Brian Scott makes a modest living as an investment adviser, teleworking by phone and fax and Internet from his home on a hill with splendid views over Melbourne’s Dandenong Ranges.
Aged nearly 50, he’s a big man with a forthright manner he’ll never be wealthy, but there’s something he values more than money and that’s his reputation for integrity and fair dealing.
That’s why, when he woke up one misty morning three years ago to find himself a multimillionaire, Scott nearly had a heart attack. It was better than winning `Tatts’ on his fax machine was a copy of a telegraphic transfer of $US9,999,996.63, $A20 million at today’s rate of exchange, into his bank account.
“I couldn’t believe it,” says Scott, “I rang up Wachtel, and I said `You can’t do this what’s to stop me just withdrawing the money and disappearing? ‘ He said, `You wouldn’t do that, Brian.”‘ We’ll discover later who that man Wachtel is, but his judgment of Scott’s character proved correct.
In an isolated house in the Australian bush, a chain of events had just been put into play that would eventually lead to a massive fraud against a multinational company, the jailing of one of its top executives, and a frantic but futile hunt from Melbourne to Los Angeles; Phoenix, Arizona to New York; Cyprus to the Caribbean, to try to claw back the missing millions.
Scott had by his own account become a pawn in the fastest-growing international scam of the new millennium, “prime bank fraud”. The scam has mutated into hundreds of variants over the decade since regulators first warned about it, but they all retain certain essentials (see box, page 34): the temptation of ludicrously high returns, such as doubling your money in a month; the promise that the investment is free of risk, often by claiming that it is guaranteed by a “prime bank”; and the insistence on absolute secrecy.
The United States investment watchdog, the Securities and Exchange Commission, calls it the “fraud du jour” and estimates that in America alone $200 million was stolen by operators of various schemes last year. In Australia, at least $50 million has gone missing in recent years, ranging from pensioners’ savings to a $7 million sting against the Bank of New Zealand’s Perth branch.
But back to the Dandenongs. What Scott had inadvertently stumbled into was the most brazen attempt yet to defraud an Australian public company a public company that, like many victims of prime bank schemes, has until now not specifically disclosed its embarrassing loss to the public, its shareholders, and the Australian regulators.
The company said late yesterday that it had recovered some of its losses from its bank and its insurance company, and now estimated it was “only” $3.8 million out of pocket. It said this loss was covered under an item in its accounts, “provision for legal and employee entitlements”.
FAST rewind to the 1980s. Village Roadshow, once the staid operator of an Australian cinema chain, decides to go public and morph into “a leading international media and entertainment business”. It opens theme parks, buys up hundreds of screens around the world, moves into radio and, in 1998, “embarks on an ambitious strategy to become one of the leading independent movie producers in Hollywood”, to quote the company’s annual report (see box, page 34 ).
The man chosen as director and chief financial officer of the new subsidiary, Village Roadshow Pictures (USA) Inc, is Ross Andrew Henry, now aged 40, a bright go-getting Sydney accountant highly thought of at Village head office. Offices are leased (on Avenue of the Stars, where else?) and an account is opened at City National Bank in Beverly Hills, where Village guarantees an $8 million line of credit against movie production costs.
What happens next is as improbable as the plot of The Matrix, a futuristic thriller which is the most successful of Village’s movies to date. Henry has a trusted friend in Sydney, a white-haired, 150-kilogram investment broker named William Stanley McKay, who proceeds to induct Henry into the secret world of “high yield investment programs”.
It is not known whether Henry was aware of his friend’s real background. Now aged 55, McKay is a former bankrupt with a string of about a dozen wrecked companies behind him, most of which have been deregistered or placed in administration. However, he lived in hope of hitting the jackpot, and in the mid-1990s had linked up with a group of American hustlers to promote a fail-safe way of making a fortune. McKay could not be located for an interview he was last spotted house-hunting in Queensland but it is clear from documents and court affidavits obtained by the Herald that what he was promoting was a variant of a “prime bank scam”. He had tapped into, he wrote to Henry, “a very close-knit network of high worth individuals” who could invest parcels of $10 million with a guaranteed return of 5 per cent a week for 40 weeks treble your money back, and all “at absolutely no risk”.
