Financial desperation feeds rising rate of fraud

Nils Martinsen had become a desperate man when he heard from a friend at church about what seemed an answer to his prayers.

CRE Capital, an Alpharetta firm that claimed hefty profits from trading Japanese and American currencies, was paying his friend and other investors 10 percent a month — just the kind of returns Martinsen craved to help take care of his 6-year-old daughter Victoria, who is suffering from a rare and often fatal cancer.

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ANGELA SHEA

The Martinsen family of Charlotte lost its savings in an alleged Ponzi scheme run out of Alpharetta. Nils and Elizabeth invested to pay for cancer treatment for 6-year-old Victoria (right).

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Facing huge medical bills with little income, the normally conservative Charlotte family invested all of its life savings and inheritance at CRE Capital.

“We basically did what we never would have done,” said Martinsen, who runs an executive placement firm with his wife, Elizabeth. “We risked it all.”

Three months later, the Martinsens’ money was mostly gone, part of an alleged Ponzi scheme that robbed at least 120 investors who had paid in more than $28 million.

“It has put us in a catastrophic situation,” Martinsen said.

While the alleged scheme by CRE Capital pales in comparison with the multibillion-dollar operation Bernard Madoff pleaded guilty to running for decades, it’s part of a long-growing local trend.

Investigators and others whose job is to pick up the pieces say the number of criminals caught running Ponzi schemes, mortgage frauds and other illegal financial shenanigans has increased substantially in Georgia and across the nation.

They include:

• A 57-year-old former insurance company executive, Georgianne Carlisle, of Taylorsville, who pleaded guilty last week to embezzling $1.2 million in insurance premiums from her employer and other companies.

• A Gainesville businessman, Wendell Ray Spell, 50, who pleaded guilty last month to running a Ponzi scheme that bilked $60 million from investors in supposed financing of construction equipment. As with similar schemes that swindler Charles Ponzi made famous in 1920, Spell promised high returns to investors but actually used later investors’ money to pay phantom profits to clients until the scheme collapsed, according to federal prosecutors.

• A Woodstock real estate agent, 61-year-old Joseph S. Jetton, was sentenced last year to 14 years in prison and ordered to pay $11.2 million in restitution for his part in a mortgage fraud ring involving almost a dozen others who also got federal prison sentences.

“Fraud is way up,” said Gregory Hays, who owns Hays Financial Consulting, an Atlanta bankruptcy consulting firm. He believes the pace has likely picked up as the recession has cut into peoples’ pocketbooks, making them more likely to become either criminals or victims.

Federal crime statistics indicate that various forms of financial fraud were on the rise well before Madoff made headlines. The Federal Bureau of Investigation said pending prosecutions for corporate fraud more than doubled from 279 cases in its 2003 fiscal year to 529 in 2007. Likewise, the FBI estimates embezzlement arrests jumped by a third during the same period, to more than 22,000 in 2007.

Investigators say a variety of factors seems to be driving financial fraud, depending on the type of crime.

Mortgage fraud — an area where metro Atlanta has long been one of the nation’s leading hot spots — appears to be peaking, said David Nahmias, U.S. attorney for the Northern District of Georgia. With the meltdown of housing and credit markets, “lenders are being much more strict,” Nahmias said, making it difficult for would-be fraudsters.

However, the same crisis means the 20 prosecutors in his economic crimes unit are spending more time looking into bank failures. They have reviewed the nine Georgia bank failures in the past year for possible criminal activity.

“We do have some investigations open,” he said.

Another busy area is Ponzi schemes, according to investigators.

The combination of the stock market crash and the notoriety of the Madoff case seems to be causing the collapse of many Ponzi schemes across the nation, including several local ones, investigators say. Investors also are becoming more skeptical and asking more questions, helping to shut down schemes.

“We’ve seen the fraudsters actually come forward” to confess that they were running Ponzi schemes in hopes of getting a lighter sentence, Nahmias said. “They realize their schemes are falling apart.”

The down market “exposes more of those frauds,” said Katherine Addleman, director of the Securities and Exchange Commission’s Atlanta regional office. “They run out of money literally,” added Alana Black, a senior trial lawyer in the SEC’s Atlanta office.

That’s what may have happened in the case of CRE Capital. The alleged Ponzi scheme collapsed after losing $12 million on currency trades, but not before spending more than $4 million on commissions to sales agents and almost $1.8 million on “other uses,” according to a report by the court-appointed receiver.

The SEC shut down the alleged scheme in January, asking the U.S. District Court in Atlanta to freeze the assets of the company and its president, James G. Ossie. A federal grand jury indicted the 49-year-old businessman last month on 10 counts of wire fraud connected to the alleged Ponzi scheme.

Ossie pleaded not guilty and was released on a $20,000 unsecured bond under the condition that he wear an ankle monitor.

Ossie’s attorney, Brian Steel, said he cannot comment on the allegations in the pending case. He said Ossie has generally worked as a real estate investor and doesn’t have a previous criminal record.

In its civil case against CRE Capital and Ossie, the SEC alleges that Ossie violated a court order by selling a BMW 750 bought with $88,038 of CRE Capital’s money.

The court-appointed receiver said in a report that Ossie diverted almost $1.8 million in investor funds, much of it for personal spending on cars, two boats and dock rental at Hilton Head, S.C., real estate, credit card bills, jewelry and services such as pet lodging and dry cleaning.

“I think what [happened] was quite despicable,” said Martinsen, who invested money in CRE Capital three months before it shut down.

Martinsen said he had been “concerned from the beginning” about the high promised returns, but he went along with it when his friend said both his lawyer and accountant had checked into the firm.

“We were desperate to find a financial vehicle that would allow us to try to re-establish the family and take care of Victoria,” said Martinsen, who largely shut down his executive recruiting firm as his daughter’s hospital stays stretched into months. The family is relying partly on donations to cover medical insurance and living expenses.

He said his friend filed for bankruptcy after his family lost what it invested in CRE Capital.

“They have lost it all, too,” he said.