Investors Lost Trust and Millions

Many ruined after collapse of alleged scheme

By Sacha Pfeiffer
The Boston Globe
May 14, 2007

Frank J. Russo, prosecutors say, was an equal opportunity predator.

He targeted the young, the old, the healthy, the sick, the rich, the poor, the living, the dead. The money he collected came from savings accounts, 401(k) plans, inheritances, court settlements, home sales, college tuition funds, scholarship programs, life insurance payments.

He repeatedly assured his clients -- most of them relatives, friends, and neighbors -- that their assets were safely invested. According to monthly statements he sent them, they were enjoying steady gains. Some even received monthly dividends and made withdrawals.

But those profits were apparently fiction.

By the time Russo was criminally indicted last month on 20 counts of fraud, he had squandered an estimated $20 million entrusted to him by more than 250 investors who included teenagers, senior citizens, and community groups, according to federal prosecutors, who allege that the Wakefield man lived a lavish lifestyle while running a pyramid scheme that thrived for as long as 25 years.

"I could put a bullet in Frank Russo and never lose a night of sleep for it, and a year ago I would have taken a bullet for him," said Jim Cipollo, 49, of Wakefield, who calls Russo his former best friend and whose family, including his in-laws and 15- and 18-year-old sons, had put $265,000 in Russo's care. "I've lost all faith in humanity."

Russo's alleged misconduct is described in criminal and civil complaints pending against him in federal court, and his lawyer concedes there is "clearly incarceration in Mr. Russo's future." But the impact of his apparent scheme took on a public face earlier this month, when about 30 of Russo's investors gathered at US District Court in Boston to testify publicly about the misfortunes they had suffered.

Now that Russo's alleged scam has collapsed, many of his clients -- often regular working people from places like Danvers, Everett, Lynnfield, and Malden who placed their trust in a local, Harvard-educated man they'd known since childhood -- find themselves financially ruined.

Some have been forced to sell their homes. Others have fallen behind on mortgage and car payments. College and retirement accounts have vanished. Nest eggs are gone. Profits from family businesses have evaporated.

The same fate could befall anyone, several of them say; their only mistake was relying on a trusted financial adviser .

"One of the things we do as human beings is trust others," said Vincent Ragucci Jr. of Everett, whose family, including his wife, parents, in-laws, and children, collectively invested nearly $700,000 with Russo. Like most of Russo's victims, he does not expect that even a portion of that money will be recovered.

"I mean, you can't go around looking over your shoulder and distrusting everybody and everything," said Ragucci, 64, who had been semi retired and, because of his $225,000 in losses, is job-hunting. "But he has taken that trust totally away from us."

Russo, 51, a former Everett High School football player who is married with three children, is confined to his Wakefield house with electronic monitoring while his case snakes through federal court. His home phone numbers have been disconnected and his Boston attorney, Paul V. Kelly, said Russo would not comment.

But Kelly denies Russo ran a pyramid scheme, in which new investor money was used to pay returns and redemptions to earlier investors, as prosecutors allege. Rather, Kelly said, Russo was a well-meaning businessman who became a casualty himself of risky financial gambles gone sour.

"Frank's intentions were in the right place," Kelly said. "He genuinely believed he was going to earn a lot of money for these people. I think what ultimately this case will show is this is a guy who did well for his investors, meant well at all times, and wasn't looking to rip people off. But in a tough time in a tough market . . . he went into more speculative types of investments and, unfortunately, those investments didn't go well."

According to the US attorney's office, however, Russo may have been misappropriating investor funds as early as 1982, around the time he formed an investment management fund called Russo Associates. In about 1997, he formed a second fund, Eliot Partners. Russo, who never registered as an investment adviser, managed the funds alone.

Prosecutors say Russo, promising "above average" returns and promoting his Harvard pedigree, aggressively solicited family members, friends, and neighbors to invest. He also encouraged them to recruit their family members, friends, and neighbors as investors, which many of them did. Even community groups such as the Everett E Club, which funds college scholarships, invested $125,000 with Russo.

When prospective clients wanted to invest but were short on cash, he pushed them to obtain money by selling or refinancing real estate, obtaining lines of credit, cashing out retirement accounts, transferring pensions, and selling annuities, according to prosecutors.

Anthony Latorelli of Everett invested $125,000 with Russo, "every penny I had," he testified at Russo's detention hearing in federal court earlier this month. Russo, Latorelli said, even approached him two weeks after his father died to ask if he were interested in investing the proceeds from the estate.

"He was trying to take the money my dead father had left me. That's the kind of person Frank Russo is," said Latorelli, 51, who testified he is two months behind on his car and mortgage payments and may be forced to sell his home.

Therese Giove of Revere planned to invest $10,000 in one of Russo's funds, but he persuaded her to increase her investment to $30,000, even driving her to the bank to withdraw the money, she testified. "I had implicit trust in him," Giove said in court. "I always felt Frank was a rock, someone you could really trust and admire."

Diane Leonard, 42, of Danvers, who became a widow and single mother of four when her husband died of prostate cancer in 2004, testified at the hearing that she gave Russo part of her late husband's life insurance proceeds, as well as other funds. That money now presumably lost, she said she has been forced to work more hours just to make ends meet, and struggles to buy cleats and other equipment for her children.

John Anderson of Lynnfield also believes he will never again see the $500,000 he gave Russo, money he received when his son bought out Anderson's portion of their manufacturing firm.

"I was devastated," said Anderson, 75. "I would have loved to leave some of that money to my kids and grandchildren, but it appears that's not going to be the case."

According to prosecutors, Russo told his clients he earned a commission only if their accounts returned profits above 10 percent. But prosecutors say Russo paid himself large commissions even when the funds generated no profits.

Despite telling investors he had put their money in conservative investments such as bonds, Russo invested in risky ventures and fabricated account statements that showed falsely inflated balances, prosecutors say.

In 2001, Russo transferred at least $12.6 million of his clients' funds, often without their knowledge, to a Los Angeles company run by a college friend called Media Data Corp., formerly known as both Veritasiti Corp. and DBK Publishing, according to the federal indictment against Russo. The company never generated returns, but over time Russo "ended up transferring virtually all the funds" to the money-losing venture, according to a pending civil complaint against Russo filed by the Securities and Exchange Commission.

To hide his funds' unprofitability, Russo, in a classic pyramid scheme, used money from new investors to repay old ones, prosecutors allege.

Kelly acknowledged Russo invested some clients' money in the California company without telling them.

Russo did so, Kelly said, because he found himself "on one of those slippery slopes where he had to keep investing more and more in hopes that the thing would finally turn the corner, and unfortunately the balloon popped before he reached that stage."

Until that point, Russo ran a legitimate operation, Kelly said.

Russo's former clients are not so sure.

"My wife and I had such blind faith in this guy, and I thought I knew him very well, but apparently that was part of his game," said Cipollo, whose family frequently vacationed with the Russos and had dinner with them several times a week. "It sickens me. We trusted Frank completely, and he has single-handedly ruined so many people."

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