Southland Too Laid Back on Scam Probes

Ah, Southern California. The sun, the palm trees, the beach. The defense procurement fraud, the savings and loan theft, the telemarketing scams.

Right under our sunburnt noses, the Southland has become the nation’s capital of economic crime. And, befitting our reputation for setting trends, we haven’t settled for old-fashioned Ponzi schemes and investment gyps. During the Soaring ‘80s we added computers, fax machines and 800-number telephone lines that permit our swindlers to take in huge sums of money faster than you can say Newport Beach. We also added some exotic, hard-to-resist international wrinkles: How about a 38% return on Indonesian certificates of deposit or a double-your-money-in-six-months guarantee on a Mexican copper mine?

What we haven’t done is crack down, at least not hard enough.

While the region’s population exploded, the scams mushroomed and the financial locus of the West Coast--and to a significant extent the nation--shifted to Los Angeles, the number of regulators and prosecutors assigned to ferret out financial crime hasn’t kept pace.

The number of people in the enforcement division of the state Department of Corporations hasn’t grown in a decade. One recent study showed that, at the U.S. Attorney’s Office in Los Angeles, the ratio of prosecutors to the population they serve is only a quarter of that found in Manhattan, and is also lower than in Chicago, San Francisco, Brooklyn and Newark.

Although the Justice Department has announced an increase in resources devoted to the S&L; scandal--including the addition of 15 prosecutors and 27 FBI agents in Los Angeles--those ratios have not changed significantly.

Similarly, the Southern California staffs of the Securities and Exchange and Federal Trade commissions have not grown to match the increase in population and fraud. What’s more, it’s estimated that only 10 of the 1,000 assistant state attorneys general and about 15 of the 800 Los Angeles deputy district attorneys are assigned full-time to major frauds.

“These (financial fraud) cases require intensive investigation, and you have to invest a lot of time,” said Irving Einhorn, former Los Angeles regional administrator of the SEC. “Out here, enforcement hasn’t kept up with the growth and geographic spread of the population.”

It’s hard to disagree with Einhorn’s assessment of whether the situation will improve: “Why should it? It’s easy pickin’s.”

What we’re dealing with is a classic case of conflicting priorities and politics, seasoned liberally with bureaucratic intransigence.

Southern California has always been the home of the fast buck. People have migrated here to get rich, and most of them have been impatient about it. Enough have struck it rich quickly over the years--legitimately or illegitimately--to pave our streets with gold, at least mythically. And that reputation is part of the problem.

In the 1980s, the means to get rich quick expanded, as did the impatience. In particular, commodities futures investments, through which millions are made and lost at blinding speed, became the game of choice for many Southland fortune seekers. And from a base of legitimate commodities futures businesses grew the much bigger business of telemarketing fraud: investment sales pitches from phone jockeys to the gullible, the naive and the fools with money.

“We had a base of commodities salespeople who saw how much more they could make by switching from legal investments to Ponzi schemes; it mushroomed,” said G. W. McDonald, chief of the enforcement division at the Department of Corporations. From a handful in the early 1980s, the number of such illegal “boiler room” investment scams operating in Southern California has grown to more than 300, despite increased prosecutions in the past couple of years.

Meanwhile, the Pentagon’s extravagance during the defense buildup and the deregulated savings and loan industry were ripe territory for impatient fortune-seekers living in a region famous for making people rich fast.

And so, given the relatively tiny law enforcement effort, the obvious occurred. In the past five years, we’ve heard of dozens of instances of defense fraud, hundreds of exotic investment scams, thousands of complaints about savings and loan swindles.

But you wouldn’t know it by looking at the resources various governments have thrown into the situation. The U.S. Justice Department has added prosecutors to the local U.S. Attorney’s staff. But not nearly enough to match the population growth, and many of those added have been used to battle drug trafficking.

Given the federal budget deficit, it’s highly unlikely that the situation will change. Nor is it likely that prosecutors or regulators will be reallocated from regions with stagnant or shrinking populations, such as New York. “No bureaucrat wants to lose staff,” Einhorn said. “One measure of esteem is the size of the staff under you.”

The district attorney and state attorney general are similarly constrained. It has been smarter, politically, for them to assign their limited resources to street crime and drugs than to financial crime. Squeaky wheels get the grease.

The telemarketing scams that operate in Southern California are usually very careful to solicit customers outside the state. What that means is there are few howling victims for local prosecutors to be concerned about. And prosecutors where the victims reside often don’t have the resources to nab scam artists thousands of miles away in California.

The prosecutors and regulators who are fighting the good fight put on a brave face and talk of their victories. Inter-agency task forces have been formed; the number of prosecutions has steadily increased and the sentences are harsher.

“Some of the major boiler room operators are now serving lengthy prison sentences,” said Terree Bowers, chief of the major frauds section of the U.S. Attorney’s Office in Los Angeles. But he adds ruefully: “The problem is that it’s a growth industry.”

McDonald, a sharp critic of the lack of resources to prosecute financial fraud in Southern California, is putting his money where his mouth is. He’s about to start transferring jobs from the San Francisco office of the Department of Corporations, where the enforcement workload is less, to the overworked Los Angeles office. And he’s hoping to add seven new jobs to the local staff if, as expected, a commodity regulation overhaul is approved this year by the Legislature.

His office now gets more than 6,000 public complaints a year about financial fraud, a 50% increase in the past five years. More than 90% of those complaints come from Southern California. But right now McDonald has only enough staff to work 500 cases at a time. “It’s forced us to prioritize,” McDonald said.

Prioritize. That’s a 1980s word that has come to haunt us in the 1990s.

CRIME CAPITAL

Investment fraud complaints in California soared during the 1980s, but enforcement efforts have been hampered by lack of resources.

Fiscal 1990: 6,102