Brazen Ponzi artist scammed FBI, IRS agents for two decades

For more than 20 years, Kenneth Wayne McLeod gave seminars explaining how to get the most out of government retirement benefits, drawing rave reviews from the FBI, Drug Enforcement Administration, Immigration and Customs Enforcement, and U.S. Customs and Border Protection employees he was hired to teach, Bloomberg BusinessWeek reports in its Sept. 6 issue.

Thousands of agents heard the pitch, often at the beginning and end of their careers, when their financial decisions mattered the most. The U.S. government gave tacit approval to McLeod’s credentials; he contracted with agencies, including the Department of Homeland Security and the IRS, and some paid him as much as $15,000 per seminar.

According to his own marketing materials, McLeod’s benefits company gave 250 presentations to law enforcement agencies since 2006. In recent years, as federal budgets got tight, McLeod gave them for free, relying on his connections with the agencies’ managers to keep the invitations coming.

He did these freebies because in addition to dispensing advice, McLeod signed up audience members for his own money management firm, F&S Asset Management Group, which oversaw $43 million for 1,100 people, almost all of them current or retired law enforcement.

“It’s hard to get into the law enforcement community,” says Howard “Ike” Hendershot, president of a group of retired secret service officers who invested with McLeod and invited him to give a seminar at their conference in Hawaii in 2008. “Once you’re in, you find that other agents trust agents, cops trust cops.”

Charity Work

McLeod also met new clients through charity work he did for nonprofit groups that support the families of agents killed in the line of duty. He was a regular sponsor of golf tournaments held by the DEA Survivors Benefit Fund. McLeod was a guy’s guy: He loved to talk about sports, particularly University of Georgia football, the school from which he claimed to be an alum.

Along with naming his boat Top Dawg, a play on the team’s nickname, McLeod liked to brag that his own dog was a direct descendant of the original Uga, the football team’s bulldog mascot. He made a big deal about attending the annual Georgia- Florida game, which is held in Jacksonville, Florida, frequently reminding people that it was known as the “world’s largest outdoor cocktail party.”

Luxurious Life

Although his company was a bit player compared with other money managers, it enabled him to lead a luxurious life that included trips to the Super Bowl for himself and dozens of his friends; suites at Jacksonville Jaguars football games; a million-dollar riverfront home with his 38-foot boat moored in the back; and several luxury condominiums on Florida’s Amelia Island. McLeod hyped to potential investors that FBI Director Robert Mueller was a renter.

McLeod lured them with what he called his “special fund,” government bonds that he promised would return 8 percent to 10 percent interest annually, tax-free. Few if any clients bothered to ask how such good returns could be duplicated year after year. Like those who put their money with Bernard Madoff, they didn’t think they were being too greedy. They weren’t trying to get rich overnight.

It all sounded perfectly reasonable. Then, in June, working on a phoned-in tip, investigators from the U.S. Securities and Exchange Commission barged into McLeod’s Jacksonville office. They grilled him for two days until he finally broke down and admitted that for two decades, he had been conning people who carry guns for a living — a Ponzi scheme with a peculiar twist.

Tough Times

As primitive as they are, Ponzi schemes are not easy to spot. As long as money flowing in from new investors covers the payouts to current investors, nobody wises up to the fraud. That often changes during tough economic times as more clients try to withdraw money and the requests can’t be covered.

That was what led to the discovery of Madoff’s $65 billion fraud in December 2008 and R. Allen Stanford’s alleged $7 billion scheme. (Stanford has denied all wrongdoing and is scheduled for trial in January.)

The financial crisis also led to the arrests of a string of “mini-Madoffs,” whose crimes, while not as massive, were just as brazen. They include New York money manager Kenneth Starr, arrested in May and charged with stealing at least $59 million from movie stars and other celebrities. Starr has pleaded not guilty, and his trial is scheduled for November.

What sets McLeod apart from the other mini-Madoffs is his client list: It’s the first time, authorities say, that anyone has dared to rip off an entire group of law enforcement officers.

