Snow Job In Colorado
There is no better place to go fishing for money than Aspen, Colo. Celebrities buy second homes here, lawyers and bankers build mansions across the valley, chief executives retire here. Every winter weekend, the ski slopes are jammed with some of the wealthiest people in America.
Aspen was a perfect place for Michael Wise. You might remember Wise: He was the financial mastermind behind Silverado Banking Savings & Loan, the Denver S&L that collapsed in 1988, saddling taxpayers with a $1 billion tab. Although by no means the biggest blowout of the S&L debacle, Silverado was one of the more memorable. Its cast of characters included the usual flashy real estate developers, hapless regulators, and most notably, Neil M. Bush--the third son of the former President, whom Wise recruited to sit on the Silverado board.
Silverado's collapse left Wise bankrupt and banned from banking. But unlike some of his industry brethren who got jail terms, Wise was cleared of federal fraud charges in 1993.
Well, he's baaack. Last fall, Wise admitted stealing approximately $6 million from well-heeled Aspenites who invested in Cornerstone Private Capital, an investment firm Wise set up in 1992 to make real estate loans. The U.S. Attorney's office in Denver alleges that the amount is $8.7 million. And it charged Wise with two counts of wire fraud on Mar. 8. He could get up to 10 years in jail and fines of $500,000. Wise's lawyer, Gary Lozow, is negotiating a plea bargain with the U.S. Attorney. "It's a matter of how much time he's going to do," he says.
With Wise's track record, why would anyone, let alone assumedly sophisticated investors, trust him with their money? Charisma. By all accounts, Wise could charm a door off its hinges. "He was perfect," says one investor, who, along with her husband, sunk $3 million into Cornerstone. "He was like Mr. Rogers, but better dressed." So much for sophistication. But even savvy lawyers and professional investors who knew about Silverado were impressed with the three-inch-thick loan prospectuses Wise was churning out.
His product line was high-interest-rate loans on Colorado real estate. It was a very good business, says Tom McCloskey, who went into partnership with Wise in early 1997. The loans were made to borrowers with spotty credit histories who otherwise couldn't secure short-term funding to purchase real estate. Each of the limited-liability corporations set up for the loans was given a first lien on the property, and the loans were typically for less than 50% of the appraised value of the property.
HAND IN THE TILL. Wise, however, couldn't leave well enough alone. Since 1995, according to the U.S. Attorney, he had been working a fairly crude Ponzi scheme--pocketing money from some investors and paying them off with money from new investors. On a $1 million loan, for example, Wise would sell 12 shares in the limited-liability corporation to investors for $100,000 apiece and keep $200,000 himself. All 12 investors would get their hefty interest payments and happily tell their friends about the brilliant new financier in Aspen. Cornerstone had about $120 million in loans outstanding.
"Here was a guy who was cheating half his friends," says McCloskey. Not surprisingly, many feel deeply betrayed. "It's not just the money. He was our friend. Our children grew up with his--it's horrible," says an investor. Adds another: "They ought to string him up."
McCloskey, meanwhile, has been mopping up the mess. While many investors say they were tempted to sue McCloskey, most have settled with him--in some cases, for as little as 38 cents on the dollar. McCloskey says he has already paid out $4.9 million to about 40 of the 44 people burned in the fraud. A receiver hired by McCloskey says as much as $5.1 million is missing.
Many investors still can't figure out how they allowed themselves to be so thoroughly duped. "He made you think you were dealing with Chase Manhattan," says one. Down the road, Wise can expect to have daily dealings with a different kind of very secure institution.