A `cesspool’ of corruption

Of all the people to ask for investment advice, James A. Capwill Jr. sometimes turned to a guy nicknamed “The Animal.”

A reputed Mafia enforcer, Eugene “The Animal” Ciasullo would show up at Mr. Capwill’s Cleveland-area office in dark glasses and a jogging outfit. In tow would be purported businessmen seeking loans or investments in their companies.

In one instance, Mr. Ciasullo flashed photos of heavy construction machinery as collateral and walked out with cash in a paper bag.

It was money Mr. Capwill, owner of Viatical Escrow Services Inc., was supposed to be safeguarding for investors.

But the stocky, slick-haired accountant, who had been broke only a year earlier, decided to diversify with a bizarre investment strategy.

And why not?

Millions of dollars were pouring in from individuals who were promised big returns from viatical settlements, and Mr. Capwill managed the money free of any oversight by government regulators.

Easy money

The scandal that ensued is a case study of how unscrupulous businessmen and organized crime have moved into the viatical industry and begun preying on unsuspecting investors.

Interviews and court documents involving the Capwill case provide a rare inside look at how one viatical operation became a feeding ground for fraud.

Once described as one of the viatical industry’s rising stars, Mr. Capwill, 36, is now a poster child of an unregulated industry run amok.

“To say Jim Capwill was investing is using the term loosely,” says Heinz Ickert, a Columbus, Ohio, accountant and certified fraud examiner who was hired to track the trail of missing money.

Though Mr. Capwill has yet to be charged criminally, federal investigators and civil lawsuits allege that the Twinsburg, Ohio, resident was part of a multifaceted scheme involving two viatical firms – Liberte Capital Group of Toledo and Alpha Capital Group of Carmel, Ind.

Fraudulently obtained life insurance policies were purchased and marketed to investors as secure viatical settlements. Then the invested funds were embezzled and squandered, according to the suits.

Mr. Capwill, for example, pumped more than $10 million into penny stocks and dot-com companies. He spent $3.5 million to buy and renovate Hudson Crossings, an upscale 500-seat restaurant in Cleveland that typically serves a mere 20 meals a night.

He paid $3.8 million to become a partial owner of Golf One Industries, a now-bankrupt California firm that owned the rights to golfer Gary Player’s name. And he loaned $125,000 to a Los Angeles rhythm-and-blues performer named Albert J. Brown, a.k.a. Al B. Sure.

What is sure is that from early 1998 through mid 1999, viatical investors handed over $170 million to Mr. Capwill, court records show.

Of that amount, Mr. Capwill allegedly diverted more than $50 million to fuel an opulent lifestyle and build an investment portfolio that today is virtually worthless.

Mr. Capwill’s stock investments alone lost in excess of 90% of their value, says Mr. Ickert. “It takes real talent to pick stocks that bad.”

Double-digit returns

For Mr. Capwill, viaticals meant salvation.

An accountant with a degree from John Carroll University in Cleveland, he was broke and on the run from creditors when he got into the viatical business three years ago. He owed $35,000 in state and federal income taxes, his student loans were delinquent, and he was being evicted from his office.

Clients were suing him for mismanaging their money, and he had to fight to get his accountant’s license back after it was suspended, investigators and court records reveal.

Not much cash was coming in because Mr. Capwill often worked on the barter system.

“He’d do the accounting for his buddies, and they’d cut his grass,” says Virginia Hale, Mr. Capwill’s former office manager, who recalls two of her paychecks bouncing.

But Mr. Capwill’s fortunes suddenly began to turn when a woman who had been arranging viatical deals joined his firm. She introduced him to the business, and in 1997 he created Viatical Escrow Services.

Through his new business, he met the executives of Liberte and Alpha, who eventually hired him to be their escrow agent. Afterward, Liberte and Alpha investors were told to send their checks to him.

Thousands of Liberte and Alpha investors were drawn in by promises that viatical investments would double their money without risk.

Alpha’s ads, for example, claimed that viaticals offered “triple-digit fixed-rate return” and “complete safety of outcome” with “no stock market volatility.”

Not surprisingly, small investors – many of them elderly or nearing retirement – sent checks. (See related story on page 44.)

“The viatical business took off, and huge dollar amounts were coming in,” remembers Ms. Hale. “They couldn’t match them fast enough [with policies].”

Mr. Capwill found himself in control of millions of dollars.

Flashing cash

Mr. Capwill is smooth and cocky by nature, say acquaintances, and the money fed his ego. “All of a sudden he came from nothing into a big deal, and he was playing the high roller,” says Mr. Ickert.

“He’s very smart,” says Ms. Hale. “If you met him, you’d love him. He’s a nice guy. But he’s a flimflam man. People were all over him, because he projected himself to be this huge money man, and it wasn’t his money. It belonged to these poor investors.”

Mr. Capwill has told investigators that, under his agreement with Liberte and Alpha, he was entitled to at least half of the interest generated from funds he escrowed on viatical deals.

He has yet to produce documents, however, that support the assertion, according to court records.

Mr. Capwill shifted funds among various shell companies and opened brokerage accounts in the names of friends and family members, sometimes without their knowledge, court documents allege.

