Investor Fraud - Anatomy of a Conman - Identifying a Ponzi Scheme and Scam Artists - Part III of III

Part III of III in this series of articles on Ponzi schemes will examine a real world, ongoing scam, the con man behind it and a few of the hundreds of investors victimized by his criminal enterprise, Millennium III Corporation.

History: At an early age, Gregg Scott Luce was falsely led to believe that his Maine based blood line was directly connected to the mink lashes storied Time-Life Henry Luce legacy. It's unclear whether this fallacy was instilled within him by personal dementia or a collective familial dementia. Luce fled his highly dysfunctional family at age nineteen and began trafficking in marijuana. Within a five year period, petty trafficking grew to major distribution: cargo planeloads of product, much of it brought in directly from Jamaica.

Ten years into this venture, Luce realized that a much greater profit margin was to be realized in trafficking cocaine. It was the early 1980's and cocaine was a popular and accepted recreational drug amongst the establishment. There wasn't the stigma attached to the narcotic that exists today. Luce was driven to the quick fix by impatience, an entrepreneurial spirit, ruthless and boundless ambition, and an insatiable craving for the recognition, cash and cache that had eluded his family for the better part of a generation as it strived, futilely, to identify itself with the gilded Time-Life Luce lineage.

Sociopathology, single minded focus and indifference to the body count in his wake, both literally and figuratively speaking, allowed Luce to establish a port of entry distribution hub in Seattle, Washington, and rapidly dominate the unclaimed US Northwest territory. Coming from a family of commercial fishermen, Luce was well versed in nautical maps. The Pacific Northwest's unsettled, remote coastline allowed inconspicuous ingress and egress of transport planes from Colombia. Luce leased a pier and houseboats off Lake Washington, hosting cocaine fueled parties frequented by prominent area artists, business leaders, attorneys, politicos and bankers.

Within a five year period of time, the distribution network extended north to Canada and as far Southwest as Aspen, Colorado, where his cartel's administrative team oversaw operations. The growing business invested in a Nascar race team. Product was transported to merch drop points in trailers used to ferry cars and pit equipment from city to city.

As with most narco-centric businesses, Luce's venture operated on borrowed time. When the DEA and Feds broke up the drug ring, all senior personnel, save for one individual, escaped. The captured operative refused to turn state's evidence, permitting his associates to quietly seek out other business opportunities. Luce took a two year hiatus lying low and pored over recent economic trends. It was the early nineties and the Nasdaq bubble had begun to gestate. Silicon Valley, Boston, Austin and Seattle were the new Wild West. Greed and green were in the air. In the fast paced world of new media startups, the "cocktail napkin to boardroom" paradigm ruled, as did drugs, violence, treachery, and legal manipulation: otherwise known as Twenty-First Century corporate best practices. Easy deals were the currency of success; futures contracts and penny stocks were the new blow. The careful vetting of business plans demurred to the haste of being first to market with a given product . Venture capitalists indiscriminately showered IT neophytes and veterans alike with more seed money than most could realistically hope to match in profits. Boom-bust high tech gold fever was in full force. Luce couldn't have scripted a better entree into legit business.

Ponzi Scheme: Thus marked Gregg Luce's emergence from the organized crime of drug trafficking to the organized crime of Wall Street. The founding of Millennium III Corp. (MIII) commemorated Luce's introduction to Fortune 500 society at the VC cotillion. In order to fly under the radar of SEC regulations and regulators, the newly minted CEO of MIII, a broadband media streaming company, limited his initial investor pool to thirty-five non-accredited shareholders. He later violated the SEC Rule 505 exemption provision with inclusion of an additional ten investors. Rather than issue shares to investors, Luce issued "convertible note loan agreements": an instrument convertible to either buybacks or shares in MIII at maturation. Luce took his tortured business model a step further, arguing the corporation maintained a non-profitable trust that secured investor monies. In this and subsequent cons, Luce argued, with poetic license, that the initial corporate form would somehow morph into a "bank", thereby ensuring the liquidity of MIII's capital funds and the security of investor monies.

In keeping with Millennium III's smoke and mirrors business structure, its CEO was functionally illiterate in New Technology: the company's core product offering. Luce was able to successfully pass himself off as an IT avatar by surrounding himself with experienced, genuine technology specialists, providing the Ponzi scheme with a patina of legitimacy. He maintained an entourage of tech savvy advance people, lest his shareholders and clientele realize that the emperor had no clothes.

