Hannes Wogner was a businessman and property owner in Germany who provided local representation and other corporate services for foreign companies. Among his most valuable contacts was Hassan Roban, a nightclub owner, architect and financial broker in Istanbul who had a lucrative sideline operation in loan sharking. Roban also controlled a network of financially insubstantial but loyal Turkish expatriates in Germany and elsewhere, and a few unlicensed brokers in London and New York. Wogner preferred to work through layers of straw men that usually involved Hernando Paria and his Belizean offshore company, China-Spanish Holdings Ltd. Wogner's contacts also included Londoner Marvin Gibbons, a father of six children who had successfully escaped prosecution by the Serious Fraud Office of England. Their mutual friend was Philipp Pepperman, an almost-retired attorney in a New York suburb with more than 50 years of experience who, for the last decade, had confined his law practice to serving as an escrow agent for investments that were structured, marketed and supposedly operated by members of this informal network based outside the United States. Their deals involved seven-figure start-up fees that, as the brokers claimed, were required by the banks issuing and trading the securities, and by other banks that provided capital for investors who did not have it available themselves. Pep-perman's much younger wife was also an attorney at his firm but — other than one secretary — they did not have a discernible law practice, or any measurable business, aside from these highly lucrative escrows that conveniently carried neither risk nor liability for them. In the investors' agreements, risks other than gross negligence and criminal intent were to be assumed by the investors in exchange for expectations of phenomenal, "risk-free" returns that supposedly were well in excess of 100 percent annually.
This association of investment "experts" primarily found their victims through the Internet. They created impressive Web sites for their affiliate brokers and targeted investors with well-crafted online marketing. E-mail chains among various contacts led to introductions between potential investors. This sense of community and trust among participants was essential to the success of the scheme, but it was completely fabricated by the culprits.
Through their U.S. and Caribbean contacts — and an expansive group of straw men, nominee directors and other agents — Wogner and his brokers created a mushroom structure of offshore companies in the Caribbean, Ireland, and certain British Isles. Some of these companies sported elaborate Web sites to tout the highly lucrative investment schemes, yet they claimed not to do business with or offer investments to the public. This shifted the risk to their investors. Plus, the wording of investment agreements gave the brokers a wide buffer of legal protection that investors needed to wade through — and hurdles posed by offshore corporations whose veils needed to be pierced — before developing a picture of the organization and how it worked. The group was essentially a changing set of intermediaries with a fixed core of masterminds.
Johann Haumgartner Ltd. was a state-licensed Austrian investment advisory firm run by its founder of the same name. It also invested for its own account. Through a convoluted chain of Internet business brokers, Haum-gartner was introduced via the Internet to a trader firm run by a man named Peter Schritt in Germany who claimed to act as a feeder for a federally licensed trader. However, Schritt said the trader's identity was confidential because of his extraordinary spectrum of access and abilities. Schritt had an open investment opportunity because one of his Internet investors — a German accountant named Kurt Weiler — was about to invest $1.2 million in Schritt's new program; Weiler needed other investors to contribute $3.6 million to collectively acquire a "lot" with Schritt's wonder-trader. Schritt put Haumgartner and Weiler in contact initially through e-mail, Web-conferencing and other Internet-based communications, and eventually used Weiler to bait Haumgartner into investing. Weiler was a live investor to whom Haumgartner had the opportunity to speak and who would invest before him, which set Haumgartner's mind at ease. Schritt then held a Web-conference with Haumgartner, Weiler, China-Spanish Holdings Ltd. and Pepperman. The team was assembled.
In the middle of March, Weiler and Haumgartner entered into elaborate escrow and investment agreements involving a myriad of companies that had one thing in common: Their names suggested an affiliation of major banks, asset managers or sovereign wealth funds.
According to the plan, Weiler and Haumgartner were being given the opportunity to invest in a high-yield program that required a minimum of $100 million. These funds would not be encumbered; they would serve as collateral to underwrite bank-issued securities offered at a substantial discount. Those would be released into the secondary market at ordinary and prevailing terms and conditions. Because the securities were to be issued at such a substantial discount to Weiler and Haumgartner, the trade in the secondary market would yield sufficient proceeds to cover market fluctuations that threatened a loss.
If the investors did not have sufficient funds to participate, they could borrow the money from third parties for a monthly fee of 3 percent. To release the funds, an advance-fee equivalent to the first month's fee needed to be deposited in an escrow account of a law firm. Pepperman's law firm was nominated as the escrow agent.
Two weeks after they had transferred their advance fees to Pepperman via the Internet, Weiler and Haumgartner were e-mailed bank documentation (for which they had paid $4.8 million) and almost right away recognized it as fraudulent — the paperwork was dated two years ago. The next day the victims retained my firm's services to demand repayment of their advance fees or, failing that, to take legal action. Pepperman claimed to have already disposed of the escrow deposits to members of the group. However, as subsequent investigation showed, he used most of the money for himself.
We found that Pepperman, Paria and China-Spanish Holdings Ltd. had been sued at least four times in the last three years in four jurisdictions under very similar allegations. Unfortunately, the incidents had not been reduced to judgment or even a disciplinary sanction. Coincidence connected one of our clients to Roban, who loquaciously provided information that led directly to Gibbons and Wogner. Discovery produced a map of documentary evidence exposing a far-flung fraud network with tentacles in Europe, Asia and North America.
Philipp Pepperman was a soft-spoken, avuncular, grandfatherly type who claimed naïvete when we spoke; he said his actions were those of an arm's-length escrow agent who had not provided legal advice or drafted the agreements. He had merely taken instructions in accordance with the escrow. At least that was his story, and he was sticking to it.
