My Scribbles!!

© 1995, 2002, 2018 By Bill Floyd

Jason and the Golden Fleecing

One of the strangest encounters I ever had occurred in the early summer of 1987.  I had begun a computer systems company in the Spring of 1986 and after slightly over a year we had grown to the point where we needed more space, more people and most important, more working capital.

As a part of preparing for this, I first moved my offices to a building where expansion was possible.  At the time, we did add some space but only a small part of what we really needed, even in the short run.  The new building offered room to grow.  The old one was full and the prospects of anyone leaving and thus vacating any significant space was low.  The co-owner was also the largest tenant and was constantly needing more space also.

I knew virtually nothing about venture capital except that it was almost non-existent in South Carolina.  Several years earlier (1978), I had worked for a medical services business that needed capital.  We had looked all over Columbia, then South Carolina and much of the Southeast without success.  We had gone all the way to Chicago to visit with the venture capital subsidiary of Continental Illinois Bank before we found someone with enough money to even say no to our needs.

After trying the University of South Carolina Small Business Development Center and finding out they knew less than I did and couldn’t help me pass gas, let alone development my business, I  called an old mentor and friend, E. A. Hall, Jr. to seek advice.

1. E. A. had been a member of the Mental Health Commission when I was the Chief Financial Officer there in the early eighties. E. A. had been on the search committee that selected me for the CFO job at Mental Health and had been instrumental in my accepting the position. He had held a similar post himself at Mental Health years earlier and shared my CPA training and credentials.

 

At the time I was at Mental Health, E. A. was Chairman of the Board of Security Federal Savings and Loan, then one of South Carolina’s fastest growing financial institutions.  So, I knew he had contacts that could probably help me if anyone could. E. A. told me he could probably get me in touch with Ed Caughman, a Columbia multi-millionaire who had been the Chief Financial Officer for a company called Inter-Tec Data Systems in the seventies and early eighties.

Jerry Wells, Inter-Tec’s founder had invented a high-powered computer workstation that took off quickly and made the company a high-flyer for several years.  They raised private capital and eventually took the company public with an initial public offering in the late seventies.

Caughman had been with the Company’s outside CPA firm in the early days and had gone to work for Inter-Tec when they got to the level they needed a full-time finance officer.  He was responsible for getting the company through the financially tough years, finding private capital to help them survive and for putting together the public offering that put them on “easy street”.

Ed had gotten a big piece of the company through various negotiations and, shortly after the public offering, decided he didn’t like the direction Wells was taking the company (actually running it like he was really on easy street).  So, he sold much of his stock for a sum “guesstimated” to be well over $25,000,000, bought a horse farm and “retired” at the ripe old age of 35.

 

I had followed the InterTec story over the years and knew of Ed and knew that he was substantial when E. A. suggested him.

1. E. A. indicated that Caughman sometimes expressed an interest in startup companies like mine, especially in the computer industry. As a result of the contact from E. A., Ed called me and inquired about my company. I gave him a quick overview and he showed some excitement but was obviously trying to avoid any indication of real interest in doing business with us, at least over the phone.

Ed said that he would like to visit the company and meet me.  He said that he would also like to bring some other sophisticated investors along because they might be interested even if he wasn’t.  He said they often shared this type of situation so they all could see more opportunities and also so they could help each other evaluate a situation.

I welcomed the extra attention and within a couple of days he called me back with a time all of his group could come.  He told me that he didn’t expect to see much in the way of people, fancy furniture, etc.  He knew what startups we supposed to look like and assured me I shouldn’t run out and spend a lot of money to make the place look impressive.

With that introduction, Ed came calling, decked out  in a golf shirt, a few days later with his friends.  They were all dressed much more business-like.  This was long before even “casual Friday”.  There were three investors with him.  Ed explained that a fourth he had planned to bring had a change of plans at the last minute.

Two of the men were private investors that lived in Columbia.  I cannot even recall their names as I never heard from or of them again.  One gave me a business card that identified himself only by name, address and the title “Private Investor”.

