It takes a thief to catch a thief

The morning of February 16, 2006 was damp and cold in Islip, New York, where the big US federal courthouse looks out over Long Island Sound. Inside the courthouse, Judge Joanna Seybert was about to announce her verdict for New Zealand’s biggest-ever con man, Derek Turner, who was falling to pieces before her.

“I am pleading, I am pleading on everything that I stand for, your Honor,” Turner wept to the court, “Nobody knows the blood I’ve seen inside the Nassau Correctional Center, the fighting, the gangs, the terror and the horror…To try and keep my mind sane…When you’re in a box, your Honor, it takes all your will not to go mad.”

Judge Seybert appeared unmoved, but Turner went on. “I will restore my clients from America to Auckland, New Zealand. And your Honor I will be a person within society that has a code of honor, that lives by a code of honor quietly…Your Honor, I beg of you, I beg of you.”

After about an hour of this, Turner’s defense attorney asked that his client be put on suicide watch in the local jail. Judge Seybert consented.

But FBI agent Matt Galioto, who investigated the case, had been watching Turner as he cried and carried on throughout the proceeding. “The second he heard the verdict,” Galioto said, “the expression in his face just disappeared and he looked up like, ‘Oh well, that didn’t work.’ I thought to myself, ‘That’s one guy who’s definitely not gonna kill himself…This is just another con.’”

If so, it was the last con Turner would be pulling for a very long time. Judge Seybert sentenced him to 20 years in federal prison.

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The general outline of Turner's history is well known.Born and raised in New Zealand, he first got into trouble after moving from Auckland to Sydney, where in 2000 the Australian Securities and Investments Commission found him guilty of trading without a licence, shut down his operation and ordered him to repay his investors.Instead, Turner took their money and moved to the Bahamas where he started up a new hedge fund, Turning International, which collected more than $US55 million from investors in New Zealand, Australia, the Bahamas, Singapore, Canada, South Africa, Costa Rica and the US.

Turner's clients included successful businessmen, celebrities, even professional share traders.He lived in a luxurious tropical compound up the street from baseball legend Barry Bonds, whom he broadly hinted was also trading with him.

In short, Turner appeared to be a dazzling success - until April 2005 when a federal prosecutor in New York announced that he had just been arrested for fraud.

It turned out, Turner had not traded his clients' money at all.He'd simply taken it, and spent it on himself.

The media jumped on the story here in New Zealand, where Turner had defrauded several wealthy investors out of millions of dollars.But those journalists glossed over the part of Turner's story that could be valuable to every business, bank and accounting firm in New Zealand - more than half of which reported they'd suffered acts of fraud between 2004 and 2006, with losses in excess of $155 million. For those businesses, the instructive part of Turner's story occurred not when he was arrested, but when he was spotted, set up and turned in by another, more clever conman named Barry Minkow.

"Former conman," Minkow will tell you.

In fact he has not defrauded anyone since he spent seven and a half years at Terminal Island Federal Correctional Institution - the same prison where Turner is now incarcerated.Minkow was there for committing a string of frauds that make Turner's crimes look small-time.

In the late 1980s, Minkow conned 15 banks into loaning him $US20 million, tricked numerous Wall Street lawyers as well as accountants from Ernst & Whinney (which through a later merger became Ernst & Young) into clearing his initial public offering, charmed the mayor of Los Angeles into declaring a "Barry Minkow Day" and convinced brokers to push his stock to a value of $US300 million - all for a business that, for the most part, didn't exist.

After his arrest, the US Congress held hearings to find out how so many top-level financial experts could have let Minkow hoodwink them."I am as much aghast as anyone," said S George Greenspan, whose firm had audited Minkow's initial public offering."Every night I sit down and say, Why didn't I detect that fraud?'"

Since his release from prison in 1995, Minkow has spent hundreds of hours answering that very question for bank executives, accounting firms and insurance companies, many of whom have hired him to give them private training sessions on how to identify and prevent fraud in their own businesses.

The people he meets at these training sessions are almost always very smart, "but they're not fraud guys," says Minkow."You have to think like a crook to expose fraud."

In the past few years, Minkow has also helped the FBI arrest numerous fraudsters.He heard about Turner in December 2003, not long before he was scheduled to give one of his fraud training sessions at the FBI academy in Quantico, Virginia.When he looked into Turner's fund, he says, he realised it was the perfect case study for his discussion with a room full of FBI agents.

"It had all the red flags," Minkow says, explaining that every fraud he's every seen - including his own - shared three simple characteristics:

--They are controlled by only one person, as Turner controlled Turning International.

--They offer unusually high earnings.Turner claimed that he had returned at least 37% a year for seven years. "He said he'd never had a single drawdown for even a month of that whole time," Minkow says. So Minkow phoned several well-respected index option traders and asked them whether Turner's claims were believable."They said No way, not tenable, too many drawdowns in the market over those seven years.'"

--They will not be able to show investors any independent proof of profits.Turner made no trading records and no audited financial statements available to his clients.Instead, he "had this glossy 12-page prospectus citing the Gann method of trading [referring to early 20th century market theorist William D.Gann]." He added "it looked just like the short glossy prospectus that I used in my fraud.I think all frauds go to the same place to get their prospectuses done."

