SCF Tip: Ponzi Schemes Don't Work In The Long Ruin

Thanks to Johnny Undercover for the tip!

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When Gregory Setser's import empire came crashing down two years ago, little was left to pay back hundreds of investors and church groups who funded his International Product Investment Corp. with at least $160 million.

Big-name evangelists and everyday churchgoers are among those who were invited to invest in a plan to import cheap, foreign-made goods for pre-arranged sales to retailers like Garden Ridge, Kmart, Michaels and Pier 1.

But what remained after the Securities and Exchange Commission shut the company down serves as testament to the lavish California lifestyle of Mr. Setser, a former Canton, Texas, ceramic merchant.

Paid for by thousands of evangelical Christians:

A 100-foot yacht moored off Mexico, a private plane and helicopter parked at a Los Angeles airport, and a quartet of well-furnished homes in nearby Rancho Cucamonga.

This morning, jury selection is set to begin in a downtown Dallas federal courtroom to decide if the 49-year-old Mr. Setser, four family members and a German business associate carried off a massive Ponzi scheme from 2000 to 2003 that used religion as part of its sales pitch.

"That was the biggest betrayal of the whole thing," said investor Helen De Lemos of Houston. "The Christian affiliation was the big reason we took the risk in the first place."

Ms. De Lemos said she and her husband lost about $30,000 investing in an IPIC venture in July 2003. Th ey were drawn into the venture through a friend at church, who also lost his investment before the SEC shut down International Product Investment Corp.

"It sounded a little funny at first, but with a Christian organization we thought we could take that risk and maybe God would watch over it," Ms. De Lemos said.

Efforts to contact Mr. Setser in Canton, where he has been on home detention and electronic monitoring since early 2004, were unsuccessful. He and four other family members, including his wife and two adult children, have denied any wrongdoing.

The Trinity Foundation, a group that regularly blasts so-called prosperity gospel taught by many televangelists, has noted a growing trend in what's come to be called religious affinity fraud.

"It's part and parcel of the whole prosperity gospel deal," said the group's founder, Ole Anthony. "People like Setser get connected and close to spiritual leaders, who make money on the first one or tw! o levels of a scheme, and that gets approval of the fraud to believers," he said.

Over 100 witnesses

Court records suggest a complicated, confusing trail of Setser family spending and business deals that used IPIC money to pay for their homes, cars, a family member's wedding -- even cosmetic surgery -- instead of building its import business.

Lawyers on both sides of the criminal case filed thousands of pages of documents, and called for more than a hundred witnesses to stand by to testify in U.S. District Judge Barbara Lynn's court. The trial could last for up to six weeks.

Among those who may be called to testify are evangelists Benny Hinn of Irving, Fort Worth's Kenneth Copeland and Florida-based Reinhard Bonnke of Christ For All Nations. Authorities believe they were duped by IPIC's scheme when the company paid them "profits" that turned out to be money taken in from new investors. In a Ponzi scheme, money from new investors is used to pay off old investors.

If convicted, the six defendants, each charged with 22 counts, could face statutory sentences of up to 45 years in prison.

Jurors may hear more than a simple accounting of how and where all the money may have gone.

Prosecutors plan to introduce evidence from court records filed last week that Mr. Setser and two family members threatened at least four people who may be called to testify against them.

In court records filed last week, prosecutor Jeff Ansley's filing wrote: "Gregory Setser threatened to have [the witness] and his family killed if he ever 'crossed' Setser.

"On numerous occasions, Setser claimed to [witness] that he had connections to organized crime, including the Mafia," Mr. Ansley wrote.

Another witness was told that he needed to be careful because he was being watched, and a third witness told authorities that "anyone who went against them in this case ... was going to go down," the document states.

The filing did not cite an exact time the threats were made, only that one threat was made after the Setser family members were indicted. No further charges of witness tampering have been folded into the criminal case.

Prosecutors also hope to introduce attempts by three Setser family members to bring in new investors in a diamond project linked to the United Nations -- long after their criminal indictment. The family would also get access to large stashes of money in offshore banks after the trial, according to court records.

Prosecutors also plan to tell jurors that all five Setser family members under indictment failed to file individual income tax returns since 1999.

Regardless of the outcome, those who lost money with IPIC have only a slim chance of collecting full restitution.