Among the deals, he put $580,000 into a securities account in the name of his then-fiancee and $193,000 in a Charles Schwab account for his mother.

Investor money also fueled Mr. Capwill’s increasingly lavish lifestyle, investigators say.

He spent $860,000 on a new house in Barrington Estates, a gated subdivision in the Cleveland area built around a Jack Nicklaus-designed golf course. He even planned to build a helicopter pad.

He wore Armani suits and owned five cars, among them a Corvette, a Jaguar and an SUV. After firing his mother from his business, he bought her a Cadillac to help ease her feelings.

A sports fanatic, he spent $12,000 for Cleveland Indians season tickets a few rows behind the home team dugout and dropped $50,000 on a junket to the 1999 Super Bowl in Miami.

Mr. Capwill’s days as a broke accountant were behind him. At the end of 1998, his net worth was zero; a year later, he claimed it was $30 million.

“Obviously that came from some source, principally from the assets he was entrusted with,” says Victor Javitch, the court-appointed receiver in the case.

Animal instincts

Since Mr. Capwill’s personal and business assets were ordered seized by a federal judge in August, Mr. Javitch, of Javitch Block Eisen & Rathbone in Cleveland, has attempted to salvage what he can of Mr. Capwill’s loans and investments.

Tremendous amounts of money went to “marginal businesspeople” whose companies were either “troubled or in desperate need for cash,” says Mr. Javitch. “The investments he made for a person in a fiduciary capacity are at best bizarre.”

Others deals were arranged by The Animal. Mr. Ciasullo supposedly earned the nickname after a particularly brutal barroom brawl.

According to court testimony, Mr. Capwill would brag about his mob friend and show off a book to his employees titled “To Kill the Irishman,” an account of the Cleveland mob’s war with a local Irish gang. Mr. Ciasullo was severely injured by a bomb packed with nails during the fight.

The book details Mr. Ciasullo’s role as an independent mob enforcer. Now in his 70s, he reportedly lives in Florida.

The Animal, however, was only one conduit for loans. The well-to-do also sought Mr. Capwill’s help, among them prominent Cleveland lawyers and businessmen.

“People just fed his ego,” explains Mr. Ickert. “`Oh, Jim, you’re the greatest in the world. There’s no one else who could get this kind of money together in a week.’ He got his ego stroked. People really took advantage of it. The easiest person to con is a con man, and I think a lot of people conned Jim Capwill.”

Mr. Ickert says Mr. Capwill could have easily earned $3 million had he simply put the $50 million he lost in 6% Treasury bills. “If he’s entitled to half, that’s $1.5 million, and he’s done nothing.”

“That wasn’t good enough. I think it was greed – a large part greed and a large part ego. I don’t know if he knew that the viatical structure couldn’t last that long,” Mr. Ickert says. “It would have collapsed anyway, but his imprudent investing caused his house to come down a lot faster than it had to.”

Investigators believe one of Mr. Capwill’s financial cronies set him up for his downfall.

The businessman, trying to get Mr. Capwill to invest in a project, brought him to Hollywood to spend time on the set of the Fox television series “Beverly Hills 90210.”

When Mr. Capwill backed out of the deal, the jilted businessman tipped off Liberte’s president, J. Richard Jamieson, about Mr. Capwill’s ventures.

Liberte in April 1999 filed a lawsuit charging Mr. Capwill with mismanagement of the escrow account, a suit later joined by Alpha. The suit eventually sparked the seizure of Mr. Capwill’s property.

Mr. Capwill’s Cleveland attorney, Nancy C. Schuster, says Liberte and Alpha sanctioned her client’s investments.

“Although the principals have denied it, I believe they knew precisely what investments Mr. Capwill was making and stood to profit from any increase in value. He certainly didn’t do anything which he, at the time, thought was improper,” Ms. Schuster says. “He believed in the end that the investments would be repaid and they would benefit all parties.”

Mr. Capwill could not be reached for comment.

Web of corruption

While Mr. Capwill has not been charged criminally, other players associated with him are either under investigation or under indictment.

Anne DiLeo, president of Alpha, has been charged in Tennessee with mail fraud and money laundering for allegedly participating in a clean-sheeting scheme in which HIV-positive patients lied on their applications to get life insurance.

Those policies were sold to Alpha for 10% to 20% of face value, says Gary Humble, an assistant U.S. attorney for the Eastern District of Tennessee.

Some people obtained as many as 31 policies in year by applying for policies of $100,000 or less, which typically did not require a medical checkup.

Federal authorities in Ohio are also investigating alleged clean-sheeting practices by Liberte’s president, Mr. Jamieson, brokers and policyholders. Agents raided Liberte’s offices in May, seized all records and closed the business.

No one has tied Mr. Capwill to the alleged clean-sheeting schemes, investigators say.

But an IRS affidavit states that a note pulled from Mr. Jamieson’s trash shows that he and Mr. Capwill may have had an agreement to secretly funnel escrow money to Mr. Jamieson’s other company, R.J. Management.

While Mr. Javitch, the court-appointed receiver, attempts to recover as much money as he can, he knows that it will be limited.

“It is going to be a pittance compared to the overall loss of the many people involved,” he says. “Why they went into the investment to begin with, whether it was even suitable, that’s my only question.”