On December 17, 2008, Keith King opened his e-mail and unknowingly played his part in the downfall of what state prosecutors say is a $20 million investment scam.
King, an Austin mortgage consultant, had been moonlighting for a friend, hawking a sure-fire investment opportunity in the midst of crumbling financial markets. Like any legitimate, non-sketchy investment program, it was advertised in the financial services section of Craigslist.
King saw an e-mail from a guy named Ron Frank: "I saw your ad...I may be interested in making an investment. Could you send me some info?"
"Yes, sir," King replied. "Take a look at this, and if you're still interested, let me know. We can then set up a meeting with my partner, David Herzog, a long-time financial advisor who specializes in retirement income."
King shot Frank some literature from a company called National Life Settlements, which sold interests in securitized pools of life insurance policies of old, sick people who sold their policies for less than face value so they'd have the money right away. These were people who were going to die in five years. All you had to do was wait around for the geezers to croak, and your $25,000 investment (the minimum) would yield $37,500, guaranteed. No traditional investment vehicle guaranteed that kind of no-risk return, according to National Life Settlements. If you invested before January 1, 2009, you'd get a 10 percent return. After that, for some reason, the return would dip to 8 percent.
Frank replied the following day, saying he was really interested and wanted to talk to Herzog ASAP. King gave Frank Herzog's phone numbers. What Frank didn't say was that his real name was Rani Sabban, and he was an investigator for the Texas State Securities Board.
According to Sabban's subsequent affidavit, Herzog explained to him that NLS was run by a Houston guy named Howard Judah — a retired former "head" of Ford Motor Credit — and his partner in Colorado, Greg Jablonski. Herzog e-mailed "Ron Frank" a PowerPoint presentation detailing how the investment product worked. In true Mission: Impossible style, according to Sabban, Herzog asked Sabban to "destroy" the file after he viewed it.
Sabban and Herzog forged a professional relationship built upon mutual omission: Sabban wouldn't say he was working undercover, and Herzog wouldn't say that Howard Judah was a three-time felon who wouldn't recognize a sensible investment program if it bit him in the ass. (National Life Settlements' literature failed to disclose that Judah had been convicted in a New York federal court of wire fraud, contempt and money laundering in the late 1990s. It's doubtful that NLS's sales agents knew this.)
The same could be said for the nearly 300 people — many of whom were public schoolteachers — in Texas and abroad who invested more than $20 million in National Life Settlements. In Texas, teachers at or near retirement rolled $2.6 million from their state pensions into NLS. Many of these people were steered toward NLS through insurance agents they trusted.
As far as the State Securities Board was concerned, Judah and Jablonski were selling unregistered securities; in other words, they didn't have proper state certification. In 2009, the board and the Texas Attorney General's Office seized NLS's assets and assigned a receiver to oversee reimbursement to investors. Judah and Jablonski were sanctioned civilly.
Then, in January 2011, the two were charged criminally in Harris County District Court with misleading investors. Both men maintain they are not guilty. (There are still hearings scheduled before a formal plea must be entered.) According to securities regulators and district prosecutors, Judah and Jablonski were responsible for the following violations, among others:
• They only invested a fraction of their clients' money and used the rest to line their own pockets.
• They claimed that NLS was an industry leader before it even had any clients.
• They misrepresented that investors' returns were guaranteed.
• They misrepresented that NLS had billions of dollars in backing from the Federal Reserve.
If NLS was the scam that state authorities allege, it was an almost obscenely unsophisticated one, perpetrated by a soft-headed septuagenarian and his equally oblivious co-conspirator. If it was a scam, it reads as a sort of what-not-to-do guide that could serve as a learning tool for budding swindlers. So if you're a budding swindler, pay attention to what Judah and Jablonski did, and try to do pretty much the opposite. It will go a long way toward ensuring an exciting career in white-collar crime.
Though not illegal, life settlements are perhaps the most repugnant way to make a buck off an investment.
