of an
admonishment from the federal judge who presided over Hoyt's criminal
trial. After handing down a 19-year prison term in June 2001, U.S.
District Judge Robert E. Jones asked the IRS to ease its aggressive
stance toward investors.
"Victims in this case truly were victimized by a person capable
of the greatest deceitful practices," he said. "My strongest
recommendation is that those remaining cases be resolved."
Yet the IRS continues to argue for maximum penalties in tax court.
The IRS remains mum on the subject of Hoyt, his investors and
the efforts to collect stiff penalties from them.
"There is no comment at this point," said Shawn N. George,
a spokeswoman in the agency's Seattle office.
Montgomery Cobb, a Portland attorney who now handles the legal
affairs of the complex web of Hoyt-formed partnerships, said there
is no signal the IRS is ready to negotiate anything with investors
whose cases are still open.
Right now, the only option is for investors to agree they committed
fraud and pay all the penalties, he said.
"Everything is still in limbo," he said.
Yet it makes little sense to keep dragging it on, Cobb said. "The
amounts accumulating right now are almost irrelevant because they
are so far beyond each taxpayers' ability to pay."
Seattle attorney Pearson said investors all agree they should
pay back any tax benefits that weren't warranted, but believe it's
unfair for the IRS to demand penalties and interest at rates as
high as 120 percent a year.
In addition, investors say the IRS shares part of the blame for
the Hoyt fiasco.
The agency helped Hoyt perpetuate his scam because the agency
allowed Hoyt to act as the primary tax matters liaison for his
complex network of partnerships, she said.
And that's even though he was under investigation for fraud since
the early 1980s.
"For six years they gathered enough information to determine
that he was selling nonexistent cattle and misrepresenting the
financial position to partners and commingling funds," she
said.
The IRS has the authority to remove a tax liaison for a partnership
if foul play is suspected —but Hoyt wasn't removed as the
tax matters partner for his 100-plus partnerships until this year.
Also this year, it became clear the IRS has withheld documents
that could have helped investors in a string of tax court defeats,
said Gary Blackburn of Orovada, Nev., an investor who once worked
for Hoyt & Sons.
He owes an estimated $750,000, of which more than $500,000 is
penalties and interest.
"Every time we go to court, they win. Every time we appeal,
we lose," he said. "All these documents we got after
the trial and we needed them before the trial."
Based on the paperwork, the IRS should have taken action against
Hoyt in the early days of the fraud —or at least told investors
it was a scam, Blackburn said.
"They could have shut him down in the 1970s when he had just
a few hundred investors," he said. "But they didn't tell
anybody or stop anybody."
Not all investors know yet what their total bill could be, he
said. The IRS is still auditing partnership records and more than
800 cases are still pending in tax court.
"The people are still waiting for the hammer to drop," he
said.
The Hoyt saga has its roots in the 1960s near Sacramento, Calif.,
where Hoyt and his brothers began raising prized shorthorn cattle
and forming partnerships to buy and own them. The business settled
in the sage-swept high desert of southeast Oregon in the 1970s.
By 1980, according to audits, Hoyt was selling investors cattle
that didn't exist.
A licensed IRS tax agent, he'd complete his investors' returns
and assign each of them a share of the cattle-raising expenses,
which they would then use as a deduction to reduce their taxes.
Investors didn't realize they were deducting costs associated with
cattle that didn't exist.
When their refund checks arrived in the mail, investors would
send 75 percent to Hoyt to pay for their cows.
Hoyt targeted unsophisticated investors he dubbed "Johnny
Six-Pack," but some of them were military officers and professionals.
At its peak in 1987, the business sprawled across more than 500,000
acres of ranches and leased BLM land from Harney County to the
Idaho border. It employed more than 200 people, most of whom became
ensnared in the tax problems because Hoyt also made them partners
in the company.
In those days, investors would trek to Burns for annual folksy
barbecues and ranch tours, blind to the fact the herds of so-called "super
cows" were vastly overstated in size and value.
Roger Carter was one of those visitors. He'd first started investing
with Hoyt in 1984 after getting the green light from his attorney
and tax preparer.
By the early 1990s, he was having doubts about the company —but
was convinced everything was kosher after ranch tours in 1991 and
1992. There seemed to be plenty of cattle.
"Whenever we were on the ranch in Burns, the facilities confirmed
all our hopes and wishes and we went away comfortable."
But in 1993, an IRS cattle count showed that Hoyt owned a total
of 7,903 cattle. At that time, Hoyt claimed he owned 26,205.
But investors weren't told —and Hoyt wasn't shut down for
good for another five years.
He was arrested in 1998 after an investigation by the FBI and
postal inspectors.
Carter, who kept sending Hoyt money until the very end, said he
feels betrayed —but even more so by the government, which
he thought was supposed to protect the little guy.
"I was brought up to believe for the most part that government
is good and they are there to help," he said.