The third was introduced as Jason Zirkel, a private investor, fund manager and  investment adviser.  Ed mentioned that Jason was his personal investment adviser and was there for two purposes.  One was to help Ed evaluate the company and the other was that he might have some interest of his own  or have other clients that could be interested.

He also told me Jason managed a portfolio of investments of several hundred million dollars and that he had an MBA from Harvard.  He didn’t just talk about Jason.  He told me a little about each of his fellow visitors.  What he said about Jason only stuck in my mind because of the subsequent contacts I had with him.

This ever-expanding opportunity to get in front of investors of means really excited me and I had to work very hard to not let my excitement show too much.  It was impossible, I’m sure to not let some of it seep through.

After their introductions, I spend about an hour describing myself, my company, my business plan, and answering specific questions the group had, primarily concerning the business plan.

After the meeting, Ed indicated that he had liked what they heard and would get back with me in the next few days.  After about a week without hearing, I decided to call him rather than wait any longer.  I didn’t want to seem too anxious but I also didn’t want him to think I didn’t care.

Ed told me that Jason had told him that it just wasn’t the right kind of deal for him (Ed) but that there might be some ways to make the company more attractive and bring it along “to the next level” so that he (Ed) might then want to get involved.

I was, of course, disappointed, but did have presence of mind enough to inquire as to what Jason had in mind.  Ed volunteered that he wasn’t sure exactly.  He suggested that he have Jason give me a call and I could work directly with Jason on it.  He indicated that Jason was interested enough to devote some time to it at no cost to me.

Jason called the next day and we talked on the phone for awhile.  He was somewhat vague but kept talking about different investment and fund-raising ideas and kept up a much higher level of enthusiasm than he had shown in the first meeting.

Based on my curiosity and his enthusiasm I scheduled a meeting with him at 5:00 PM in his office on the following Tuesday afternoon.  I had been willing to meet at any time.  The late time was his idea.  I supposed this was to keep me out of his regular work day, since this one was basically gratis.

To put this meeting in perspective, it is important for you to know my state of mind at the time and also to know that Jason had done this enough to know even better than I what my state of mind was here.  After all, I had told them things in confidence about my business that I would have shared with no one else.  It was only because of my knowledge both through the newspaper articles I had read  over the years and through E. A.’s personal knowledge  that Ed was for real that I shared all this.

And my state of mind was this.  My company needed money to grow.  It could not grow without additional money.  It probably wouldn’t even survive very much longer without additional investment or a very lucky break in the very short run.

My staff and I had developed a very good product — a family of business accounting systems aimed at small retailers, distributors and wholesalers.  We had a small base of over 25 good customers.  We had a couple of large accounts that were evaluating our product that could buy dozens of systems for all their operations.  We were negotiating with even larger companies to get evaluation systems installed.

We also, especially dealing with mostly small companies, had our share of neer’ do wells who were forcing us to spend a lot of time trying to make our product do a lot more than it was ever intended or represented to do.  These were common in the computer business, but they were a real financial drain and sapped off almost half our support staff and three-fourths of our programming staff.  But, we looked at this as further investments in the future and found some positive in even the most negative of it.

While all in all, the business was going very well, we had gone through almost $125,000 and I was about out of cash, personally and corporately.  We needed an infusion of cash now and we didn’t need our number one sales person (me) tied up looking for capital.

When I arrived at Jason’s office in the Barringer Building, his secretary was sitting at her desk with her hands folded as if she were a piece of the furniture.  The single most noticeable thing about her was how much more she looked like a part of a movie set than a working office.  Every hair was in place, her makeup was perfect, she looked as if she had been at work for ten minutes rather than all day.  And she looked and dressed more like a model than a secretary.