They literally place a value on human suffering and death. The industry's ideal insurance policy was written for an old person with at least two severe medical conditions. Once you plunk your money down, you become a buzzard. You are waiting for someone's grandmother to die so that you can get a return on investment. Ideally, this grandmother is in an advanced stage of renal failure or smokes Salems through a stoma, because you're betting on the short life expectancy that was advertised. If doctors suddenly cure what ails them, you're screwed.
The industry got its start as "viaticals" in the mid-1980s, when AIDS was a death sentence and patients wanted immediate access to funds. Young men whose bodies were ravaged by toxoplasmosis and Kaposi's sarcoma were many an investor's meal ticket. But unfortunately for them, as time passed, advances in HIV/AIDS care prolonged patients' lives, and there was no longer any way to adequately predict their life expectancy. The industry withered, but not before attracting its share of unscrupulous entrepreneurs eager to exploit regulatory agencies' unfamiliarity with the product.
Viaticals later resurfaced, repackaged as "life settlements," and old people with multiple health problems were where it was at.
National Life Settlements pitched this product to retirees as safer than stocks and more lucrative than traditional retirement accounts. The problem, according to authorities, is that Judah and Jablonski created NLS mostly to serve as their own piggy bank. Prosecutors also accuse the NLS co-founders of not disclosing Judah's criminal background, and not accurately describing the inherent risks of the life-settlement market, among other indiscretions, such as flat-out lying. The indictment alleges that Judah "knowingly misrepresented that Warren Buffet was an investor, owner or affiliated with National Life Settlements...and that [NLS] was the custodian of policies on behalf of a company controlled by Warren Buffet known as GenRe..."
According to the indictment and federal court records in New York, Judah was convicted of the following:
• conspiracy to commit wire fraud in 1998. Sentenced to 32 months in prison followed by three years of supervisory release;
• engaging in monetary transactions in property derived from specified unlawful activity in 1997. Sentenced to 46 months in prison, followed by two years of supervisory release;
• contempt of court in 1996. Sentenced to 12 months and a day, followed by three years of supervisory release.
The wire fraud conviction related to Judah and a co-conspirator "devising a scheme to sell to victims nonexistent or fraudulent bank documents referred to as 'prime bank guarantees.'"
Moreover, according to the indictment, Judah told victims in that scam that he was a "senior executive of Ford Motor Credit and/or Ford Motor Company" — something Texas authorities allege he also did with NLS investors.
In the "monetary transactions" charge, Judah "was convicted of combining and conspiring with others to transfer funds that were purportedly the proceeds of cocaine sales from the United States through an account in France to an account in Montevideo, Uruguay."
The conviction was obtained in part through wiretapped conversations between Judah and his co-defendants. It appears that, the more Judah talked, the more investigators believed they were reeling in a big fish. It wasn't until later that they discovered Judah had a rather tenuous relationship with the truth.
Baruch Weiss, the former federal prosecutor who tried the money-laundering case, said that, when it came to Judah's "internal circle of people, he would lie to them all the time, to puff himself up."
As for the history Jablonski brought to NLS, according to the Texas charges: He didn't disclose to investors that a company he launched in Colorado, My E-Networks, filed for bankruptcy in 2007, "with almost $6 million in liabilities and $57,652 reported as assets..."
False statements and material omissions seemed to be part and parcel of NLS from its inception.
Shortly after incorporating NLS, Judah and Jablonski created booklets for sales agents that claimed the company was an established industry leader. Jablonski conceded in a 2009 deposition that those claims were fictions. Yet those claims were in sales agent David Herzog's PowerPoint presentation — the one that requires destruction after viewing — to the undercover securities agent.
The PowerPoint describes Herzog and his nebulous associates at IAM Financial, Inc. as 20-year experts in "bringing the most innovative and market leading investment products to our clientele," who "thoroughly research and scrutinize every offering before making a recommendation." This bold assertion is followed by the claim that NLS has been around for "many years." (Herzog declined to comment, but in his defense, it's entirely possible that his definition of "many" is "one or two.")
Judah and Jablonski could never have spread their gospel without a hungry sales force, which included licensed insurance agents and people who liked to play financial expert on the weekends. And in February 2011, the receiver sued these agents in an attempt to recoup $9 million.
