David Namer had the perfect place for your retirement money: mid-yield corporate bonds – Private Placement Memorandums – backed by insurance from a top-rated company. It was perfect until the pyramid collapsed. Learn how this convicted former banker took thousands of small investors for almost $35 million.

In the faux economy of the 1990s everybody was making money or so it seemed. The expanding economy and rapidly rising stock market, combined with the overall lessening of world tensions, created an environment of unbridled optimism – and ripe for fraud. Here we’ll focus on a significant investment-bond scheme that the perpetrators conceived to bilk millions from investors and went unnoticed for some time as the stock market’s paper profits accumulated.

Significant fraud schemes all have common elements. They:

• are audacious, innovative and complex;
• exploit a hidden weakness or blind-spot; and,
• typically involve numerous victims.

This fraud was a modern interpretation of the classic Ponzi scheme, set in the highly specialized world of investment bonds. It would require the active cooperation and collaboration of individuals from insurance, investment banking, securities trading, brokers, real companies, and innocent investors. Despite the protections ostensibly in place, a single man stole almost $35 million from the American investing public.

The Players

David I. Namer
Principal of the scheme. Namer had more than 20 years of banking experience, mostly in mortgages and securities. In the early 1980’s, he had been convicted on federal bank fraud charges) and had been banned from working in the banking industry. Following his conviction, he moved from banking to “financial advising” where he put his banking experience to work in fraud schemes. Subsequently, five years later Namer was arrested and charged in connection with subsequent fraud schemes in Oklahoma and Louisiana but the charges were dismissed before he was arraigned. (Prior to Enron, prosecutors often deemed complex white-collar cases too hard to prosecute, dismissed criminal charges, and told victims that they should pursue civil remedies.)

Namer moved to Memphis, Tenn., and set the investment-bond scheme in place. Although he wasn’t listed as an officer or director, he controlled two companies – Network Mortgage Services Inc. and Offshore Insurance Services Inc. – that allowed him access to the issuers and more importantly, the money. After numerous company failings and civil litigation and subsequent federal scrutiny, he was indicted on 93 counts, went to trial, convicted, and sentenced on May 12, 2003 to almost 30 years in federal prison.

Frederick J. Smith
The junior partner in the scheme. Frederick had more than 30 years of experience in commercial insurance. He owned and operated Cara, Ltd., which was doing business as the Associated Insurance Agency in Boston, Mass. He provided both insurance forms and confirmation of policy terms, which were keys to luring investors into the deals. He subsequently pled guilty but didn’t testify against Namer.

Richard Quackenbush
Vice president of underwriting for Universal Bonding Insurance Company. Universal Bonding was the issuing agent for Crum & Foster Insurance Company, Westchester Fire Insurance Company, and United States Fire Insurance Agency. Quackenbush was responsible for ensuring that appropriate collateral was received before issuing bonds. He accepted $121,000 in bribes to issue bonds without collateral. He subsequently pled guilty, was sentenced to four years in prison, ordered to pay $18.7 million in restitution, and testified against Namer.

Craig Colwell
Managing director of Sutter Securities Inc. and registered broker/dealer in San Francisco, Calif. As a licensed stockbroker, Colwell was in a position to market these securities to investors, including retirement plans, mutual funds, and individuals. He accepted $90,000 in bribes to sell the securities to various investors. He pled guilty, was sentenced to one year and one day in prison and testified against Namer.

Bruce Barbers
Licensed stockbroker with Meyers Pollock Robbins Inc. and registered broker/dealer in New York, N.Y. As a licensed stockbroker, Barbers was in a position to market these securities to investors, including retirement plans, mutual funds, and individuals. He accepted $141,000 in bribes to sell the securities to various investors. He pled guilty, was sentenced to five years and 10 months in prison, ordered to pay $150 in restitution, and testified against Namer.

Larry Baresel
Attorney, who worked in-house for Namer, controlled companies to affect the scheme. He was intimately involved in preparing the documents for investors. He pled guilty, was sentenced to five years and eight months in prison, ordered to pay $33.8 million in restitution, and testified against Namer.

Michael and Shelli Ploshnik
Owners of Meyers Pollock Robbins Inc., who were sued by the Securities and Exchange Commission in conjunction with their roles in marketing the securities. During the scheme they sold Namer a 50 percent interest in the brokerage firm for $1.975 million, which he paid with funds stolen from a bond offering they marketed. Michael Ploshnik pled guilty and was sentenced to three years and four months, ordered to pay $11.9 million in restitution, and testified against Namer.

The Entities

Lending and Investment Advisory Inc. - After Nov. 4, 1996, Namer issued $2.5 million in 10-year, 10.5 percent notes.

Voyaguer Lines, Inc. - After Nov. 1, 1996, Namer issued $3 million in 10-year, 9.5 percent notes.

Tri Star Financial Corporation - From March 15, 1996 through February 1, 1997, Namer issued $5 million in 10-year, 11.5 percent notes.

Aircraft Leasing and Funding Company LLC. - From Feb. 6, 1996 through Feb. 1, 1997, Namer issued $1.7 million in 10-year, 10 percent notes.

Ray & Ross Transport Inc. - From Feb. 27, 1996 through Nov. 1996, Namer issued $6 million in 10-year, 10 percent notes.