Missing Funds

At the time the fraud was uncovered, about 150 people thought they had money in McLeod’s special bond fund, according to the SEC, totaling $34 million in missing funds. Overall, 260 investors cycled through, many having been referred by friends and colleagues.

The clients McLeod scammed were those who had invested in the bond fund. His F&S Asset Management Group was legitimate, and many of those investors, including Hendershot’s Secret Service group, didn’t have their money stolen.

Fraud experts say McLeod ran a classic scheme where there were few warning signs about what was really going on. He targeted a like-minded group of people and ingratiated himself however he could. He told them “anything they wanted to hear,” McLeod explained to an SEC investigator.

Buyer Beware

Research has shown that males between the ages of 55 and 64 — the bulk of McLeod’s client list — are the most typical investment-fraud victims, according to Lori Schock, the head of investor education at the SEC. As a group they are financially more literate than most, yet are willing to take bigger risks while doing less due diligence.

“Affinity fraud can happen anywhere,” Schock says. “It’s buyer beware at all times.”

McLeod had a background very similar to his clients. He grew up in Jacksonville, graduated from high school there in 1980, and went into the insurance business. He never attended the University of Georgia, and until starting his “special fund” didn’t seem destined for financial success.

He filed for bankruptcy shortly after marrying his first wife, Sheila, in 1987, and opened his consulting company, Federal Employee Benefits Group, that year. The firm advertised assistance with “getting the most out of your federal benefits,” with a specialty in “the complex issues surrounding special group employees, including law enforcement officers, firefighters and air traffic controllers.”

Dizzying Maze

Unlike most government employees, federal law enforcement officers are required to retire at 57. If they have 20 years of service they can quit with full benefits anytime after hitting 50. As a perk, their agencies offer a series of training seminars on how to navigate the often-arcane rules underpinning the federal retirement system.

The training usually is offered at the beginning of their careers, then again several years before they are eligible to leave. Agents are often encouraged to attend multiple classes and even to bring their wives.

In his presentations, McLeod taught agents how to allocate investments in their retirement accounts and helped them estimate how much money they would need in retirement. He walked his pupils through a dizzying maze of retirement programs with acronyms like FERS and CSRS and FEGLI.

He’d tell them about the “windfall elimination provision,” which deals with how pensions affect Social Security, and remind them not to forget their military service time in calculating their retirement packages. Frozen sick leave or government pension offset rules? He knew how to handle them as well.

On the Road

McLeod told the agents how to take advantage of the government’s matching contributions to their thrift savings plans and when they could begin withdrawing the money. He offered predictions for where the markets were heading and which were the best funds for earning high returns. And at the end, always, McLeod would encourage anyone needing more help to get in touch.

In the mid-1990s, even as McLeod was beginning to take his seminar business on the road and speak to law enforcement officers across the country, his company didn’t make much money.

When he and Sheila divorced in 1995, they had very little to divide up: He was required to pay $200 a week child support for their four children. He also took the 1993 Jeep Cherokee and the wide-screen television — neither of which had been paid off yet — along with the washer and dryer. Sheila kept the 1993 Ford Aerostar van, with Wayne taking responsibility for the car loan.

Nest Eggs

By 1998, McLeod’s business appeared to be booming. He purchased a new home in Jacksonville and had a growing stable of clients. His increase in wealth came to the attention of his ex- wife, who hauled him back into court to increase her child support. The settlement called for increasing the payments to $2,100 a month. A few years later, McLeod married again. He and his new wife, Susan, had one child.

The rise in McLeod’s personal finances coincided with the growth of his “special” bond fund. McLeod seemed to target agents who had been promoted to supervisory roles, jobs that required them to move frequently. While law enforcement officers don’t make big salaries, some are able to build substantial nest eggs buying and selling their homes. McLeod zeroed in on that money.

‘Exclusive Clientele’

Douglas Garner, who has worked for 22 years for the agency now known as Customs and Border Protection, met McLeod in 1998 at a seminar in Corpus Christi, Texas. It was the first of five training sessions that Garner attended with McLeod or representatives of his company.