Although life-settlement investments aren't considered securities by the U.S. Securities and Exchange Commission, they're classified as such in Texas. As stated on the State Securities Board's Web site, "the term 'security' is defined broadly..." Basically, if you invest money in something and expect money in return, Texas considers it a security, whether you like it or not. The board doesn't keep this information under lock and key. There is no secret handshake or special door-knock required.
Through their attorneys, Judah and Jablonski claim that they honestly didn't know life settlements were securities under Texas law. In the year and a half since NLS was shut down, they haven't come up with a better argument. Through their lawyers, Judah and Jablonski have constructed a legal defense predicated on the suggestion that they are pathological idiots incapable of performing even the most basic Google search, and who delegated fundamental financial matters to "experts" with an even more alarming scarcity of sense.
According to Ben Dominguez, who represents Jablonski in the 2011 criminal matter, but who represented Judah in the 2009 civil action, the NLS co-founders depended largely on the advice of an accountant and a former IRS worker. At no time in the planning and creation of NLS did the two men consult an attorney, something that maybe should've been on a to-do list for two guys planning to control tens of millions of dollars. Somewhere along the way, apparently no one bothered to ask the question, "Are we dealing with securities?"
"Howard Judah, as a normal course of conduct, tried to cross his T's and dot his I's," Dominguez said. To Judah, this apparently meant keeping in touch with the Texas Department of Insurance. Dominguez said that insurance regulators never told Judah that life settlements were not within their authority.
And that's probably true, because the Texas Department of Insurance also regulates life settlements. It's just that the insurance people and the securities people regulate different aspects.
Dominguez's description of Judah as "basically the brain behind this organization" takes on an ominous tone in the face of the Yohannes Riyadi story.
In 2008, it appears, a failed Florida real estate developer and self-proclaimed financial expert named Park Beeler tipped off Judah to an incredible opportunity, something that would safeguard NLS's investments. Beeler, currently serving four years in a Florida prison for repeat drunk driving offenses, provided Judah with official Federal Reserve Board documents indicating that an Indonesian fellow named Yohannes Riyadi had inherited what can only be described as a shit-ton of gold from his grandfather and now "had full signatory authority" over $35 trillion in "United States Treasury Checks." The papers were signed by Fed Chairman Ben Bernanke.
Beeler's documents also included some thoughts from Riyadi himself, written on his own letterhead. Riyadi explained that he was bound by certain confidentiality agreements, which was why most people hadn't heard of him. But, "all top traders in the world should know my history," he assured anyone lucky enough to stumble upon this bounty.
Beeler was willing to hook Judah up with $62.5 billion.
According to the receiver and State Securities Board, Judah and Jablonski told sales agents that NLS was backed by $62.5 billion, and sales agents in turn repeated that to the poor unsuspecting schoolteachers. But in their depositions, Judah and Jablonski explained that, if they told agents about the treasury checks, it was just for the agents' personal knowledge, and not meant to be conveyed to the prospective client. This was because, on the outside chance that the paperwork might not be authentic, Judah wanted to perform due diligence.
After NLS was shut down and Judah and Jablonski were charged civilly, Judah actually presented the Riyadi papers in court as evidence that there was no bad faith in any claims that NLS had heavy Fed backing.
It's unclear why he would hinge part of his legal defense on documents that are so obviously fraudulent. It's also unclear what Judah meant by "due diligence," because, had anyone in the entire NLS apparatus simply Googled the totally un-sketchy name "Yohannes Riyadi," they would have found a scam alert issued by the Federal Reserve Bank of New York in 2007.
What kind of person would do that — and how could he convince people to fork over $20 million?
Howard Judah, who is now 81 or 82 (there are conflicting birth dates) and suffers from prostate cancer, is just the type of near-cadaver that life-settlement investments are built upon.
Born in Indiana during the Great Depression, Judah served in the Marines during the Korean War, in which he claims to have been held as a POW during the Battle of Chosin Reservoir, a particularly brutal campaign waged in subzero temperatures. (Judah's military records from the National Archives indicate he was in Camp Pendleton, San Diego, during the Chosin battle.)