Seven years after the founding of MIII, I was retained to review intellectual property issues. Approximately twelve months into my work, original note holders began contacting me, expressing concern that they had received no annual statements from MIII -- for that matter, no communication at all from the board of directors or corporate officers for several years. More troubling, to a man, every investor had demanded buyback upon maturation of their convertible note loan agreements. Luce refused to honor the promissory notes. The paper trail showed Luce used money from the non-accredited investor pool to line his own pockets, and money from new investors to pay contracted employees that held stock options; thereby, perpetuating the ruse. A textbook definition of the classic Ponzi scheme with a slight twist: using money from new investors to pay dividends to original investors.

I approached the CEO with my concerns. He was non-responsive, as was the board. The newly enacted Sarbanes-Oxley Act provided new remedies for attorneys caught in this dilemma, allowing them the ability to whistleblow without fear of reprisal for breach of attorney-client privilege. The new law permitted me to alert the shareholders and law enforcement to Luce's misuse of corporate funds. Attorney-client privilege was a lesser concern, as Luce had long since waived any privilege enjoyed when he actively solicited me, demanded actually, that I launder corporate receipts for his conversion to personal use. As I dug deeper into the CEO's history, unearthing a deep list of accounting firms, law firms and contractors owed money, I came to learn that this was one of Luce's tricks: secreting money in his attorneys' client trust accounts, knowing that the lawyer would be obliged to release the funds to Luce as client, regardless of whether the money was dirty. In addition to confronting shareholders with Luce's malfeasance, I reported his actions to attorney general offices in two states. Formal investigations into Millennium III and its CEO were underway.

With heat turned up by law enforcement and shareholders, Luce did a money grab, embezzling from his own corporation, and fled the state to set up shop in Arizona. Luce didn't see running off with investors' money as theft. His mindset was such that he was constitutionally incapable of distinguishing between corporate assets and personal assets. As he saw it, MIII's assets were his assets; hence, there was no theft in this distorted world view. This would be a recurring theme in his subsequent Ponzi schemes. His flight left dozens of investors in Washington State, Nevada and Idaho holding the bag -- out all their money. To this day they have not recouped a penny, despite two eighteen month long concurrent investigations by AG offices in both Washington and Arizona.

A good con man seldom remains static in product or presentation. This is particularly true after a Ponzi scheme has been exposed. After Luce was chased out of Washington State and started anew in Arizona, he changed his entire business model to cater to the New Age Sedona crowd. Con men gravitate towards products and services where performance cannot be measured empirically. New Age meditations, administrations and potions proved a market ripe for exploitation, since it was largely faith based and not governed by the FDA or AMA. Under the banner of a MIII Corp. foreign corporation registered in Arizona, Luce began to solicit investors for ventures ranging from the mundane -- self-improvement courses -- to the fantastical -- space tourism. He held out his partner's Flagstaff real estate as his own, using it to collateralize investments. His shotgun approach to offering a multiplicity of services failed. After five years without seeing a return and suffering a loss in excess of $500,000 USD, Luce's partner gave him the boot, forcibly evicting him from the property. To this day, Luce holds out the property as his own, despite the fact his name is not on the title and a court order was awarded for unlawful detainer.

Luce then ventured further south to Santa Fe, New Mexico, this time altering his physical appearance to a startling degree: Luce retired the Brooks Brothers suits and button-down conservatism for 'aging rock star' couture and a metaphysical slant in pitching his "marks", completely changing his look and product. The man looked like Rod Stewart. On a bad day. Where he was reserved and presentable while working and living in Seattle, Luce now came across as a raving lunatic without someone knowledgeable, articulate and balanced fronting him at the bargaining table. These handlers were defecting in lockstep with their CEO's deteriorating psyche; Luce's entourage of competent advance men was rapidly thinning; the patina of legitimacy appearing more trompe l'oeil. To see just how "crazy" crazy is, peruse the nonsensical manifesto that appears on his MySpace page. Video clips and photos of Luce executing his various cons are linked to his homepage. Courtesy of his formidable ego, this is a rare opportunity to see a con man in action.