Minkow's red flags for fraud should be obvious to any good businessman and certainly to any accountant. And yet, he says, time after time investors, lawyers and accountants gloss over these three points for one simple reason - they don't want to find bad news.
They really want the deals to go through.And so they almost always do a little less work than the fraudster, who simply has to keep giving his investors meaningless paperwork and phony evidence until they tire of asking for more.

For example, Minkow likes to point out that in the place of an audited financial statement, a company might show an investor a Dun & Bradstreet report.As Dun & Bradstreet discloses, those reports may simply be the company's own numbers, unaudited, and yet Minkow points out that many people feel more confident about those numbers when they see them on Dun & Bradstreet letterhead.Many investors just assume they're looking at an independently audited report.

While he's slowing down the due diligence process with different copies of the same report, a fraudster can also impress his victims with a long list of important-sounding fake references. This looks excellent on paper, and no one wants to chase down a lot of busy people to make sure they really are solid references.It's tedious and time-consuming, and what does it mean if you can't get hold of someone anyway?

Better yet, Minkow will tell you, the conman can refer potential investors to his current investors.But until the whole scheme fails, those clients have no idea that they've thrown their money away and they're likely to recommend the investment to anyone who asks about it.

Finally, the one thing that every white-glove law firm and auditing house failed to do when Minkow defrauded Wall Street was this: even when they followed through and made their due diligence calls and visits, they failed to confirm that the people they were talking to were not themselves frauds.Minkow threw together fake companies staffed by his own co-conspirators to talk to auditors.And when a group of lawyers and accountants actually asked to see a job in person - in Minkow's case he was claiming to do large restoration jobs on business buildings - he simply paid off a security guard at an empty, half-built structure to let him and the auditors into the place and to say "Hello, Mr.Minkow" when he walked by.One property search and one phone call to the building's owner would have exposed Minkow's fraud, but no one ever made them.

Minkow always points out that as soon as one big firm vouched for him, that smoothed the way for all the others to believe him as well. Because, although they might question Minkow, who would question a prestigious accounting firm like Ernst & Whinney?

When Minkow showed Turner's case to the FBI agents at Quantico in 2004, he knew they would listen to him just because of who he was and what he'd done in his past.But he also knew that before any law enforcement officials would open a case against Turner, he had to pass what he calls the "if-then" rule.

"You can't go after someone on a negative," he explained.Specifically, the FBI wasn't going to open a case because Minkow told them Turner had no in-house controls and no proof of profits.
"So I had to say If I'm right about this then I'm going to be able to find some kind of smoking gun evidence.'"

Minkow found his smoking gun the morning he was scheduled for an appointment at a federal prosecutor's office in New York.He wanted to press that office to investigate Turner, but he knew they wouldn't open a case unless he could show them positive evidence of fraud.

"So," he says, "I thought, How did I fall? I fell because of a Los Angeles Times article.'" In 1988, when Minkow's fraudulent company was at its height, a reporter dug up old charges that the company had committed credit card theft.The article prompted a series of investigations which eventually sent him to prison.And so, 16 years later as he prepared for his appointment with the federal prosecutor, Minkow decided to go online and search for old stories about Turner.

"I found an Australian article from 2000 saying that he'd been shut down there for trading without a license.And I thought, How can he have been making profits every month for seven years when he was shut down for part of that time?'"

It was just the kind of evidence Minkow was looking for.

He gave it to the federal prosecutor, who put him in touch with FBI agent Matt Galioto in Long Island, New York.

It must have been a strange meeting.Minkow is not a very big man but he tends to fill up a room. He talks fast, moves his arms constantly and paces around a lot.He's so quick it's difficult to follow him sometimes, and it's not hard to see how he might have used that to his advantage during his criminal career.

Galioto, on the other hand, is slim, serious and understated - so understated that Minkow says he didn't think Galioto could handle the case when he first sized him up.But that changed, he says, when with a few brief comments Galioto cut Minkow down to size and then laid out exactly what he needed to make the case work.

The first thing Galioto needed was for Minkow to go undercover and "flip" a couple of Turner's key investors - get them to work for the FBI. According to Galioto, these investors were an impressive group, including doctors, lawyers and business executives. Some of them had invested millions in Turner's fund.

And that raises the question both Galioto and Minkow have answered so many times before: how could intelligent, educated people fall for what in retrospect looks like an obvious scam, based on a flimsy prospectus and some dubious promises?

"Yeah, you'd think..." says Galioto, with the tone of a cop who's seen too many fraud victims over the years.Turner "had guys from the financial industry investing with him, even people who'd started their own hedge funds," he says. "Due diligence just went out the window.
Greed took over."

Minkow, however, answered the same question from the conman's point of view, stating simply, "Derek sold them on Derek." And then he laid out another lesson from his fraud workshop for executives, which he calls "the three techniques of fraud."

They are:

--Failure to disclose material facts;

--Drawing big conclusions from little evidence; and

--Diversion.