A Nexis search didn't turn up anything about Judah until 1984; information about his life before then was provided in stray articles from now-defunct newspapers presented by his attorney, John LaGrappe. According to the articles, Judah ran for Indiana's General Assembly in 1961. Fast-forward to 1978, and Judah, now living in Des Moines, Iowa, was the country's number one Renault dealer. He could move Le Cars like nobody's business.
LaGrappe also provided paperwork indicating Judah was invited to a White House reception in 1978 and to a private reception for Senator Ted Kennedy and his family in 1979. LaGrappe also supplied undated photographs of Judah jokingly presenting a contract and a pen to a tiger that was either stuffed or incredibly well-mannered.
By 1984, Judah was in Southern California, fancying himself a corporate executive.
In July of that year, the Birtcher Corporation, a developer and manufacturer of medical equipment, announced that Judah had been elected to its board of directors. He would purchase 22 percent of Birtcher's common stock through a corporation, WJCW, created strictly for the stock purchase.
Birtcher's press release described Judah as "president and chairman of International Property Exchange, Inc., a publicly traded company headquartered in Orange County."
He was also, according to the press release, "president and major shareholder" in "National American Corp." and "National Consolidated Institute." No description of those companies was given.
"Prior to that," according to the release, "he was general manager of Ford Motor Co.'s dealer development and retail outlets program."
Two months after the July announcement, Birtcher nixed the stock sale without explanation.
One possibility for the sudden cancellation might have been the U.S. Security and Exchange Commission's filing of a complaint against Judah and two of his partners at International Property Exchange (IPX).
The complaint accused IPX's principals of overstating the company's real estate holdings in corporate filings — IPX claimed to have more than $20 million in assets, when "in fact those assets were worth less than $1 million."
Judah and his partners agreed to a consent order enjoining them from "further violations" of the antifraud, reporting and registration provisions of the Securities Exchange Act. Subsequently, a federal judge entered an order of permanent injunction against the principals.
Judah later moved to Houston and appears to have led a quiet existence until his federal charges in New York. After he was released from prison, he returned to Houston and started a mortgage company. Then he started a remodeling and construction company. ("You could always go on the local corner and pick up two or three people that wanted to work, mostly Mexican; and that way you didn't have any overhead unless you had a job," Judah explained of his business model in his 2009 deposition.)
His entrepreneurial spirit was unflagging; even behind bars, he set about improving his station. In his deposition, Judah claims to have taken correspondence classes at Rice University. Of course, Rice does not offer correspondence courses, and a university spokesman said there is no record of a Howard Glen Judah Jr. having graduated. (According to the receiver, Janet Mortenson, Judah apparently didn't claim just to have an undergraduate degree from Rice. In an e-mail to the Houston Press, she stated that Judah and Jablonski shared an office "lined with law books. I asked Mr. Jablonski if anyone there was a lawyer, and he told me that Mr. Judah was a graduate of Rice University law school. As you know, Rice doesn't have a law school.")
When the whole Rice issue came up in Judah's deposition, it unleashed a bizarre exchange that can only be appreciated by reading the transcript:
Q: What degree do you believe you've earned from Rice?
A: Bachelor of Science.
Q: Okay. And — what's your major?
Q: Okay. So at Rice, a Bachelor's of — you can get a Bachelor's of Science degree with a major in business?
A: You got to have a major and a minor.
Q: Okay. And what's your minor?
Q: Okay. And that is a — at Rice University, you're saying that's a Bachelor's of Science degree, is that correct?
A: That's my understanding.
Q: Okay. Well, Mr. Judah, you were the one taking the courses, right?
Q: Okay. And you've represented to people that you're a Rice graduate, haven't you?
Q: Okay. You don't have a diploma on the wall, but you've told people, "I graduated — I'm a Rice graduate," right?
A: The only people that I think I can tell is two of our licensed agencies — there were two black fellows that ran track there, and they graduated from Rice.
