$30 Million Ponzi Scheme Halted
Salvatore Favata's $30 million Ponzi scheme admitted to according to SEC. Now this was a very clever mix of a legitimate business, mortgage brokerage, with the standard ponzi scheme based upon a real estate investment.
"The Commission's complaint alleges that from 2001 through 2006, Favata, acting through NCM, operated a massive Ponzi scheme, which raised more than $30 million from over 200 investors by offering rates of return from 30-60 percent on the investment. In fact, investor funds were used to pay Favata's gambling debts in excess of $10 million, personal debts and monthly living expenses, including leased luxury vehicles, lavish house parties and community music festivals."
Presented in this stark light, the investors were surely mad with greed to invest looking for a 30-60 percent return. But, the whole story is more interesting because it explains how "Sal our Pal", who apparently has a criminal background, was able to steal $30 million from 200 investors.
According to this newspaper story, the investors were holding unsecured promissory notes with an interest component of 8 -12%. Hmm, not exactly too good to be true material.
Now, I can offer everyone a verified return of 30% on their money, but with an undisclosed risk of 50%+ chance of losing the entire investment and have this scheme run forever - play black consistently at the roulette table. Now if I could just find a way to get rid of that sub-tree of losing bets! It is never too good to be true, but it might be too risky to afford.
How did NCM gain the necessary trust of the investors, given that Fatava apparently had a criminal background? Well, the NCM's website is still up and running and promises to match up lenders with borrowers, which apparently they did for several year successfully. Home borrowers would then want to renew their mortgages, using the NCM. My guess is that NCM targeted primarily one year mortgages.
According to the court documents filed by the trustee of NCM, this is when the trouble began. In 2002, Fatava created a "Private Money" division of NCM. Fatava alleged in written documents that he was looking for investors money for residential homes and could offer between 30 -50% return, but with apparently no specified risk. (The documents are not filed on the Pacer system, so I cannot evaluate their effectiveness as influence scripts.) Homeowners, flush with new mortgage money, in a rising real estate market were easily persuaded to take out larger mortgages and "invest them in even more real estate deals".
There are some other interesting issues in this fraud. As reported in the White Collar Crime Blawg, Favata's own lawyer appears to have turned him in. And while "many states, and now the ABA, permit disclosure of client fraud, California appears to apply the older approach limiting disclosure only if there is a risk of death or serious harm by the client. It may be that the attorney represented the mortgage company rather than Favata personally, so it might have waived the privilege when the misconduct came to light. The release, however, states that it was "Favata's attorney" and not the company's counsel."
Finally, it would be very interesting to know how many of these individuals realized that the promissory notes that they were purchasing were unregistered investments.