Near Los Alamos, the MIII CEO tapped into a group of retired physicists and businessmen working on new encryption technology. Luce managed to convince them he was an Information Technology visionary with the ability to pair product developers with financiers. Despite his new eccentric look, he nearly pulled this off, mesmerizing a young, naive investor from Los Angeles that ponied up $75,000 USD with the pledge of a much greater, second angel investor check. Before proffering this second check, the investor had the belated good sense to run the attendant paperwork by his attorney. The attorney had the joyless task of informing his client that, not only was his money gone, there was no basis for criminal or civil suit due to the nebulous nature of the "services contract" he entered into with MIII. The contract did not bind the con man to any identifiable, legally binding specific performance. As a legal document the contract was meaningless. It was convoluted enough to convince the investor to part with his money: that's where its value ended. In short, from a legal standpoint, the $75,000 was no more than a "gift" from one individual to another.

Present day: Word of Luce's reemergence in New Mexico reached my law offices this past month. I was put in contact with lawyers representing both investors and innovators to the deal. Neither attorney was surprised to find Luce was a con man, as they had arrived at that conclusion without my help. They were, however, shocked that he had such a prolific and recidivist history as an experienced confidence man. I provided them with documentation outlining Luce's Ponzi schemes in Washington and Arizona. A mere week later, Luce surfaced in Santa Monica, California, where he had settled in as interminable house guest at the demi-mansion of a successful, well-intentioned New Age marketer. In short order he had tapped into the marketer's professional network where he succeeded in both co-opting and alienating business contacts.

Like a parasite seeking out a host body, Luce would not only insinuate himself into the business lives of his marks but their personal lives, as well. The key to his con -- and that of many confidence men -- was to appropriate the professional and social networks of his victims in order to feed his scam. If one investor dries up, another in the network is primed and can be approached.

As a consequence of his relationship with Luce, the marketer was losing credibility, standing and relationships within the tight knit naturopathic community. Further fomenting discord was Luce's volcanic temper. He had a history of violent outbursts, lashing out at those that would question him, particularly minorities and women. Not exactly consistent with the New Age humanist perspective. Luce's true character was revealed when his temper flared. Despite the grave liability he presented his host, the businessman was so taken in by the scam artist's charisma that he was in denial.

The marketer's good friend, another prominent businessman in Los Angeles's homeopathic community, was not so enamored by Luce or deluded by his charisma. In fact, when introduced to the con man at a Hollywood Hills party, he found his pitch too good to be true and Googled Luce's name on his Blackberry: up popped my name with a warning to prospective Millennium III investors. He called my office the following day, sharing his concern for his friend's well being. It took repeated sit downs and patient conversations with the marketer, armed with documentation I provided him, to objectively layout Luce's history and machinations. Even with hard, tangible facts in front of him, the marketer remained incorrigible. It took a second round of documents and direct correspondence from my desk to the marketer's in order to shake him free from the con man's Svengali-like choke hold on his reasoning capacity. The marketer kicked Luce to the curb.

In the past five years, Luce has successfully mounted three separate financial scams, even being so brazen as to threaten law suits against investors who severed ties with him after realizing they had been swindled. Consistent with all successful con men, Luce has a keen eye for identifying a need in his mark, then convincing the mark that he is uniquely positioned to satisfy that need --despite lacking the intent, ability or desire to deliver on his promises.

Luce is beginning to unravel and grow ineffectual. The con man has become entangled in his own web of deceit. Unable to keep his lies straight, he contradicts and exposes himself at every turn. His temper, misogyny and racism have surfaced repeatedly as the intensifying scrutiny of law enforcement, bilked investors, lawyers and accountants attenuates stress by directing klieg lights on his various Ponzi schemes.

Con men are often difficult to apprehend, because they are not driven by monetary gain, alone. They are sustained in large part by the adrenalin rush experienced moving in for the kill, gutting then hanging their prey to bleed out. Luce is particularly skewed in this respect, often forfeiting the big score in order to slink away and mount another scam in another state. Stealing just enough cash to continue the ruse, but not so much bounty that criminal or civil suits are filed as a matter of course.

Jason M. Kays is a published author, jazz musician and intellectual property attorney. He has had extensive hands on experience debunking con men. For updates on the con man, Gregg S. Luce, including video clips of him in action, please visit the musings page found on the author's website