Crossing the Line

Frances Ellen always wanted enough money to be able to make choices. Unfortunately, she and her partner chose poorly. They used illegal practices in their investment firm to make lots of cash for their investors. But their lies eventually destroyed their business and sent them to prison.

More than 25 years later, Ellen ponders on the lessons she’s giving others.

Entrepreneurs are an interesting breed. Most of them are ambitious, motivational, and even inspirational at times. But some can be grandiose, self-centered, and, sometimes, criminal. 

“There’s a fine line between the spirit of an entrepreneur and a con man – a very fine line,” says Frances Ellen.

Ellen was convicted with her business partner in 1983 of tax and securities offenses in their Los Angeles investment firm. They lost $13 million of their investors’ money when their firm collapsed. She served three months of a one-year prison sentence, worked 1,000 hours of community service, and was fined $3,500.

“I was very driven to be successful,” Ellen said. “I had a tremendous amount of ambition and a need to be the best at whatever I undertook. I was also a divorced mother of three who wanted to beat men at their own game.” She also had a strong desire to be in the limelight.

The eldest of three children, Ellen was born in 1941 in a small Missouri town. Her parents divorced when she was 4 years old, and she went to live with her aunt and uncle in Independence, Kan. When she was a junior in high school, the family moved to Chicago. At the end of her sophomore year in college Ellen married and moved to Wheaton, Ill. Ten years later, she divorced her husband and their children stayed with him.

She then moved to Nashville where she worked for a nonprofit, co-hosted a television program, and began modeling. Ellen was determined to get into show business so she moved on to Los Angeles and worked for a television production company. At a party, she met her future business partner – a man who would change her life, but not for the good.

“My business partner had just returned from Oxford University,” she said. “He was a Rhodes Scholar, had majored in economics, and he was a well-known UCLA first-string football player.” He had started a financial management firm and asked Ellen to go into partnership with him.

“I was very excited about the prospect because I respected who he was, his creativity, and his determination to succeed,” she said.

He became her mentor. They began handling the financing for TV movies and Hollywood businesses. “My partner was the visionary. His goals were to own a bank and eventually have a controlling interest in Universal Studios,” she said. “I wanted to become a top woman in the financial world and be wealthy so I could have control of my life. Also, I wanted to be a part of something dynamic. Obviously, working with well-knowns from Hollywood was an exciting start.”

She said they didn’t originally start out to commit fraud; they just wanted to make lots of money for their clients – and for themselves.

“My partner wanted to use clients’ money to buy up all the property he could in Santa Monica,” she said. He had done an econometric study at Oxford that said that properties in the city were going to jump dramatically, she said. Unfortunately, he told their clients, with Ellen’s knowledge, that the firm would be investing their cash in arbitrage and foreign currency.

“At a time when S&Ls were paying 8 or 9 percent interest, we were paying 15 percent. And for six years, people got their checks just like clockwork,” she said.

WASHING THE CASH

Money begets more money and soon people were asking for other services. A Hollywood screenwriter came to them and said, “I have $10,000 in a safe deposit box and would like to get it into the system.” Then they were introduced to another businessman who was divorcing his wife and had converted $250,000 of his assets to cash to avoid splitting it with his wife. Ellen consulted with her firm’s banker who said they were only responsible for what they did with the money, not where it came from. “When we deposited that much cash in our account, we should have had to fill out the necessary forms for the IRS, but we didn’t – our banker said, ‘Don’t worry about it.’ ”

A Beverly Hills physician gave them $3 million in cash within several months. “I would go to his office and pick up the money, which was in a small paper bag, and sign a receipt. He just kept giving us money and was earning the 15 percent,” she said. “At one point, he mentioned to my partner that this money was not all his. Then he called and said that we would have to give him 30 percent, payable monthly in cash or we would have to give the $3 million back all at one time! Of course, that was impossible.”

In the early 1980s, they used much of the investors’ money to buy dilapidated houses in Memphis through a local Realtor with the honest intention of renovating the houses and flipping them in six months. That’s not quite the way it worked out. They couldn’t turn the properties fast enough to cash out investors, the business plan devolved into a Ponzi scheme, Memphis’ The Commercial Appeal wrote several incriminating articles, and Tennessee regulators put a freeze on their client trust checking account. Ellen said their Memphis attorney had overdrawn the account by $1 million. “We couldn’t cover it and everything began to fall apart. For the first time, we couldn’t issue profit checks to investors.”

According to a Feb. 14, 1981, article in The Commercial Appeal, “Confused California Investors Put Blind Faith in Odd Couple,” by Shirley Downing and Thomas Jordan, the California investors had received $3.5 million in largely unsecured loans from an L.A. bank to support the ill-fated Memphis real estate operation. The Memphis county register’s office showed the houses and apartment buildings were being sold back and forth among the investors, the Realtor, Ellen, and her partner, according to the newspaper. In most cases, property valuations listed on warranty deeds escalated with each transaction, even when renovations hadn’t been made, the newspaper reported.