A: And we used to kid each other about the time difference in athletes and things.
Judah's deposition is riddled with similarly convoluted claims and rambling non sequiturs. Although he was heavily medicated for prostate cancer at the time, his defense attorneys have never claimed that he wasn't in full control of his faculties. No family members have publicly accused prosecutors of picking on an old man whose groceries might not all be in the same bag. Still, Judah's non-answers and forgetfulness are somewhat unsettling. At one point, unable to remember the word "computer," he talks about a "big square thing." He says, of a business responsible for $20 million of investments, "You got to remember, it don't take much intelligence to run this business. Because that way your employees didn't cost you as much, they're damn glad to have a job, and they come to work."
Even on the rare occasions when Judah gave a straight answer, the results were troubling — as when he described how he brought his 54-year-old schizophrenic son into the NLS office on weekends to empty trash and work on the computer. For these services, Judah gave his son a $26,000 truck, paid for with NLS funds. Judah also said he used NLS funds to pay for his son's treatment at a mental hospital. Shortly after the younger Judah got his truck, he disappeared. Police in New Mexico found him a year later.
Judah's attorneys only spoke up about his physical condition, which apparently required him to take a break every 30 minutes, much to the consternation of Michael Shaunessy, attorney for the court-appointed receiver, who had to reschedule the deposition at least five times prior. "I'd actually like to get [the deposition] over before I retire from the practice of law," he told his opposing counsel. For Judah's part, he just wanted to make sure "I don't want to wet my pants here in front of everybody."
Plowing on, Shaunessy had to deal with a multitude of downright strange replies from Judah. Take, for example, the following exchange, in which Judah seems to be trying to explain his belief that a 1911 opinion by Supreme Court Justice Oliver Wendell Holmes that life insurance policies were transferable property somehow justified NLS's claims that investors' returns were "guaranteed":
Q: The [investment] returns were guaranteed because you-all represented to the investors that you were going to go out and acquire life settlements that guaranteed that their money would get paid back, right?
A: I didn't guarantee them. The Supreme Court of the United States guaranteed them, and that was — a decision was handed down — because this is the one I did my research. You asked me why I didn't get a lawyer. When I read that the chief justice of the United States — who is that — Oliver Wendell Holmes, handed down a decision that the — with the insurance — You got to remember insurance companies were started for — for people that started in this country, we had little farms, they wanted to hand them down and everything.
In the deposition, Judah also reiterated his claim that he was at one time the head of Ford Motor Credit.
"Why would a man with [an] extremely successful background in auto sales feel compelled to exaggerate his background," Judah's attorney John LaGrappe told the Press in an e-mail. "Would it really make a difference to a potential investor if he was a Ford Executive or one of the biggest car dealers in America at one time?"
LaGrappe also offered the following: "Let me ask you this: how are you going to know or not going to know if Howard Judah was a senior executive with Ford in the 1960s? Can you go get those records?"
The answer to the question is "Yes." Receiver Janet Mortenson told the Press in an e-mail that "I subpoenaed Ford Motor Credit's records and their response was that they maintain their employment for decades, and no one with Mr. Judah's Social Security Number has ever been employed at Ford Motor Credit."
LaGrappe is fiercely protective of Judah, pointing to Judah's military record and proficiency in Le Car sales as evidence that Judah has been nothing but a decent, productive citizen. But he concedes that, when it comes to NLS, "negligence and [incompetence] were definitely a problem. They were very inexperienced in the investment business."
As for why Judah never Googled, or directed anyone to Google, "Yohannes Riyadi," LaGrappe explained in an e-mail that "You see the world through your experience. I had never sent [an] email until January of 2009. I had never googled anyone until November of 2009. They call it 'old school.'"
Moreover, LaGrappe wrote of documents claiming that a man in Indonesia no one ever heard of had $35 trillion sitting in the Federal Reserve Bank of New York, "the documents appear legitimate on [their] face."
Besides, LaGrappe wrote, Park Beeler vouched for their authenticity, and "Would you not agree that Park Beeler seems legitimate."