Turner failed to disclose to investors that he'd been shut down by the Australian Securities and Investments Commission - a material fact.
An even more material fact, of course, was that he wasn't trading their money at all, but rather had used it to buy himself and his wife property, homes, cars, furs, paintings and sculpture. Instead of facts, Turner sent his clients a brief prospectus, mentioned that sports star Barry Bonds was one of his neighbours and hinted that Bonds might be a client (he was not). Then - drawing big conclusions from little evidence - he told clients they could make extraordinary returns on their investments with him.

But according to Minkow, what really sold Turner's clients was the third technique of fraud, diversion.Turner secured his deals by diverting his clients' attention away from the facts of his fake hedge fund and toward his awe-inspiring headquarters in the Bahamas.
"It was like a movie," says Minkow, who visited Turner's compound posing as a potential investor. "He had two pools, two houses - one for living and one for business."

Inside the business house, Minkow says, Turner had a fantastic array of charts. "It was the charts that did it.He gave you the impression that he could predict the market with all these charts. The guy rarely if ever traded but he charted like crazy."

In Minkow's case however, the more Turner charted, the more his prospective "investor" was convinced he'd found a fraud. And while Minkow was making his own mental notes about Turner, he was also eliciting from Turner a checklist of items that Galioto needed to arrest him.

With Galioto listening on a wiretap, Minkow asked Turner how many investors he traded for, and where. Turner told him he traded for more than 200 investors worldwide and named brokerage firms. Galioto checked with those brokerage firms, which told him they had no records of Turner ever trading with them.

Minkow asked Turner how much money his fund had, and if it was in a single bank account. Turner told him he had $US500 million, all in one account at Scotiabank in the Bahamas. Galioto checked with Scotiabank and found that Turner had only $US300,000 deposited there.

Soon after Minkow visited the Bahamas, Galioto arrested Turner in New York City. For a month, Turner kept spinning out stories to lawyers and law enforcement officers from jail. "He was just in his own wacky world," says Galioto. "He even offered me a job. He said I could be his accountant."

But eventually, Turner confessed that he had not been trading his investors' money. His attorney, Joseph Conway, a seasoned veteran of New York's Eastern District, secured him a six-and-a-half-year sentence based on his representations that he had defrauded investors of $US16.7 million.

"Let's put it this way," Conway says."Given the nature of his deal and the discussions we had with his attorney in Australia, we decided it was a good idea for him to plea bargain."

But Turner still hadn't given up his biggest secret - he'd stolen tens of millions of dollars from investors in Australia and New Zealand that the FBI didn't know about. Just before he was due to be sentenced, one of those Australian investors contacted Judge Seybert, who realized that Turner had been conning her, too. According to Conway, "That changed everything."

In the end, Judge Seybert threw out Turner's plea agreement, judged his fraud at a value of $US55 million and gave him the maximum sentence of 20 years in federal prison, followed by permanent deportation out of the US.

Turner is appealing his sentence, and his appellate attorney Joel Rudin has advised him not to talk to the media. But Minkow says he was recently approached by a documentary producer who'd received a letter from Turner. "He keeps saying that when he gets out he'll pay everyone back," Minkow says.

Those of Turner's victims who attended his sentencing probably don't hold out much hope of that. Even as Judge Seybert ordered Turner to pay restitution, she told him, "I'm horrified that I cannot in good conscience expect that restitution is going to be paid in this case, but there is simply no way, no how, that I would ever, ever expect you to be true to your word. You're simply not to be trusted, Mr. Turner."

FRAUD IS THRIVING IN NEW ZEALAND

When Mark Leishman founded KPMG's Auckland-based forensic accounting unit three years ago to track down fraud, his colleagues in the accounting field told him not to bother.

They told him fraud isn't a problem here, Leishman says.

But they were wrong.

Last year, Leishman co-authored the 2006 KPMG fraud survey in New Zealand, which contacted 465 of the largest businesses in the country and found that not only is fraud a problem here, it's such a serious problem that law enforcement can't hope to keep up with it.

The KPMG survey revealed the following: * The incidence of fraud was higher in New Zealand than in Australia.

* 53% of New Zealand businesses had been defrauded at least once between 2004 and 2006.

* 42% of those companies that suffered a major fraud never recovered any of the money or goods stolen from them.

KPMG's findings dovetail with the New Zealand government's fraud statistics, which show that every year for the past 10 years the police have recorded more than twice as many fraud cases as they've solved.

And according to Ron McQuilter, who runs the country's largest private investigating firm, the Serious Fraud Office and the police don't even see a large percentage of the fraud victims out there.

Instead, those victims have started turning to private investigators.

In fact, as McQuilter said in a speech he presented to the New Zealand Police Act Review Team last November, the fraud going on across New Zealand has created a kind of boom in the country's private detective business.

Today, for every five sworn police officers in New Zealand, there is one private sector investigator - and every one of those investigators is probably working on several cases of fraud.
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Full court transcript:
/docs/turner_verdict.pdf
PDF, 0.5 MB