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.
"It was a ruse. We knew they wouldn't get a brokerage license. It was a way to set a finite date so they'd cease operations," Feigin says. "When they applied for the license, it gave us the opportunity to ask questions they otherwise wouldn't have answered. It was a way of leveraging more information."
The securities division issued subpoenas to the banks in which Schlaks deposited his earnings and uncovered a complicated paper trail that wound through forty separate bank accounts -- 32 in Colorado and eight in New Mexico. "Most businesses that are legitimate don't need forty separate bank accounts," says Victor Reichman, a senior assistant attorney general who got involved with the case much later. "When you have this number, you do it to hide the money."
Feigin filed an injunction in August 1983 to stop Schlaks's operation. On October 18 -- the very day the judge was supposed to hear the case -- Schlaks and company filed for bankruptcy. "Under traditional legal procedures, when someone files for Chapter 11 protection, all other cases [against them] are frozen," says Feigin. "We feared they [filed for bankruptcy] in an effort to stop our injunctive action from going forward."
He was right. After three days of testimony, a bankruptcy judge ruled that the injunctive action had to stop.
It was around this time that investors like David realized they'd been duped. For a few months, everything had been going as planned, and David was getting his monthly interest payments. But then three months went by with no payments -- and no word from First Territorial Mortgage. David and his wife called the company, only to find that its phone had been disconnected.
"We got in our old beat-up Dodge and drove over to the building and found out the thing was a scam," David says. "Someone in the building where Mr. Schlaks leased his space said First Territorial Mortgage was defunct. We found out that the company had filed for bankruptcy. Someone took our number and address, and our name got onto the list of people who had been injured by this company. After that, we started receiving notices of informational meetings, and we attended those. We were one of a number of large investors who had been hoodwinked, but it was small potatoes compared to the others. We just wrote it off as a loss and figured we'd paid for a pretty intense lesson.
"The sad side of this whole scenario," David continues, "is that time passes as the wheels of justice grind. Even though they grind because of the energy of caring and competent people, still, it takes time. People's lives go on and sometimes end. I remember one man who was aged and frail. During one of those explanatory meetings, he recounted to a group of about sixty people -- each of whom was involved or who had a family member involved -- that he'd lost $200,000, and that that was what he had to live on for the rest of his life. That kind of thing leaves you with a sick feeling in your stomach. At the time, our loss was a pretty severe jolt, but really, it was a minor bump on the road back to financial stability. For a lot of people, though, it was the end of a long career of financial stability, and it happened at a point in people's lives when their ability to recover their loss was nil."
Some victims had invested the minimum $5,000, but others, like a couple from Arvada, lost $100,000; a man from Pueblo lost $80,000; a 63-year-old man from Louisville lost $62,000, and a 54-year-old Denver man invested $25,000.
The bankruptcy court eventually reversed its decision and allowed the injunction to go forward. The judge appointed a trustee for Schlaks's estate, and his assets, including the Cheesman Park homes, were liquidated. Ownership of the land in New Mexico reverted back to the bank from which Schlaks took out the loan.