Dominguez, Judah's former attorney, thinks otherwise. He says he was bowled over when, in 2009, Judah arranged a conference call with Park Beeler and Beeler's London associate, who also vouched for the Riyadi papers. Two seconds into the call, Dominguez realized Judah was dealing with crackpots and actually had to walk out of the room. When he came back in, he told Judah that there was no way he could use those papers as a defense.
While Dominguez doesn't think Judah's a liar, he, unlike LaGrappe, believes the man may have a tendency to exaggerate.
"The common observation of Judah is he's a smart man, he's got very good social graces...it's very common [among] people who want to be important...there's an inclination to exaggerate. And that is what got Judah in trouble, I think," Dominguez says. If a person, say, inferred from Judah that he was tight with Warren Buffet, Judah wouldn't rush to clarify. As Dominguez puts it: "He created the illusion without correcting the illusion."
There's a chance Judah and Jablonski might not have run into as much of a problem with state officials, or maybe at least not so quickly, had they actually invested the bulk of clients' money in life settlements. But authorities say they didn't. Officials say the whole thing was simply a smokescreen Judah and Jablonski could use to line their own pockets.
In a 2009 court hearing, Mortenson, the receiver, testified that the two co-founders "used investor money as a personal ATM. There were debits in the hundreds for restaurants, even $4.44 for a Jack in the Box. There were tanning salons, limousines, Las Vegas, pages of expenditures at Wal-Mart, at Home Depot. Mr. Jablonski acknowledged that they used investor funds for their personal living."
In their depositions, Judah and Jablonski testified otherwise. The hundreds of thousands they took from the NLS till, they said, were simply "loans."
One of the most striking aspects of the NLS debacle is that investors never had any clue their money was being siphoned off.
The Texas State Securities Board wasn't acting on investor complaints; its enforcement division was merely trolling online for stuff that didn't look right. Had NLS's agents not been so egregious in their idiotic advertising, it's quite possible that investors wouldn't have realized their situation until much further down the line.
Joe Rotunda, the board's head of enforcement, says that life-settlement scams have increased since he came aboard in March 2007, fueled by fear that traditional investment plans were no longer safe. And the typical person at retirement age shopping for alternative investments probably won't be too keen on "exotic" opportunities like derivatives or collateral debt obligations, Rotunda says.
"But we understand that people die," he says. Making money off their insurance policies "is a very easy concept to explain to somebody." Moreover, a single life-settlement scam can reach a lot of people quickly if you rope in just a few sales agents with a built-in customer base.
"The promoters themselves are often not selling, they're recruiting," Rotunda points out. "...recruiting that one insurance agent is the same as recruiting perhaps dozens of investors."
The beauty is, the agent doesn't even have to be complicit in the scam. It's possible the agents recently sued by the receiver didn't realize they were participating in a scam. It's possible they're just enormous imbeciles who have defied the odds according to natural selection. Either way, as Rotunda says, "They may not know that it's a big fraudulent scheme, but without their efforts, none of this works."
Investors were also lucky that, if Judah and Jablonski really had any criminal intent, they weren't even wise enough to move their money offshore or otherwise hide it in a series of complex shelters. Receiver Mortenson was able to recover two-thirds of the investors' money, so it doesn't appear that anyone was completely wiped out.
Judah and Jablonski have maintained that NLS was always going to be able to make good on investors' returns, and that state officials were trigger-happy thugs.
Dominguez says the duo may have made "stupid mistakes, but mistakes that could've been remedied."
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It seems that there was so much stupid to go around that everyone related to NLS is too embarrassed to talk. The Texas agents the Press tried to reach disconnected their business and personal phone numbers, so were difficult to contact. The Press tried reaching more than a dozen investors to see if they would be willing to share their stories, so that others might not make the same mistakes in the future. The only investor we were able to speak with was a retired professor who asked that his name not be used. The Press declined.
Judah's wife, son, daughter-in-law and granddaughter, who all collected money from NLS, could not be reached for comment. And neither, of course, could trillionaire Yohannes Riyadi.