"After our dealings with Hoyt, we found the government isn't
really willing to help and instead will take advantage of people
if it is to the government's benefit. It's a very bitter feeling."
Carter also places some of the blame on himself, he said. "I
allowed myself and my lack of education to put my family's future
in jeopardy," he said.
He said he's not a tax protester and agrees that he should pay
back any improper deductions, but he is holding out hope that the
high penalties and interest can be erased or reduced.
"If I didn't think there was a positive outcome down the
road, this would be senseless," he said. "We're just
hoping it will be more favorable than the worst-case scenario."
BEND, Ore. —AP Seattle Times - 12/08/03 - Thousands of investors
in an ill-fated tax-shelter scheme run by a smooth-talking cattle
baron from Eastern Oregon still face investigation by the Internal
Revenue Service, despite a federal judge's urging that the IRS
ease its stance.
About one-third of the investors have yet to settle with the IRS.
Most owe between $50,000 and $500,000, said Wendy Pearson, a Seattle
attorney who is representing a coalition of the investors.
Known as the "Paper Cowboy," Walter J. Hoyt III of Burns
was sentenced in 2001 for selling cattle that existed only on paper,
as well as other schemes. Investors used shares in the nonexistent
herds for tax shelters.
Hoyt conned investors in 41 states out of more than $100 million
in a case that has been called the biggest agricultural scam in
U.S. history. Now 63, he is in federal prison.
But investors still must deal with the IRS, which believes that
they were not victims of a scam but willing accomplices and tax
cheats. The IRS disallowed the tax deductions and billed investors
for repayment.
The ongoing pursuit of Hoyt's victims goes against an admonishment
from the federal judge who presided over Hoyt's criminal trial.
After handing down a 19-year prison term in June 2001, U.S. District
Judge Robert Jones asked the IRS to ease its aggressive stance
toward investors.
Pearson said investors all agree they should pay back any tax
benefits that weren't warranted, but they believe it's unfair for
the IRS to demand penalties and interest at rates as high as 120
percent a year.
Investors say the IRS shares part of the blame for the Hoyt fiasco
because it allowed him to act as the primary tax-matters liaison
for his complex network of partnerships, Pearson said.
A licensed IRS tax agent, Hoyt would complete his investors' returns
and assign each of them a share of the cattle-raising expenses,
which they would then use as a deduction to reduce their taxes.
Telephone Facilities
Toll-free telephone numbers which phone companies can put in homes;
postal service centers, call forwarding, executive service centers
and voice mailbox services are all used by fraud professionals
to hide their location and identity.
You have no idea when you are calling a phone number today where
that call is actually going. Call forwarding can give multi-office,
even international respectability to one tiny home office. They
can have a tape recording of plant sounds or hectic office noises
in the background to create an illusion in your mind.
One operation worked from a little office with multiple phone
lines coming into it. They acted as their own references and their "bank" to
people who were encouraged to check up on them. A call to a reference
number in Japan was routed right back to the scammers for a glowing
report. Another crook even continued to operate his credit fraud
scams from a prison payphone.
Some foreign fraudulent telemarketers hide the fact that they
are not based in your country. Some use 800 numbers that connect
United States consumers to boiler-rooms located in Canada and visa-versa.
Consumers are not likely to expect that calling an 800 number
would connect them to a foreign country. Even consumers who understand
that they are talking with someone in a foreign country may not
understand the implications this may have on their rights, or on
the ability of their respective government to investigate and redress
fraudulent practices.
Officials are seeing a new trend in investment scams whereby supposedly
foreign companies pretend to operate outside the US but are actually
operating, and scamming US citizens, domestically. All it takes
to create this illusion is a contract with a business services
company (i.e., a mail forwarding/phone answering service) in the
country of your choice, and a website identifying that foreign
address and telephone number as the company's business contacts.
In a case involving Donald O'Neill, he purported to be placing
customer funds with a German securities firm, when in fact the "firm" was
nothing more than a German business accommodation address for which
O'Neill paid, and that forwarded all calls and correspondence right
back to him.
A Prominent Address
If your only contact is by mail, the office may bear a prestigious
sounding address on a prominent street in a major financial district.
Often, this is nothing more than a mail drop or forwarding service
from a mail box rental service.
Supporting Documentation
Keep in mind that a "hot" industry does not necessarily
translate into a "hot" company. Just because a lot of
headlines are being generated about the prospects for a new or
emerging high-tech industry does not mean that a specific company
is going to be part of the overall success story. Promoters of
illicit schemes often attempt to make themselves seem more legitimate
by providing copies of glowing news articles from the Wall Street
Journal, Business Week, Forbes and other business publications.
Take the time to look at these stories carefully. If they do not
mention the company that has approached you, they are irrelevant
to your investment decision.
