Take the Money and Run

It took sixteen years and international extradition, but the Colorado Attorney Generalís Office finally got its man.

David didn't visit the plush office that helped put some investors at ease until a few months later, when he went to find out why his interest payments had stopped. "These guys were good. They didn't come across as hesitant in what they were saying; they came across as clearly in charge of their financial world. There was no question about the solidity of their investment; they said you just can't lose by investing in real property. That was our security -- the land was there, and it was never going to go away. There was no specific word or phrase that they said; it was the overall impression they left on me. It was the difference between talking to some young acolyte in a church proceeding who is learning the ritual versus talking to the Pope. I felt like I was talking to the Pope. They had every angle covered."

And yet David never asked to see any pictures of the land or any drawings of the proposed development. "I guess people would say, 'What do you expect? You're handing these people money and not getting anything in return.' I have no good comeback for that now. But at the time, it all seemed so compellingly clear."

Georgiann McSwigan, an 85-year-old Denver woman, invested $22,000 around the same time. She never met Schlaks; she only dealt with one of his account executives -- a man she is convinced knew nothing of the fraud he was helping to commit. The young man, she says, was very nice, and so was the office. There were easy chairs in the reception area and leather chairs and other beautiful furnishings in the inner office. "It would convince anyone," she says. "What we didn't know was that our money was financing it."

The fugitive: After a sixteen-year chase, Jay Schlaks is now serving time in a Colorado prison.
The fugitive: After a sixteen-year chase, Jay Schlaks is now serving time in a Colorado prison.
A feeling of security: Phil Feigin wouldn't give up on the Schlaks case.
James Bludworth
A feeling of security: Phil Feigin wouldn't give up on the Schlaks case.

Fortunately, she wasn't financially ruined by the loss. "I had other sources of income, but others did not," she says. "It was a pathetic thing. He took money from people who had to go on relief."

It may never be known exactly how many people fell prey to the scam, but according to court documents, at least 250 people were tricked into satisfying Schlaks's champagne tastes. First Territorial Mortgage managed to squeeze at least $3.2 million from these people between January and August of 1983.

Schlaks kept the front going by operating a classic Ponzi scheme: He used money from one investor to pay off the interest due to another. There never were any companies that had planned to develop the land in New Mexico. And none of the investors ever could have held a deed to the land, since it was owned by a bank in New Mexico that had loaned Schlaks the money to buy the property. So even if the plan had been legitimate and the development companies went bust, ownership of the land would have reverted back to the bank, not to the investors.

Schlaks also used the investors' money to pay the mortgage on his four Cheesman Park homes, telling them he planned to refurbish and resell them at a profit. What he failed to say was that he was living in one of them.

While Schlaks was cheating investors, a top official with the Colorado Division of Securities was on to him. But it would take a fifteen-year legal roller-coaster ride before Schlaks would pay for his crimes.

As a former securities investigator for the State of Wisconsin, Phil Feigin knew all about the gimmicks con men use to hook their victims. So in November 1982, when he picked up the newspaper at his first day on the job as Colorado's deputy securities commissioner and saw the ad for First Territorial Mortgage, he figured it had to be a hoax. No investment is ever secure, as the ad promised, and the 14 percent return it guaranteed sounded overly optimistic.

Feigin called First Territorial Mortgage and asked what the company was up to. The firm's in-house attorney, William Kraemer, told him the company had moved to Colorado from Taos and was in the business of selling deeds on residential property. He insisted that all operations were aboveboard. But Feigin wasn't convinced, and he became even more suspicious when he discovered that Kraemer wasn't even licensed to practice law in Colorado. "To this day, I am amazed at how flagrant were their representations," he says. "The only thing that turned out to be true was that they were from Taos."

Thus began the investigation into First Territorial Mortgage.

In the early '80s, the state securities division was operating on a shoestring budget. In addition, the state attorney general's office -- which represents state regulatory agencies such as the securities division and prosecutes tax-evasion and Medicaid fraud cases -- was stretched thin and didn't have the special securities-fraud unit they do now. "We used whatever time they could spare for a securities case," Feigin says.

His first goal was to stop Schlaks from attracting more investors. But to do that, he had to be crafty. Feigin told Schlaks that since First Territorial Mortgage qualified as a brokerage firm, the company would be shut down if it didn't obtain a brokerage license within a certain period of time.

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