Mr. Setser promised investors returns of 25 to 50 percent in two or three months' time. Other investors were promised 6 or 7 percent returns each month for allowing IPIC or its subsidiaries to manage their money.

Accordi ng to court documents and interviews, goods were imported, including toys, knickknacks, decorative ironwork for gardens and electric scooters. Showcases were built in Los Angeles and Panama to allow IPIC employees to display to prospective investors warehouses stockpiled with mountains of cheaply bought bounty.

But such goods were "rarely" really purchased from abroad for resale to retailers as promised, according to Dennis Roossien, a court-appointed Dallas attorney who has spent more than two years tracking and selling off the remnants of IPIC to repay investors.

"It was simply stated that Setser and IPIC wanted to share the extraordinary blessing bestowed upon them with other like-minded Christian organizations," Mr. Roossien wrote in court documents.

His investigation involved a cadre of lawyers and forensic accountants who scanned bank accounts and offices from California to New York to Germany and Panama.

"Very little capital appears! to have been used to purchase merchandise," he wrote.

Investors who could prove they gave IPIC money claimed about $35 million in losses, but prosecutors believe IPIC took in at least $160 million -- no one knows for sure. The Setser family did not cooperate.

By last summer, Mr. Roossien's investigation had spanned the globe, but only a little more than $12 million was found to return to investors.

Documents show that almost $2 million came from investors who voluntarily paid back early "profits" IPIC had given them after the investors learned the money was really just new investor money.

Mr. Roossien also recovered about $6 million by selling Mr. Setser's personal estate -- which traced back to IPIC investor money.

Mr. Roossien never found any accounting by the Setsers of what was actually owed investors, should their business plans have actually worked.

Last summer, Mr. Roossien asked a federal judge to allow him to ap! prove refunds to be mailed out this fall -- when all is said ! and done payouts could be as little as 15 cents on the dollar.

Some items worthless

The rest of the missing IPIC money appears to have been squandered in grandiose, incomplete business ventures doomed to lose money -- or that would have required millions more in capital before they could be sold, court documents allege.

Much of the product lines actually purchased by the Setsers were part of the "elaborate sets" and couldn't be resold or were worthless, Mr. Roossien wrote.

Like the condoms and the corn liquor.

IPIC funds paid for millions of condoms from Brazil and thousands of liters of corn liquor from the U.S. -- all found in a warehouse in Central America.

"No one other than Gregory Setser appears to know how he envisioned selling the liquor or the condoms or why they were located in Panama," Mr. Roossien told the judge.

Ms. De Lemos remembered that her investment involved buy! ing a large shipment of latex condoms for a stateside buyer.

"I'm surprised to learn they ever bought any," Ms. De Lemos said. "I thought it was just another empty promise.

"Now, we can sort of laugh about it," she said. "It wasn't our life savings, but when you think about some who put in retirement savings, it's not funny at all."

Court-appointed lawyer Dennis Roossien has spent more than two years compiling a list of assets paid for by investors in International Product Investment Corp. Here's a partial list of what was found:

50,000 liters of corn liquor made in the U.S. and stored in a Panamanian warehouse, but no liquor sales permit for Panama.

7 million latex condoms from Brazil with a December 2004 expiratio! n date.

A 108-acre coffee plantation in western Panama bought for $200,000 that had yet to yield a bean.

A $1.2 million paint factory in Panama that never sold or manufactured anything.

Equipment for a bottling plant in Ensenada, Mexico, that sat in shipping crates.

A bottled water company with a few pallets of stock for show -- plans called for Panamanian tap water to be used as its source.

A $1.2 million "start-up" Internet service provider that never started up.

A worthless Tasmanian oil and gas project.

A record company to "ignite the singing career" of a Setser daughter. It lost $780,000.

450,000 gallons of obsolete, expired paint in a California warehouse used as a prop for investor pitches that cost $3 a gallon to dispose of under state law.

Hundreds of boxes of cheap toys from China with no interested buyers lined up.

A large extrusion machine that was bought despite its inventor's admissions that it didn't work.

An inoperable concrete building-block plant that never formed one concrete block.

Half ownership in an idle, steam-generated power plant near San Francisco that would cost millions more to be recommissioned, and required $6,000 a month to monitor.