Their L.A. legal counsel advised Ellen and her partner to turn themselves in, which they did immediately, and deliver the firm’s tax records to the Internal Revenue Service, she said. 

“Initially, when the business collapsed, investors were in disbelief,” she said. “For a couple of weeks, several of them formed a group to try to restore the company. One investor from England who had monies with us flew us there to raise funds so we could be back in business. Others said, ‘You were just foolish and got caught; how can we get you back in operation?’ ”

They didn’t get back into operation. The FBI, IRS, and the Justice Department began investigations. Ellen and her partner weren’t charged with fraud but plea bargained for tax and securities violations, she said. Both of them admitted to conspiring to help investors in their financial consulting firm evade taxes and to selling securities without a license. She did her three months; her partner served six months.

Before she went to the federal penitentiary, Ellen had lost everything she was worth – about $3 million – but she had renewed her faith in God. In prison she began researching the reasons individuals become white-collar criminals. After getting out, she retrained herself in the field of human development and then fulfilled her community service by leading workshops for other white-collar criminals and felons through a private, nonprofit L.A. group in conjunction with the L.A. Federal Probation Department. She even spoke at some ACFE seminars. Ellen worked as a business consultant and workshop leader to support herself.

THE GREATEST CRIME AND RATIONALIZATION

“The greatest ‘crime’ is not the loss of the money but betraying the trust that others had placed in you,” Ellen said. “If my partner had been doing good business and it failed and the money was lost, we could have recouped and moved forward with the same investors.”

She said that after she was out of prison for about six months, she sent an invitation to all the clients listed in the bankruptcy to come to a meeting at her house. “There were so many rumors and untruths that circulated and some of the clients did not even know we had been sentenced and served time. I apologized for my actions and behavior. I explained that I did not have any money, but I was willing to do work for them. One client, who was working on a recycling waste project, had me type up all his findings! Another asked me to come into his business and recommend changes that would make it more profitable!”

As she looks back, she realizes that she and her partner were guilty of more than just tax and security offenses and money laundering. They kited checks, lied to investors, falsified financial statements they gave to the bank, and paid profits under the table. But at no time did she think they were committing fraud, she said. “I just figured we were being shrewd at business since we were participating with a lot of other professional people,” she said. “Even our banker had money invested with us.”

Her rationalization was always, “This is just necessary for a little while and then we’ll quit.” She said she was a feminist “before my time because I wanted to be successful and I wanted it immediately. I didn’t want to be married to have a certain quality of life. It was never about ‘being rich’ for me. I just wanted enough money to have choices.

“Also, it was about power,” she said. “A former friend of mine said, ‘He who has the gold makes the rules.’”

Ellen said she was driven to make money quickly. “Impatience is one of the signs of a person who can get in trouble because he or she wants to do everything faster than everyone else – to be first. When you are overly ambitious, you are vulnerable and open to bending the rules,” she said.

MORE THAN A CAUTIONARY TALE

Ellen now lives in Waipahu on the island of Oahu, Hawaii, near her oldest daughter (who had come to live with Ellen in Los Angeles in 1976 when she was in the ninth grade). She keeps in touch with her other daughter and son on the mainland. Ellen speaks to corporate and nonprofit executives, associations, students, and others about her crimes; corporate ethics; personal integrity in the workplace; the process of conviction, incarceration, and probation; and how not to become a victim, among other topics. Her Web site is: www.whitecollarcrimeexposed.com.

“I tell my seminar participants that if you are asked to do something against your values, are you then willing to risk the consequences or will you yield to pressure?” She said that one of her seminar participants, a CPA who had worked for the IRS, told her after the seminar that she had been ready to lie for her pastor about a financial situation. “She said that as I spoke about consequences, she realized that she was putting her license and livelihood in jeopardy. She quickly called her pastor and told him, ‘No, I cannot do that.’ ”

Ellen said she’s found that many of the white-collar criminals she has known come from alcoholic, abusive, and dysfunctional families (much like her own). “If an offender isn’t addicted to a substance, often they become workaholics – intensely driven to succeed, as I was,” she said. “Low self-esteem, getting recognition and love for being successful, and proving to others you can make it are common factors.”

Ellen said that most don’t realize the permanent personal consequences of being a convicted fraudster. “For instance, I was turned down when I applied to live in senior housing because I was a convicted felon!

“Often, when people talk about white-collar crime, there is nothing personal – no level of intimacy and no understanding of how it affects peoples’ lives. Fraudsters might have ‘paid their dues,’ but they have to live with the realization that they’ve damaged lives, and they have to deal with tremendous shame and guilt,” she said.

“I have learned that life is not about getting but about giving,” Ellen said. “Anything tangible can be gone in a second. What cannot be taken away is loving and honoring another. Being of service to others so they can learn to live a quality life and achieve their goals is now my objective.”

Dick Carozza is editor-in-chief of Fraud Magazine. 

The Association of Certified Fraud Examiners assumes sole copyright of any article published on www.Fraud-Magazine.com or ACFE.com. Permission of the publisher is required before an article can be copied or reproduced.