At one conference for special agents in charge of regional offices that Garner went to in Washington several years later, he says, McLeod was introduced and praised by the agency’s most senior leaders. They encouraged the office chiefs to hire McLeod in their home states, according to Garner, who booked the investment adviser for programs when he ran offices in Texas and Florida. “It was clear that he was endorsed by our own top of the chain,” Garner says.

After being transferred to Washington and selling his home in Texas, Garner asked McLeod what to do with the profits, about $85,000. He recommended they be placed in the special bond fund. The investors, McLeod claimed, were his “exclusive clientele,” including high-ranking government officials, federal judges and a Supreme Court justice.

All Gone

McLeod encouraged Garner to buy his new house in the Washington area using an interest-only loan with no money down, pointing out that his house profits from Texas would make more money in the guaranteed bond fund.

The move worked so well that when Garner was next transferred to Florida, he did the same thing, plowing about $90,000 in profit from selling his home in the Washington suburbs into the fund. He bought a house in St. Augustine, Florida, on another interest-only loan.

Because of the success of his investments, Garner says he didn’t object when McLeod encouraged Garner’s father to buy into the fund in 2007. After cashing out stocks and other investments and paying about $30,000 in broker fees, Harold Garner gave McLeod $599,728. It is all gone.

Now 52, Douglas Garner has a mortgage that is about to reset at a higher interest rate, and he still has to put two of his six children through college. He has been consulting an accountant to figure out how to stabilize his finances.

“I am the poster child,” says Garner, who lost almost $800,000 of his and his father’s money in the scam. “My life is what you would call upside down right now.”

Family Inheritance

Former DEA agent Kurt Coront and his wife, Claire, who were also investors, began to grow suspicious of McLeod toward the end of 2009 when he became more evasive about their investment questions. Fearing the worst, both began to look for jobs. After consulting with attorneys, Coront complained about McLeod to the SEC and the Financial Industry Regulatory Authority, the industry-funded brokerage regulator.

Over eight years, Coront and his wife had put in $458,500, coming mostly from the profits of two home sales and a small family inheritance. At times Coront also withdrew money from the fund, getting back $202,500.

After consulting with McLeod, Coront says, he had decided to retire in 2005 at age 53. He bought a smaller house in Bradenton, Florida, and was learning to enjoy life outside the front lines of the drug wars.

Coront says he terminated McLeod as his investment adviser in early 2010 and asked to redeem the entire balance in his bond account. He never got the money. He now has a job teaching criminal justice at a local campus of the ITT Technical Institute. His wife also works there as a receptionist.

“Without the jobs, we’d be out on the street,” he says.

New Significance

Coront’s calls to the SEC and Finra on May 17 coincided with a dispute McLeod had had with the firm he used to register as a broker (a relationship he needed to sell clients variable annuities), which ended with McLeod quitting.

The move triggered a requirement that the company, Lincoln Financial Securities (which isn’t accused of wrongdoing), notify Finra about the change. Though often routine, the notifications have taken on a new significance at the Washington-based regulator in the wake of the Madoff scandal and after Finra created a new fraud detection office last year.

Cameron K. Funkhouser, executive vice president of the Office of Fraud Detection and Market Intelligence at Finra, has pushed his junior staff to scrutinize the notifications. When McLeod’s came in, Sharon Kravitz, an analyst, flagged it.

Disturbing Results

Once the case was in Funkhouser’s hands, he did what any top investigator would do: He Googled.

“I wish I could say this was brilliant, but it was brilliant in its simplicity,” Funkhouser says.

The results were disturbing. One warning sign was that McLeod’s education and experience weren’t typical of other experts in the profession. Funkhouser also came across a local news clip of McLeod loading coolers onto a chartered bus for a trip to the Super Bowl in Miami. McLeod told the reporter that he had been paying for such trips for the past six years.

Finra investigators got in touch with some of McLeod’s clients and asked McLeod himself to come to Washington for an interview. McLeod demurred, saying he was unable to make the trip due to his busy schedule and some financial troubles.

