Apr. 25—An unregistered Santa Fe investment adviser dubbed a “mini-Madoff” was ordered to pay nearly $10.4 million in restitution and penalties after engaging in a Ponzi scheme for 20 years involving 45 investors across the country.
A federal judge issued a consent order April 7 for a permanent injunction against Douglas Lien, 79, after the Securities Division of the New Mexico Regulation and Licensing Department issued a cease-and-desist order against Lien.
Among the victims were three women in Santa Fe, including Randa Phillips, 71, who approached the Securities Division in May 2019 with her complaint against Lien.
The Securities Division forwarded the case to the Commodity Futures Trading Commission, which prosecuted Lien in U.S. District Court.
As part of the consent order, Lien is prohibited from making commodity futures transactions, providing investment advice in New Mexico, or soliciting or accepting funds to invest on behalf of someone else.
The order from Chief Judge William P. Johnson dictates that Lien “immediately” pay $5,195,679 in restitution and $5,195,679 in penalties.
Phillips, along with Norma Bell, 81, and a woman named Patricia, who didn’t want to use her last name, said they doubt they will get their money back. Lien owes Phillips $62,633, Patricia $7,500 and Bell said she is owed $50,400.
In a news release announcing the consent order, the Commodity Futures Trading Commission said “orders requiring repayment of funds to victims may not result in the recovery of any money lost because the wrongdoers may not have sufficient funds or assets.”
The Trading Commission and Securities Division are only authorized to do civil prosecution, but criminal prosecution through other jurisdictions is possible if Lien doesn’t pay.
“It’s an easy case for any district attorney to bring. It’s all laid out. He acknowledged his guilt,” said Jean-Nikole Wells, Bell’s attorney, who had another client 10 years ago who invested with Lien. She discovered then that Lien was not registered as an investment adviser, but her client got her money back so she didn’t pursue the matter.
“I have seen him interact with these people and make them feel that he is their friend,” Wells said.
In an interview last week, Lien said he agreed to everything spelled out in the consent order but hoped to negotiate the “immediate” payment order.
“Obviously, I cannot pay it tomorrow,” Lien said. “It will take some time. I can’t tell you what we will come up with. I would say two to five years. You can imagine coming up with that amount 1/8$10.4 million] that quickly.”
The judge appointed the National Futures Association in Chicago as the monitor to receive payments from Lien. The association is a self-regulatory organization for the U.S. derivatives industry.
Lien told the court he dealt primarily in commodity futures contracts, mostly U.S. Treasury bond futures. But Lien had a trading account balance of only about $25,000 from 2013-19, according to the consent order.
His Santa Fe victims said they believe he has money stashed away. Since at least 2000, Lien took in $14.2 million from 45 investors, court records show.
“He hasn’t spent $14.2 million,” Phillips said. “It’s around.”
“He’s pretty slippery,” Patricia, 67, said. “From what we’ve seen from him, he has it hidden in many places. I don’t know if we will ever see any money.”
Court records show 12 of the 45 people who invested through Lien’s firm, Westend Investments, are owed more than $100,000 each and one victim is due $1.5 million. Another 15 investors — including the three Santa Fe women — are owed less than $100,000.
But 18 investors made money “investing” with Lien, with four profiting by more than $100,000 and the top investor coming out ahead by $863,000.
That is a classic Ponzi scheme: With relatively little or no money actually invested, the Ponzi operator typically uses money from new investors to pay gains to early investors, who usually profit at the cost of later investors. The scheme works as long as there are enough new investors.
Lien cooperated with the court to detail how he went about operating without being registered as a futures commission merchant with the Commodity Futures Trading Commission, an independent federal agency. Instead of a trial, this was a settlement agreement.
“I felt all along the investing I was doing would work out,” Lien told The New Mexican. “It just became overwhelming with the paperwork. What looked possible at one point, it was more than I could handle. Of course, I have remorse that it didn’t work out. I intend to fully repay in two to five years. I am under pressure to repay as quickly as possible.”
In court documents and interviews, the women said they invested thousands of dollars with Lien.
Phillips invested $239,000 with Lien in 2004-05, the sum of the inheritance from her mother. Bell invested $95,000 in 2014, using her 401(k) funds. She withdrew it in September 2015 at the advice of her accountant, but reinvested $90,000 with Lien in January 2016 after he dangled a 9 percent interest rate per month. Patricia invested $18,000 with Lien from a lump sum payment from Social Security.
“We call him the mini-Madoff,” Phillips said in reference to Bernie Madoff, the infamous financier who died in prison April 14 after being incarcerated for a dozen years for swindling investors out of an estimated $17.5 billion in an elaborate Ponzi scheme.
The consent order said “Lien socialized with his clients over the years, even inviting some of his clients to vacation with him and his wife on a private family-owned island near Martha’s Vineyard, and many of Lien’s clients viewed him as a friend.”
Lien charged clients 15 percent a month on trading profits, with the court finding he kept more than $3.5 million for “management fees.”
“The account statements and tax forms that Lien sent his clients did not reflect Lien’s actual futures trading results, but instead showed fake trading profits and management fees that Lien charged on those fake profits,” the consent order states.
Clients paid taxes on these fake statements.
End of the line
Lien’s Ponzi scheme started to fall apart in early 2019.
“Throughout 2019, several of Lien’s clients requested the return of all or a portion of their funds,” the court ruling states. “While Lien has returned some of the funds requested, he failed to disclose to clients that on multiple occasions, he paid clients using funds he received from other clients, in the manner of a Ponzi scheme, or using funds he obtained from equity lines of credit, and not using funds from clients’ own account balances or trading profits. He has otherwise strung clients along with false excuses or simply ignored them.”
The Santa Fe trio were among those asking to cash out their investments in early 2019.
“He said, ‘They were all tied up long-term,’ and ‘You need high interest to live on,’ ” Phillips recalled. “For all those years, I paid high taxes because of bogus 1099s.”
Bell recalled Lien saying: “Don’t take your money out. Leave it with me and let it accrue.”
“I wanted to withdraw it all and take it somewhere else,” Bell said. “That’s when he started making excuses.”
Patricia suffers from a disorder that has caused her to break many bones.
“I asked to get my money out because I tried to get to my doctor,” Patricia said. “He should lose all of it to repay his investors who are made to have harder lives due to his Ponzi scheme.”
Friends referring friends is part of how Ponzi schemers build their clientele. Phillips in 2004 followed a friend who had successfully cashed out of an investment with Lien, and in the 2010s, Bell and Patricia were added to Phillips’ account because their investments were too small for Lien to accept individually.
“I thought this would have
saved me from absolute poverty,” said Phillips, who said she has suffered from a severe autoimmune disorder since 1989. “I gifted people who needed money that I would not have done. I spent more than I would have. The house I bought in 2005 will be on the market soon.”
Bell regarded Lien as a friend.
“Knowing now that he knew all along that he was doing fraud, what really hurt me was he was trying to be part of my whole estate planning and it was all bogus,” Bell said. “I want people in town to know who he is and what he’s done.”
Lien spelled out his plan to repay the $10.4 million.
“As soon as I am [able] to make a final agreement of repayment, I plan to communicate privately with each [victim],” he said.
Lien also said he has started a separate business to trade options and stay away from futures and commodities, which the federal consent order prohibits.
Per the state Securities Division’s cease-and-desist order, Lien is prohibited from accepting money from any person and investing at a person’s behest.
“I’m going to try to raise a small amount of capital in the form of gifts,” Lien said. “I’m not looking to act in any capacity as an agent. If somebody wants to give me money as a gift, I would take it as a gift.”