Northstar Leasing Company LLC. - From May 21, 1996 through Nov. 1, 1996, Namer issued $6.2 million in 10-year, 10.5 percent notes.

Meyers Pollack Robbins Inc. - This Boca Raton-based brokerage firm had offices in Florida and New York. When Namer purchased his 50 percent interest it had more than 400 brokers. Subsequently the firm was charged with enterprise corruption for its involvement with New York-organized crime families in “pump and dump” schemes. It’s now defunct.

Anatomy of the Scam

The key to success in large fraud schemes is the abuse of trust. In this scam, Namer took advantage of a common technique – misdirection. With most of the attention in the ’90s focused on the stock market, the bond market was seen as “stodgy” and “safe.” To capitalize on the absence of equivalent scrutiny, Namer devised a plan to use the bond markets to raise capital that he could then divert and control for his own use.

What’s the bond market? Bonds are debt instruments wherein public and private entities raise money by selling debt. Most investors maintain a percentage of their portfolio in bonds, and these investments are generally considered safer than stocks. Bonds work by allowing entities to access capital now, paying interest only over the life of the bond and then returning the capital to the investor.

For Namer this meant he could use and control what eventually became $35 million with interest payments of only $3.5 million annually. He was able to steal and divert more than $28 million for his own purposes for two years before the scheme collapsed. His operation involved elements of the classics – Ponzi, pyramid, and stock fraud schemes – to mislead investors. He also used the time-honored practice of bribing others to validate and market his ruse.

Namer hooked his victims by promoting the bond offerings as “safe investments.” He included in the prospectuses copies of insurance contacts that appeared to guarantee the performance of the issuing entities. Thus reassured, the bonds were sold to investors who only later would find out that the policies were forgeries.

How it Worked

Namer identified companies that needed capital but couldn’t raise it by traditional means. He recognized that these companies would be easy to take over and/or control. He then would approach the management of each company and sell it on his ability to facilitate the process. He would talk about his vast experience, his track record in the bond market, and his vision for his future. (Of course, he wouldn’t mention his fraud conviction.)

Namer’s process was highly sophisticated, demonstrating a carefully orchestrated series of steps that would buy off the prior owners, assume control of the company, issue a debt offering, divert the funds, and snowball the proceeds into the next venture. For most of the participants, this meant cashing out today at the expense of millions for bondholders later.

Namer’s scheme avoided scrutiny by targeting funds, investment groups, and high net-worth individuals. His primary vehicle was a Private Placement Memorandum (PPM), a class of restricted, unregistered, and unregulated securities. These restricted investments avoid typical securities industry oversight and their sophistication tends to generate confidence; in other words, they’re perfect vehicles for fraud. Because PPMs are more common in stock fraud schemes, Namer’s victim investors weren’t suspicious of unscrupulous bond market deals. Investors knew how to scan these prospectuses for the details of the financing, interest rate, term, company history, purpose of the proceeds, etc.

To reach these investors, and further drape his scheme in apparent legitimacy, Namer bribed insurance executives to provide him with forged or (more often) blank insurance contracts, which he then incorporated into the fraud. He also bribed stockbrokers to push the PPM to high net-worth investors. He depended on the connection with legitimate investment groups and high visibility firms to further ease his entry into the restricted world of high-value investments. He then diverted the proceeds to further his lifestyle and set up the next stage of the scheme.

An Ambitious Fraud

In Namer’s pyramid structure, he continually put together deals, increased the volume of diverted funds, and parlayed the process into ever-larger and more ambitious plans. Over the course of the scheme, he acquired interests in a variety of businesses including a regional trucking firm, a start-up airline, and a 50 percent interest in a Wall Street brokerage firm.

Unfortunately, he found that regulatory agencies and large companies were a lot less gullible then the old school world of private placement bond investors. He assumed control of a bus company but when regulators found it had lost its minority-owned status he watched much of its value slip away with its contracts. His dreams of creating a regional airline and selling it to the one of the major airline carriers for a significant profit evaporated when the purchasers learned of his prior fraud conviction. His efforts to take over the brokerage firm also crashed after the SEC investigated it for ties to organized crime.

Even as his funds disappeared, which caused defaulting bond offerings and civil lawsuits, Namer continued to try to spin the story by attempting to reassure investors, curtail investigations, and blame others for the defaults. He had varying success. But the final collapse began when the FBI picked up the trail from the civil litigants. Five years later the case came to trial. All of Namer’s co-conspirators took deals and all but one testified against him.

Namer, unrepentant to the end, refused to admit defeat. He tried every legal defense and stunt, fired several sets of lawyers, made long and dramatic speeches to the court, entered motions for both legitimate and imaginative grounds, and played to the media at every opportunity. Interestingly, after his conviction, he was silent. He declined the opportunity to comment for this article even when I told him I wouldn’t place limits on his commentary and he would have the right to have his attorneys present for the interview.

David Namer is now serving out his nearly 30-year sentence. He actively pursues appeals on a variety of issues, proclaims (through counsel) his innocence, and, no doubt, plotting his return. We haven’t seen the last of David Namer.

Jonathan Turner, CFE, CII, is managing director of Wilson & Turner Inc., of Memphis, Tenn., and a member of the Fraud Magazine Editorial Review Board.