If any further inducement was needed, that was provided by Henry’s associates in the United States, people apparently of the highest integrity a retired Federal Court judge, Quentin K. Morgan, and a Canadian company director, Lawrence Gilbert Ryckman, among them.
And then there was Robert Wachtel.
Operating from offices in Corona del Mar, 80 kilometres south of Los Angeles, Wachtel gave the appearance of a successful finance broker. However, the most cursory check with credit agencies or the regulatory authorities would have shown that Wachtel had a long history of promoting failed investment schemes, through companies including Triple Infinity, Sphere 777, Millennium Holdings, the Wachtel Foundation and Brite Corporation. Henry, however, apparently did not investigate his credentials, nor those of other “guarantors” McKay introduced him to. He swallowed the bait. Village, according to an affidavit filed in America by its chief operating officer, Steve Krone, is still unsure if Henry was part of the plot, or just a sucker for a convincing scam.
Either way, on February 13, 1998, Henry took a deep breath, drew $20 million from Village’s account in Los Angeles, and transferred it to an account operated by Scott’s company, Money Network Pty Ltd, in Melbourne. Scott had done some legitimate business with Wachtel previously, but says he had no part in any prime bank scam, and no knowledge the money was coming until he received that fax notifying him of the transfer.
Scott threw a spanner into the works when he refused to follow Wachtel’s instructions on the disposal of the money. Eventually, after sitting in a Melbourne bank for nearly a month, $18 million of it was returned to the Village Roadshow account in Beverly Hills the missing $2 million was paid out to about a dozen people and companies in America and Australia who claimed to be either creditors of Wachtel, or who were owed “commissions” on the deal.
Henry had certified to the bank that the funds were “transferred with full authority, and such funds are free, clear and [of] non-criminal origin”. However, in its affidavits, Village Roadshow is adamant that Henry moved the money without its approval, and concealed this and three subsequent transfers from head office in Australia.
Village Roadshow yesterday attempted to explain how its financial systems could allow Henry, on his own, to make such huge transfers in the first place, and how the company and its auditors could have missed the missing millions the losses are not specifically identified in the company’s annual reports.
It said that the transfers were authorised by Henry alone and were “outside his authority” and should not have been approved by the bank. Village’s managing director, Graham Burke, said they had not been picked up by the auditors because the transactions were “outside the books” and Henry had destroyed all records.
Extraordinarily, this was just the start of Henry’s adventure into prime bank fraud. On three separate occasions over the following 19 months he took a total of another $9 million from Village for “commissions” and investment in prime bank schemes and none of this money has ever been recovered. The biggest hit was almost exactly a year after the first, on February 18, 1999, when Henry drew on the company’s line of credit to electronically zap $8 million across the continent to New York, and into a bank account controlled by another group of scamsters. The main man on this occasion was Lawrence (Larry) Ryckman. Like Wachtel, Ryckman gives a plausible impersonation of a reputable finance broker, until his record is examined. A Canadian, he found it impossible to operate in his home province of Alberta after he was banned from dealing in securities and fined nearly $1 million by the local securities commission for stock manipulation, had a number of court judgments (including one for $1 million) against him, and was assessed as owing $3 million in taxes.
He moved to Phoenix, Arizona, in the mid-1990s and began operating through a company called Sundance Financial Corporation, of which he describes himself as the president. Little else can be discovered about Sundance, because it is based in the Caribbean, in the Turks and Caicos Islands, a notorious tax haven and money laundry with strict corporate and banking secrecy laws.
