10 Years Later, Case of M. David Howell's Ponzi Scheme Nears End

by Gwen Moritz  on Monday, Oct. 29, 2012 12:00 am  

M. David Howell Jr.

(Editor's Note: This is the latest in a series of business history feature stories. Suggestions for future "Fifth Monday" articles are welcome. Please contact Gwen Moritz at (501) 372-1443 or by email at GMoritz@ABPG.com.)

Last Tuesday was the 10th anniversary of the death of M. David Howell Jr., whose Ponzi scheme was the largest ever perpetrated in Arkansas, generating claims of more than $84 million - including one for $11 million by Dallas Cowboys owner Jerry Jones.

The date was noted at yet another hearing in Pulaski County Probate Court, where the case file opened with the submission of Howell's last will and testament will also mark its 10th year on Tuesday, Oct. 30.
Last week's hearing was a minor one: Probate Judge Mary Spencer McGowan disallowed a claim against Howell's estate by American Express for failure to respond to communications from the estate's administrator, retired Circuit Judge Robin Mays. But the parties had scheduled it on Howell's death date specifically hoping that it would be the final action in a convoluted case that schooled even experienced attorneys.

Nothing about the Howell case could be that pat. There is still one more piece to be dispensed with before 59 claimants who have already divided up $2 million get their shares of the $507,000 remaining in the estate.

"We've got to get squared away with the Internal Revenue Service as far as any tax liability that the estate might have," Stuart Hankins, the Little Rock attorney representing Mays and the estate, said last week.

The estate does not expect to owe any taxes but needs the IRS to put it in writing.

"To my knowledge, that is the last step that needs to be made to close the probate case," Hankins said. "We'd love for it to come before the end of the year, but we think it will be the first of next year."

When the final distribution is made, the estate will have paid about 6 cents for every dollar of the $38.3 million in approved claims from friends and friends-of-friends who believed Howell was an investing genius.

"There would have been a whole lot more money in the estate if we had not had to fight so many things," Mays said last week.

Another $34.8 million in claims were disallowed. Jerry Jones, who had previously invested $5 million, got his $11 million secured investment back within months after Howell's death because he had been savvy enough to insist on a letter of credit from Howell's bank. Bank of America, in turn, had required Howell to buy a certificate of deposit to cover the letter of credit.

Mays believes it was that CD, purchased in August 2002, that sent Howell's scheme into a nosedive.

"Jerry Jones is what brought it down," Mays said. "He, to his credit, required a letter of credit to guarantee his last investment. Howell had to take Jones' money and buy the CD, and then he didn't have the money to keep making payments."

Six weeks later, the checks that had been paid to investors like clockwork for at least seven years started to bounce. After three more weeks, Howell was dead at age 54.

The Discovery

On Thursday, Oct. 17, 2002, the Arkansas Securities Department ordered Mace David Howell Jr. of Little Rock to stop selling unsecured promissory notes like the $15 million worth that regulators believed he had sold to at least 16 customers in Arkansas, Tennessee and Texas.

It was a quick action by the Securities Department, which had received its first complaint about Howell on Monday of the same week and had formally begun its investigation on Tuesday. The first order represented the tip of Howell's iceberg, but time was of the essence because Howell seemed to have vanished.

On Wednesday, Oct. 16, Bank of America had filed a lawsuit in Pulaski County Circuit Court revealing that, during the first week of that month, it had honored 25 checks totaling more than $2 million even though Howell's account was depleted. On Oct. 8, BOA had stopped honoring checks, and investors who were then unable to locate Howell began looking to the ASD for help.

Howell, it turned out, had spent a week at the Betty Ford Center, a substance abuse rehabilitation center at Rancho Mirage, Calif., then checked into the Peninsula Hotel in Beverly Hills. There, on Oct. 23, he died of a drug overdose.

The Scheme

The Securities Department has since destroyed most of its investigation files, in compliance with its paperwork policy. According to a 2004 Arkansas Democrat-Gazette report, the ASD determined that Howell claimed to have developed an uncanny strategy that balanced short-term day trading and long-term arbitrage investing.

