On July 17, and in a print column July 27, we quoted ex-bank examiner
Richard Newsom, who in the 1980s helped bring down savings and loan
villian Charles Keating, as saying,
"This is an example of the old standard rule, that if it looks too good to be true -- run."
It was Newsom who originally spotted the ad. He told SF Weekly,
as well as investigators at the Securities and Exchange Commission,
that Advanta's balance sheet suggested the floundering company was in
no position to pay back the investment notes, and that it was giving
investors faulty information that glossed over the foundering company's
In Newsom's words, the company was operating a Ponzi scheme.
Now, investors who responded to the offer must now get in line with
creditors grubbing for the $100 million in cash the bank holding
company has to pay off obligations. According to Reuters and AP stories
reporting on the bankruptcy announcement, Advanta had $138 million in
investment notes outstanding. Given that bankruptcy will entail
mountains of attorneys and other fees, a best-case scenario suggests
investors will have lost more than a quarter of their principal investment in less than four months. The Chronicle ad, in other words, should have offered negative annualized interest.
The worst part about the whole affair, according to Newsom and former banking regulator William Black, is that the U.S. government should have known enough four months ago to shut Advanta down. Instead, it took Newsom's tip to the SEC's enforcement arm to stop the company from selling investments based on faulty information. By the time the SF Weekly story came out, regulators had halted the sale of Advanta investments advertised in the Chronicle.
A Nov. 9 recording on the company's investor and press information line, however, was still offering to mail investment packets to callers on request.
"This is not unlike the Lincoln Savings and Loan scandal 20 years ago,
in which they sold investment notes to widows right up to the day they
closed," said Newsom. "We probably saved a few million dollars for some people. But you feel sad about any of the people who were sucked into this Ponzi scheme. This was the classic scenario: They went after older people. And as an older person [of 62], I'm particularly offended by people who swindle older people."
they were in desperate trouble. They knew they couldn't have sold it to
sophisticated investors. So they sold it to people who are vulnerable to this
kind of offer," Black said.