Henry transferred the money to an account in New York owned by a shady Cyprus-based bank but controlled by Sundance, and sat back to wait for the 100 per cent yes, 100 per cent return that he had been guaranteed in 30 days. Surprise, surprise, the excuses and promises went on for months, but the interest never arrived and the $8 million has never been recovered. In December 1999 Henry quietly left the company after making two more transfers, totalling nearly $1 million.
Village says in its affidavits that it did not discover the thefts until February last year, two years after the first robbery and two months after Henry had left. This time the company says it contacted the police fraud squad in Sydney and the FBI in Los Angeles.
After a three-week investigation, the FBI pounced, arresting Henry on March 24 as he cleared customs at Los Angeles International Airport, returning from a trip to Australia. He has been held without bail in the Metropolitan Detention Centre in downtown Los Angeles ever since, and will be sentenced on April 5.
Henry has struck a plea bargain with the US Attorney’s Office, under which three of the original five charges against him have been dropped. He has pleaded guilty to two Federal felony charges, wire fraud (he phoned the bank) and “deprivation of honest services” and faces a maximum of 10 years’ jail and a fine of $10.8 million the amount he admits is missing. His lawyer, Leonard Levine, says he is hoping the court will be lenient, in view of the plea and Henry’s ongoing efforts to help Village recover its money. “He has pled guilty and taken responsibility for what he has done,” he said. “The truth is that he hoped to make money for himself, not take it from Village Roadshow, but he was just a pawn in a big school and he was swindled himself.”
But Village Roadshow has admitted in subsequent civil litigation that it is still not exactly sure how much has been stolen, nor how much it has lost in interest for months it was paying out $3,222.22 a day to the bank in Beverly Hills.
Village has filed civil actions in Australia and the US against 11 parties, including Ryckman, McKay and Scott, to try to recover the money, but all of them are vigorously denying any impropriety and the case has been delayed for nearly a year, with no indication that the company will recover so much as a cent, apart from what it has received from its bank and its insurance.
In the most audacious twist of all, Ryckman the alleged scamster has filed suit against Village Roadshow the alleged victim in Arizona, claiming that Henry was the mastermind of the fraud, and that Sundance has been deprived of $20 million in interest it would have earned if the prime bank “investment” had gone ahead.
Ryckman’s bank, the First Merchant Bank OSH Ltd of Cyprus which claims a paid-up capital of $3 trillion but occupies premises in a rickety apartment building on the outskirts of Nicosia, and admits that its president has been held for questioning by Italian police has filed an even more vigorous affidavit with a New York court.
“Roadshow is a flaky California movie company involved in a year-old investment scam which it will not own up to and is trying to cover up,” say the bank’s lawyers. “… Ross Henry, who was behind this entire charade, caused Roadshow’s loss [if there was a loss] … Roadshow thinks it is writing one of its own movies, inventing what it likes to get what it wants.”
Roadshow’s US attorney, Lawrence Kasten, rejects this and summed up the company’s defence in an affidavit filed with the US District Court in Arizona : “Village Roadshow is the victim of a well-orchestrated fraud … [its] success and high profile have made it an attractive target for unscrupulous characters and devious schemes. In February 1999 [the company] was swindled out of $US4 million. Now, to add insult to injury, one of the parties that played a role in that diversion has decided that the best defence is a good offence.
“Village Roadshow is not just the victim of a well-orchestrated fraud, it is also being sued by the bandleader for good measure.”
As for the missing millions: “The money, it turns out, is blowing in the wind, somewhere between Turks and Caicos and Cyprus,” says Kasten.
A tough year in the Village
In spite of its screen successes the Oscar-winning Matrix and the gangster comedy Analyze This have been among its recent hits Village Roadshow Ltd has been struggling to convince the stock market that it really is a profitable “leading international media and entertainment business”, as it boasts.
Although it has been a public company since 1987, it is still trying to shake off its image as a family business controlled by its founder and president, 82-year-old Roc Kirby, his son and $2.2 million-a-year chairman John Kirby, and other members of this Melbourne-based entertainment dynasty.