In reality, according to the Democrat-Gazette article, he lost millions on commodities futures between 1995 and 2002, and was heavily investing in plain-vanilla S&P 500 index funds during the slide that started before and accelerated after the 9/11 terrorist attacks in September 2001.

Desperate, he was collecting cash as quickly as he could, offering annualized returns of 40 and 50 percent in the spring and summer of 2002, the promissory notes filed as proof of claims in probate court showed. But his trading account lost $1.8 million in April 2002, $1.1 million in May and $3 million in June, according to the newspaper account.

Meanwhile, he wrote $36.6 million worth of checks to his investors during the first nine months of 2002. By the end, he was paying out more than $6 million a month.

Howell also spent lavishly on himself and his family, and the Democrat-Gazette reported that he paid more than $1 million to casinos in 2002 alone.

"Several people said this was one of the longest-running Ponzi schemes they had ever seen," Mays said. "Usually they crumble much earlier. And I think that if Jerry Jones hadn't done what he did, it might still be going on."

With total claims of $84.1 million, Howell's classic Ponzi dwarfed that of Kevin Lewis, the former Little Rock lawyer who pleaded guilty last year to cheating banks out of more than $40 million in an irregular Ponzi that used loans secured by phony improvement district bonds to pay interest on earlier phony bonds and loans.

"Sir" Allen Stanford's $7 billion Ponzi involving bogus Antiguan bank CDs is believed to have cost Arkansas investors about $54 million, according to state securities regulators.

The Litigation

Howell's family trust - ultimately, his two sons - was the beneficiary of a $19.5 million life insurance policy, but carrier Reassure Insurance Co. refused to pay, claiming Howell lied on his application. The trust sued but settled for $6.5 million in February 2005, giving Howell's victims assets to pursue.

Rather than fight the Howell trust separately, in 2006 the estate and many of the larger victims entered a pact to pursue insurance proceeds together and to allow the estate to prorate any recovered funds to all claimants based on the size of their approved claims.

"I have to give the greatest credit in this thing to [victim] Robert Vogel's lawyer, John Calhoun," Mays said last week. "He figured out the dynamics of everything that could possibly happen and how it might happen. Plus, he had a much better memory than the rest of us. He's very quiet, very methodical and very bright.
"He approached us and said, ‘It's crazy for us to fight each other. Let's get together and all of us go after the trust money.' He presented it in such a way that made such sense."

Calhoun declined comment.

The claimants and the estate together pursued several legal avenues for getting at the life insurance money. It took until January of this year for a settlement to be approved by the probate court: The Howell family trust would pay $2.79 million to the estate for distribution and an additional $85,000 to Richard T. Smith of Hot Springs, whose $18.5 million claim against the estate had been rejected. (Smith, who had cosigned many of Howell's promissory notes, pleaded guilty in 2009 to filing a false tax return for the year 2000 and was sentenced to two years of probation.)

The settlement took 72 percent of the life insurance proceeds that the Howell family trust had left after legal expenses, according to the March 13 probate court order approving attorneys' fees in the case. More than $340,000 was paid out to the attorneys, including Calhoun, who represented the claimants in the pact.

"The lawyers would still get paid off the top, which was more than fair," Mays said. "They were going to do all the work so that the estate didn't have to, but the money would have to come through the estate." That way, she said, approved victims who couldn't afford to pay for a legal fight still shared in the recovered funds.

In the End

On May 31, the distribution formula for $1,999,820 from the estate was approved by Judge McGowan, and Robin Mays wrote out the 59 checks by hand.

For her work over the past 10 years, Mays has been paid $100 or $150 an hour, depending on whether she was acting strictly as administrator or also assisting in legal research.

"I have learned a bunch," Mays said. "It came from all sides that you were not expecting. I think a lot of lawyers got hit from a lot of angles that they weren't expecting."

During that time, she also formed some opinions about M. David Howell Jr., a man she never met in life, and she is surprisingly generous.

"There's nobody else in the schmear that believes this: I just can't believe he started off to do it, mainly because these were his friends and his really close business partners.

"Now, there are facts that dispute this, but I just can't believe anyone would do this [deliberately]. I think he just couldn't tell them no and got way in over his head and couldn't find his way out."

"There are certainly arguments on both sides. I guess I just don't think anyone is that rotten." 



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