Hassan Roban was a man of many talents that apparently included running an extensive network of forgers, Turkish expatriates and people with access to the offices and letterheads of banks. Hannes Wogner was owner of substantial real estate in southern Germany and a number of corporate vehicles. These two were perhaps the best at maintaining appearances because as far as the investors' paperwork was concerned, they did not exist.
Discovery produced detailed information about the distribution of the funds placed in escrow by Weiler and Haumgartner. A day or two after Pepperman received the investment, he wired it to a dozen unlicensed entities, none of which provided any service whatsoever. Moreover, China-Spanish Holdings Ltd., the investors' counterparty to the escrow, had delegated its authority to Marvin Gibbons in London. In turn, Gibbons issued wiring instructions to Pepperman for more than $3 million of the escrowed money. Pepperman claimed to have verified the recipients of the transfers, but he did not request bank-to-bank confirmation.
As Weiler and Haumgartner suspected when they received their investment documents, the bank asserted that they were forgeries. Pepperman proved (and the bank admitted upon review of its e-mail records) that the bank received his transmission requesting verification. However, the bank claimed to have no record of the contents of the transmission or the outgoing e-mail produced by Pepperman that showed a statement confirming his inquiry.
Weiler and Haumgartner contacted Pepperman one day after they received their paperwork to notify him of their suspicions of fraud and requested that he return their undisbursed funds. However, he continued to disburse millions of dollars after they contacted him; it was clear that he acted in collusion with the recipients of the escrow disbursements. We conducted research at the county clerk's office of Pepperman's hometown and learned that he had transferred his property to his wife on the same day I issued my complaint against him, so we added Mrs. Pepperman as a co-conspirator and accessory after the fact.
After Haumgartner's and Weiler's Austrian and Turkish counsel conferred with Turkish and German prosecutors, Roban and two of his pawns (who had received $1.6 million of Pepperman's escrow disbursements) were taken into custody in Turkey and interrogated. Their bank accounts were inspected within three days. However, because Roban had connections in the local Turkish prosecutor's office, we had to bring in the Turkish national government from Ankara.
Shortly thereafter, German police raided the homes and offices of several transfer recipients in Germany, authorized surveillance of their electronic communications and confiscated evidence. Together with the records that Pepperman provided during discovery, Wogner then became a suspect.
The investigation was long, tedious and detail-oriented — along the lines of classical forensic accounting work — yet it proved relatively simple.
It was also costly, weighing in at about one-third of the amount of damages. A basic comparison of time lines showed that Pepperman, Gibbons, Roban and others could not possibly have acted in good faith because Haumgart-ner had notified them of his suspicions well before the last — and quite substantial — disbursement of his escrowed funds was made. Offshore corporations controlled by Wogner routed money through Pepperman's accounts without a discernible commercial reason. However, in so doing, the defendants violated the cardinal rule that successful frauds must follow: Preserve the appearance of integrity and credible deniability.
Drawn-out settlement negotiations with Gibbons, Roban and Wogner proved useless. Almost four months after I received the initial complaint, we brought action in federal court for racketeering, fraud, breach of contract and various other torts. We notified authorities in Austria, Germany, Turkey, England and the United States and initiated disciplinary proceedings against Pepperman. Several criminal investigations are still pending. Pepperman's professional liability insurance, though unlikely to indemnify his victims, is paying for his legal defense. Until his $ 1 million coverage is exhausted by legal fees, he will doubtlessly drag out civil litigation. The cases will remain pending unless or until a settlement is reached by the financially solvent parties — Wogner, Roban and some European banks.
Marvin Gibbons agreed to settlement negotiations but failed to produce the funds when they were due; he requested more than six months of extensions to deliver, but he hasn't to date. A few weeks later, Pepperman and his wife requested settlement negotiations but they offered the barest minimum — with other people's money. Pepperman offered a $200,000 contribution from his liability insurer, and his wife offered to sell her property and provide a small portion of the proceeds. Both argued that they needed to retain assets to pay for criminal investigations and to secure their retirement. Despite my assurances that, to avoid criminal charges, they only needed to turn over evidence against the bigger players in the scam, Pep-perman insisted that he had no incriminating evidence and had already given me the relevant information he knew.
After months of back and forth, Mrs. Pepperman agreed to settle for a small fraction of the claim, payable upon sale of her property over the next year. Settlement negotiations with her husband are ongoing but an agreement has been reached in principle. Pepperman's professional liability insurer will agree to pay 50 percent of the overall amount Pepperman and his wife owed in restitution, and Pepperman will have to liquidate his retirement assets to pay the other 50 percent.
This case could have set the standard for stalling and delays. However, the forthcoming settlement agreement with Pepperman will likely force other defendants to settle within 24 months or face criminal consequences. We sued and obtained default judgments against an array of intermediaries and business brokers to force them to cooperate with our proceedings against the wealthier — but far less cooperative — defendants.
Note
Lessons Learned
Reliance on written representations of attorneys and other licensed professionals — but especially of unlicensed parties — is wholly insufficient for investors. It is equally dangerous to trust online investors whom you have not met in person. Bank employees and other individuals who appear to hold positions of public trust are not above collusion with criminals. The critical traits I observed in organized criminal fraud perpetrated through an international, Internet-based network include:
Perpetrators manage the risk.
Lawyers create significant buffers and delays.
Settlements seldom occur before the start of a criminal investigation.
Costs of criminal defenses often compete with funds available for settlement.
Settlement rarely achieves full restitution.