The Ponzi Producer
In order to give the reader of this article the background on a scam and the steps and precautions that could have been taken to guard ones self against fraud I've created a case study using passed frauds as examples. One television show that showcases scams of all sorts is American Greed , which airs on CNBC. In this article I've included a synopsis of a scam profiled in an episode of American Greed and how the investors could have conducted due diligence on the opportunity being presented in order to raise red flags.
Year : Early 2000's
Fraud Amount : 5.5 million dollars.
Number of people defrauded : 70
Joseph Medawar had some minor success as a Hollywood movie producer, but his next production would make him famous as a scam artist.
Medawar billed himself as a movie producer who was looking for investors in his latest TV series named DHS that will profile real incidents from the files of the Department of Homeland Security. He claimed to have 26 episodes that were all in some stage of production that both FOX and HBO were competing for the right to purchase the episodes.
In 2003 Medawar showed the trailer to congressman Dana Rohrabacher of California. In order to help the producers in making the television series as real as possible, Rohrabacher introduces Medawar to government officials in the Department of Homeland Security. He was able to have his picture taken with these government officials and other members of congress. Throughout his attendance at various fundraising dinners he was eventually meet and have his photo taken with President Bush. Medawar plastered these photos on his website in order to increase the legitimacy of his business deal.
He showed potential investors the trailer created as part of the "pilot movie." It turns out that the trailer was really just snippets stolen from other movies edited together to make it look as if it were actual footage filmed as part of the finished tv series. Investors were able to purchase stock in his company, Steeple Entertainment, for one dollar per share telling them that the company was about to "go public."
Medawar then went to small Southern California churches to claiming that his series had a religious message and that it will run on faith-based television networks. One church member took a $ 57,000 equity loan on her Watts home where she had raised 13 children in order to invest in Medawar's "movie." When her investment was not returned in the promised time, she couldn't keep up the payments on her home and eventually lost her home. She laments the fact that she won't be spending Thanksgiving or Christmas with her family at their home. In all, Medawar bilked 3 million from unsuspecting churches and parishioners.
Another investor who heard about the "opportunity" from a colleague at work, took out a second mortgage on his home for over $ 100,000 in order to purchase the $ 1 shares of stock. He said that he expected that once Steeple Entertainment had their IPO (initial public offering) he'd be able to sell for $ 40 / share.
Financial Pornography Due Diligence:
The potential investors could have contacted the California State Securities division asking if Steeple Entertainment had notified the State to sell securities in the State of California or if they had ever heard of Joseph Medawar. The investors could have hired a private investigator who may have dug up the fact that Medawar had been cited for stock fraud in another company in 2001.
An understanding of the Securities Laws would have given investors a red flag that only accredited investors are allowed to invest in many pre-IPO stocks. While it may be difficult for the general public to obtain this kind of access, one FBI agent spoke with several investment banks who said that they had never worked with Medawar or Steeple Entertainment for the purposes of taking it public.