An Internet Presence
Some fraudulent investment promoters will fool you with web sites
that make their "investment company" look like a solid,
top-rated Wall Street investment firm with a slick-looking web
site that uses graphics, audio and even video clips.
While even the fastest-talking boiler-room operator would be hard-pressed
to make more than a few hundred "cold call" telemarketing
pitches in one day, they can now send e-mail to many thousands
of individuals in less than an hour and can post a bulletin board
message that may be read in a matter of weeks by individuals around
the world.
While many bulletin boards dedicated to investment topics are
interested in little more than swapping ideas about specific stocks
and exchanging general financial advice, there is a shady group
of individuals using them to enrich themselves at your expense.
A temporary worker for Goldman Sachs and Credit Suisse First Boston
who had access to non public information about impending mergers
and acquisitions passed the info on in a chat room where it was
used to net an estimated $8.4 million in illegal insider trading
profits.
As one online promoter has marveled: "With the online
world growing quickly, we can reach hundreds of thousands of
people with a single message. I can make it appear that many
people are posting on many different systems, all talking up
a stock."
Some deceptive investment information sites may ask you to submit
personal financial information online to determine whether you're
an "accredited investor." In addition to your name and
e-mail address, you may be asked for your income level, bank account
information, Social Security Number and other personal information
which is used to help them develop a qualified "lead list".
06/23/03 NEW YORK (Reuters) - A London lawyer has pleaded guilty
to attempted racketeering in connection with an international stock
fraud conspiracy that operated in New York and Britain, prosecutors
said Thursday.
Andrew Warren, 56, of Norfolk, in eastern
England, a former partner in the London firm of Talbott,
Creggy & Co., made a plea agreement in connection with
his role as legal counsel to a criminal enterprise run
by Westfield Financial Corporation, a
registered broker dealer in New York.
State Supreme Court Judge William Wetzel will sentence Warren on Aug.
4 to a state prison term expected to be between 20 months and five years.
He had faced up to 25 years in prison if convicted after a trial.
Warren was first indicted in June 1999 in connection with the stock fraud,
in which thousands of British and U.S. investors were allegedly cheated
of more than $17 million.
The scheme allegedly involved the sale of unregistered securities to
foreign shell corporations secretly controlled by Westfield. The principals
are alleged to have run up the price of stock to profit at the expense
of innocent investors.
Warren was charged with setting up and helping to manage the shell corporations.
Manhattan District Attorney Robert Morgenthau said that as part of the
scheme lawyers in London and Canada recruited a "distinguished" Liberian
diplomat to pretend to own the companies, paying him substantial sums
while obtaining blank signed documents from him to use in the fraud.
Spain is Boiler-Room Heaven
COURT ENTERS DEFAULT JUDGMENT AGAINST INTERNET STOCK TOUTER MARK
SCHULTZ, ORDERS PAYMENT OF DISGORGEMENT, PENALTIES AND INTEREST
The Commission announced that on July 10, 2002, Judge Milton Pollack
of the United States District Court for the Southern District of New
York entered a default judgment against Mark Schultz, 49, an internet
stock touter who now lives in Spain.
The Commission's complaint upon which the default judgment is premised
alleged that, as compensation for his touting, Schultz received undisclosed
stock and cash compensation from at least twelve issuers between 1995
and 1998.
Those issuers are Acacia Research Corp., American Entertainment
Group, American Nortel Communications, AWG, Ltd., Eutro Group Holdings,
Inc., EVRO Corp., Imagica Entertainment, Inc., Imaging Diagnostic
Systems, Inc., N.U. Pizza Holding Corp., Tessa Complete Health
Care, Inc., Wasatch International Corp., and WestAmerica Corp.
The Commission's complaint alleged that Schultz's recommendations
typically made inflated financial projections and predicted short-term
price increases of 100 percent or more. The Commission's complaint
also alleged that Schultz misrepresented his recommendations of
these issuers as the product of independent analysis when in fact
his publications were merely paid tout sheets. The complaint alleged
that in many cases Schultz would receive "bonuses" if the stock
he touted achieved certain price levels.
The complaint also alleged that Schultz engaged in the practice
of "scalping" or selling stock contrary to his circulated recommendations
with respect to the securities of Acacia Research Corp., Advanced
Laser Products, Inc., Colossal Resources Corp., and Imagica Entertainment,
Inc.
Schultz moved from Florida to Spain in approximately late 1998.
He did not file an answer to the SEC's complaint or contest the
allegations, prompting the Court to enter a default judgment.
In its order, the Court permanently enjoined Schultz from future violations
of Sections 17(b) of the Securities Act of 1933, and Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-thereunder, and ordered
him to pay disgorgement of $566,035.93, to pay prejudgment interest of
$300,871.22, and to pay civil penalties of $110,000.00.
[SEC v. Mark Schultz , Civil Action No. 00 Civ. 3443(MP) SDNY]
(LR- 17676)
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