Group falls for alleged fraud despite caution

May 18, 1991|By Leslie Cauley

When Lewis Bracy and his Hanover-based investment group, Blacks for Success, began searching for an investment opportunity in 1988, they took a look at International Loan Network Inc. in Lanham, then in its start-up phase.

As Mr. Bracy recalled, his five-member group sat in on an ILN seminar in Washington and followed up for the next two years with calls to the Securities and Exchange Commission, two offices of the Better Business Bureau and 10 ILN investors to try to make sure ILN wasn't a pyramid scam.

Nine months ago, Blacks for Success, an economic self-help organization, invested $1,000 in ILN.

On Wednesday, it was revealed that the SEC had accused ILN of fraud, contending in a complaint unsealed in U.S. District Court in Washington that ILN was nothing more than a pyramid scheme in which the primary source of income was the continued influx of new members.

"My only regret is that I don't have the name of the SEC investigator I talked with so I could go and cuss him out," fumed Mr. Bracy.

The SEC action Wednesday came just days after it had obtained details of a Maryland investigation of ILN that has been going on for more than a year.

At the SEC's request, the court has granted a restraining order prohibiting ILN from accepting additional investor funds and freezing the assets of the company and its principal officers, Melvin J. Ford, president, and Odell Mundey, vice president.

The SEC complaint alleges that from at least October 1988 to the present, the defendants have operated a pyramid scheme. According to the complaint, thousands of individuals were told that for their investments of $1,000 to $10,000 they would receive, within 180 days, returns of five times their investment in cash or 10 times their investment in property value.

Neither Mr. Ford nor Mr. Mundey could be reached for comment yesterday.

Asked if anyone at ILN could comment on the SEC action, a woman answering the phone at ILN yesterday said, "No, I don't think that's possible. Thank you," and then hung up.

Pyramid operations, which are illegal in Maryland, require a constant influx of new investors to keep going. That's because cash reserves are depleted by disbursements to early investors, leaving the till empty by the time newer investors join.

To generate new investors, ILN would typically hold seminars that bordered on a Bible-thumping revivalist experience: ILN speakers would typically give motivational speeches aimed at encouraging attendees to invest, often distributing copies of payment checks on the spot to whip up the crowd.

One such meeting occurred in Baltimore last Saturday at the Mariott Hotel. ILN's Mr. Ford spoke to the hundreds of people in attendance, periodically pulling out large wads of cash from his pocket as he spoke. According to an observer, Mr. Ford told the group that an investment in ILN was "better than" a certificate of deposit.

According to the SEC, as many as 40,000 people nationwide have invested in ILN.

State Securities Commissioner Ellyn L. Brown said schemes like the one perpetuated by ILN are becoming commonplace as the recession continues.

"In times of economic hardship we see a boom in the number of pyramid schemes and other similar types of get-rich quick schemes," Ms. Brown said.

"It's obviously very tempting to people when times are tough to want to believe that there really might be something for nothing -- or a big something for very little," she declared.

She said schemes today are increasingly targeted to specific communities. Many of the schemes, such as the one ILN allegedly operated, rely on referrals from family and friends who already have joined.

"In economic hard times, con artists are more creative than usual," Ms. Brown said.

Investors in ILN who have questions may call the state Securities Commission at 576-6360 in Baltimore.

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