Too Smart to Be That Stupid (Gwen Moritz Editor's Note)

Working on this week's retrospective on the strange case of M. David Howell Jr. has put me in a nostalgic mood, and an old newshound is worse than an old soldier with war stories.

The Howell case ranks among the most interesting stories I've ever worked on, which is easy to say since I was neither his relative nor one of his hapless investors. Prior to October 2002, a Ponzi scheme was an abstract phenomenon for me. I knew the term and understood that it was a swindle in which early investors were paid with money raised from new investors rather than with actual investment returns.

But I had never covered one, never tried to ferret out the details. I had certainly never tried to interview victimized investors in a Ponzi scheme. (One of David Howell's victims was so nasty to me that I quickly stopped thinking of him as a victim. It didn't make me sad to see him on the list of investors whose claims were denied.)

In the fall of 2002, I spent a lot of time down at the Pulaski County Courthouse fishing through files in circuit court and probate court. But catching up on recent events in the probate case that turns 10 years old this week was incredibly convenient. Most of the documents filed since November 2005 are available online in PDF form - and searchable. This time, I didn't have to type in every name and claim amount for the list on Page 18; that's why God invented copy and paste.

Since the Howell scheme collapsed and he died, which were almost simultaneous events, we have all learned that Ponzi schemes can be much bigger and longer-lasting than previously assumed. Bernard Madoff's scheme, which unraveled with the stock market crash in late 2008, was almost 1,000 times bigger than Howell's. A couple of months later, scores of Arkansans would learn that about $54 million paid for certificates of deposit in Allen Stanford's Antiguan bank had similarly evaporated.

Ponzi schemes must inevitably collapse because, without real investment returns, there simply isn't enough money to pay the investors back with interest. The demise of Howell's Ponzi, like Madoff's and Stanford's, was tied to an overall decline in the equities market. In its way, the Ponzi that former Little Rock lawyer Kevin Lewis cooked up was far more clever and sustainable.

Lewis took advantage of lax regulation of the improvement district bond market and, to steal a phrase from 9/11/2001, a failure of imagination on the part of lenders. He created phony improvement district bonds and sold them to banks (and possibly individual investors) or used them as collateral on loans. Like Doritos, he kept making more in order to access cash to make the scheduled payments on the earlier ones. It was a Ponzi and a logistical nightmare, but it wasn't threatened by any outside turn of the markets.

Instead, Lewis was busted by bank examiners - but not because they suspected the truth. Lewis, falling victim to his own fictional universe, used the proceeds of phony bonds to buy controlling interest in a bank and then invested every bit of his own bank's equity capital in bonds that he knew to be worthless. It was that concentration of assets in a single investment that the bank examiners flagged, and the bank management only learned the truth when they tried to sell some of the bogus bonds.

Kevin Lewis pleaded guilty and has never explained what he was thinking when he started down the path that led to federal prison. And David Howell, of course, killed himself (deliberately or not) before he could be brought to justice. But Robin Mays, the retired judge who has acted as administrator of the Howell estate for almost 10 years, told me that she didn't think he set out to operate a Ponzi scheme. She thinks he genuinely thought he could make money for himself and his friends, and he just couldn't extricate himself when the losses started to mount.

"I guess I just don't think anyone is that rotten," Mays told me.

I wonder if anyone plans to create a Ponzi, considering that the scheme is, by its very nature, destined for failure. Ponzi operators certainly commit deliberate criminal acts to keep the plates spinning, but was it planned? I doubt it, but not because I don't think anyone is that rotten. I just don't think anyone smart enough to run a Ponzi scheme is stupid enough to want to.

(Gwen Moritz is editor of Arkansas Business. Email her at