Originally the operator of a chain of surburban drive-ins in the ’50s, Village embarked on an aggressive international expansion in the ’80s, eventually taking a stake in 1,500 cinema screens in 19 countries, theme parks such as Warner Bros Movie World, Daydream Island resort (both since sold), the recently floated Austereo FM radio network, and interests in video and the Internet. It was touted in BRW magazine as recently as 1996 as “Australia’s most exciting company”.
What a difference half a decade makes.
Its riskiest adventure was in 1998 when the company decided to get into movie-making, with a strategy “to become one of the leading independent movie-producers in Hollywood”. It was a strategy which would cost the company at least $11 million, or 15 per cent of last year’s net profits.
The market had been uneasy about Village, even before news that it had been the victim of a massive scam. It disclosed in its annual reports that it had been assessed by the Australian Tax Office as owing $55 million, in addition to a tax claim in an unidentified country of $32 million claims the company is contesting.
Results were disappointing in 1999-2000, which the annual report describes as a “tough year”. From a peak of $6.51 in 1996, its shares have plunged to about $1.50, stripping three-quarters of the value from its market capitalisation, now about $1 billion.
The company has been selling assets, and late in 1999 restructured its board, with the resignation of four of its 10 directors deputy chairman Robert Kirby, corporate counsel Peter Ziegler and Terence Jackman all resigned on December 22, and British director Lord (David) Puttnam left a month earlier.
The company said yesterday that it had not become aware of the frauds until February last year, and the resignations two months earlier were unconnected.
How to recognise a scam
There are a number of characteristics of prime bank scams which investors should beware:
They always offer ludicrously high interest rates, anywhere from 10 to 200 per cent a month. These returns are said to be previously available only to a cabal of well-connected international financiers, and investors are given an “exclusive opportunity” within a tight time-frame to pool their funds to make up parcels of $1 million to $10 million to participate in the “trading program”, “high-yield investment program” or “roll”.
The investments are always said to be “risk free” and “guaranteed” by a variety of financial instruments, some apparently legitimate, such as medium-term bank notes or debentures and letters of credit, and others laughably worthless, such as certificates of deposit from bogus banks and bonds in long-bankrupt railway companies.
The legitimacy of a scheme is “authenticated” by claiming it is operated by a “prime bank” or a “top 100″ bank (never named), that it is guaranteed by the World Bank, the IMF, the US Federal Reserve or the International Chamber of Commerce.
Operators work in networks which often contain apparently reputable people who claim degrees or other qualifications such as company directorships, wealth or connections. Surprisingly, nowadays many of them are poorly educated, barely able to understand the investment jargon they use, and their documentation often contains schoolboy howlers.
Participants are terrified into silence by threats that the “deal” will collapse if it becomes publicly known. Many are required to sign draconian “secrecy agreements” which add to the feeling of being let into an exclusive club of fabulously wealthy investors.
No investor ever receives one cent of interest, and most lose all their money. Only in a few lucky cases have prosecutors been able to claw back real estate, cars, racehorses and other “investments” which the scamsters have been too stupid to hide. Further information can be found on the these web sites, U.S. Securities and Exchange Commission, ASIC (Australian Securities and Investments Commission) and FIDO (financial tips & safety checks from ASIC).
Pub: Sydney Morning Herald
Pub date: Saturday 17 March 2001
Section: News And Features
Sub section: News Review
Word count: 3104
Classification: Company/Village Roadshow Ltd Crime/Fraud
Geographic area: Australia
Photo: Robert Rough.
Illustration: Harry Afentoglou
1. Financial battle … Village managing director Graham Burke and chairman John Kirby.
2. Village Roadshow’s The Matrix … the $11 million scam was as improbable as the film’s plot.
Comments: “A tough year in the Village” and “How to recognise a scam” joined to article.