After Funkhouser heard the response, he got a sickening feeling. He and his deputies picked up the phone and called McLeod himself. “He did exactly what I expected him to do, which is he talked,” Funkhouser says. “He basically went into the sales pitch.”

Golf With Mueller

McLeod insisted he had nothing to hide and told Funkhouser that he could ask any senior official at a law enforcement agency and he would know who Wayne McLeod was. He said he was very good friends with FBI Director Mueller and that the two played golf together.

McLeod described his sponsorship of DEA survivors’ golf tournaments, telling Funkhouser it was “all about the families.” When asked about a special bond fund he might run, McLeod said he didn’t have one.

After the call, Funkhouser alerted the SEC and suggested they needed to send inspectors out to Jacksonville and prepare court papers to freeze McLeod’s assets. A few days later, the SEC did just that. On the second day of his SEC interview, McLeod admitted to the entire scam, and the agency filed its lawsuit.

Empire’s Wreckage

Today, as the FBI continues to investigate the fraud and a court-appointed receiver sifts through the wreckage of McLeod’s empire, looking to recoup whatever remains of the money, his victims aren’t in a forgiving mood.

The bond fund that they were told was yielding them tax- free 10 percent returns never existed. A group of them started commiserating via e-mail, discussing how they fell for the ruse and wondering if they will ever see any of their money again. Many are embarrassed, knowing full well the irony of a federal agent, trained to spot frauds, being robbed blind.

How McLeod won his contracts and was given so much freedom to visit federal offices remains a mystery. Spokesmen for the Office of Homeland Security, which includes ICE and Customs and Border Protection under its umbrella, declined to comment or didn’t return calls.

The FBI, where McLeod gave seminars at its Quantico, Virginia, training center and for 10 different field offices, including Boston and New York, says the decision to bring him in had been made by the local leadership.

Mueller’s Condo Use

The FBI also issued a statement about Mueller’s use of McLeod’s Amelia Island condo: “Director Mueller contracted with a property management company to rent vacation condominiums on Amelia Island occasionally over the past several years,” said spokesman Michael Kortan. “The management company may at times have provided a unit owned by Wayne McLeod, as well as units owned by other individuals at other times.”

Kortan added that the FBI chief “had no personal or professional relationship with Mr. McLeod, nor did he engage in any financial dealings of any kind with him.”

The government’s silence on the question of how McLeod was able to conduct the fraud is frustrating to some of his victims, and some wonder privately if their employer is concerned about its liability.

That’s one area that Michael Goldberg, the court-appointed receiver, is probing in his effort to recover money for the victims. Goldberg, a Fort Lauderdale attorney and expert in Ponzi schemes, says there doesn’t appear to be much money left.

He’s preparing to ask the court to give him the proceeds from McLeod’s life insurance policies and has sold off what is left of his office equipment.

‘Wolf to the Sheep’

Goldberg says the case is more disturbing than most. McLeod wasn’t promising outrageous returns, he notes, and the agents seemed to be relying on the approval of the government when they signed up with the investment adviser.

“These are the guys that put their lives on the line every day for us,” Goldberg says. “Their employer brought the wolf to the sheep.”

Shortly before 11 a.m. on June 22, five days after McLeod confessed to the SEC, a single gunshot rang out in Mandarin Park, a quiet, wooded area on the St. Johns River in Jacksonville where families come to barbecue and boaters are warned to steer clear of the manatees that swim along the coastline.

Arriving at the scene seconds later, officers from the local sheriff’s office found a middle-aged man slumped behind the wheel of his black Hummer, with a handgun nearby. The doors were locked, and the keys were still in the ignition. A bullet hole had pierced the driver’s-side window.

Wayne McLeod’s suicide was an inglorious, though perhaps predictable, end for the father of five with a hidden life that had just come crashing down on him. Over the weekend before McLeod’s death, many of his clients were frantically trying to get in touch with him, spooked by a vaguely worded mass e-mail he’d sent notifying them that he was shutting down the special fund they had put their life savings into.

In words no investor wants to read, McLeod had written: “I pray that at some point in time you can and will forgive me.”

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