And the furniture that she looked to be part of also looked out of place.  It was much fancier than any office I had ever been in, first of all.  And I had been in some fancy offices including the Raleigh, NC offices of a company called Litchfield Plantation Company.  They developed, among other things, an elaborate residential community and golf course at Litchfield Beach, SC and their offices really did look like a movie set. The founder of that company had married really big money and at 26 years of age, acted like he was a pre-Donald Trump. (Edit note: Really, I wrote this long before Trump even hinted at running for President)

But more important, it didn’t look like it was used for an office.  The desk was small and ornate.  Except for the phone, there was not a single thing to make it look like a desk.  No computer, no typewriter, no steno pad — nothing.  Of course, computers were still mostly back-room items in a lot of companies in 1987, but every office has some “stuff” that qualifies as clutter.

My anticipation and hopes were so high that even this didn’t tip me to anything unusual at the time.  It was only later that I started thinking about this.

She buzzed him and he came out and introduced me to her.  Jason then showed me around his office suite, which he explained that he shared with a law firm.  He also told her she could leave for the day.  I somehow got the feeling that she was a temp hired just to sit there for that meeting.  But I was too excited about the prospects of something positive to focus on this.  He introduced me to at least two of the attorneys.  The entire suite was very lavishly furnished, even for an upscale law firm.  But I only saw the conference room, the halls and one attorney’s office, so I really don’t know how the rest of the firm was furnished.

He then showed me his personal office which was also very plush.  It did contain a computer and a desk that appeared to look like some work was done on it.  He then turned the conversation to his stock portfolio that he managed and threw out the names of several large clients he managed funds for.  He said his entire portfolio exceeded half a billion dollars ($500,000,000).

He then quickly showed me some files on his computer that he said were on line access to his accounts.  At the time, I just accepted this as fact, but now I seriously doubt it was in fact on line with anything.  PC’s connected on line certainly existed then, but they were fairly limited in scope and function.

He then suggested we get a drink.  His scattered conversations, excited tone and flitting from one subject to the next was getting on my nerves but, I, of course, was just trying to get on his good side and get to know him so that eventually, I might get an investment from him or at least get a good word from him back to Ed who I knew clearly had the bucks to invest.  Therefore I was quite ready for a change of scenery.

I even imagined that a lot of his reason for the conversation pattern might be some sort of psychological test he was administering on me.  Only later would I learn he didn’t even have a degree, let alone a Harvard MBA.

He told his “secretary” she could go for the day and we then walked down the street to the Marriott (now Adam’s Mark) and went into the bar.  He spoke to a couple of people and the waitress immediately snapped to as if he was her favorite customer.  Apparently, he was quite a tipper and indeed was her favorite customer.  She obviously knew him well and he went to great lengths to make a show of his friends in the place.

After a quick drink he was ready to return to his office for further conversation about my needs.  Now we were getting to the part I came for.  On the way back he indicated he needed to drop something off at his car.  We walked about a block out of the way to where his car was parked on the street.

It was an older but immaculate Rolls Royce convertible with right-hand drive.  The top was down.  This was the first real tip that even I couldn’t overlook.  What moron would leave a Rolls Royce parked with the top down in downtown Columbia all day.  It was there, I’m convinced, for me to see and for nothing else.  I began to feel set up.  But then I quickly went back to how I had come to know this man and the credentials of E. A. who I had known for years and Ed who from several sources I knew to be on the up-and-up.  So, I decided to go along but maintain a healthy skepticism.

So we went back to Jason’s office.  This time he was all business.  He insisted that I needed to get more money into the company before I went to professional investors.  He suggested a plan he said he had used successfully several times.  He explained that I should hold an investment party where we could discuss the company and get personal friends and relatives of mine to invest.  Jason would send the invitations and host the party at his office.  He would help me with the sales pitch and even help me close the deals.  After that and another year of success, he explained, we would be ready for Ed, himself and others to put money into the business.

He further explained that rather than having them (my friends and relatives) take risks, they would merely make loans to the company that would pay a good interest rate and then use some money from the next round of financing to take them out.  That way, they would get a good return with virtually no risk.

If you bought that last line, I’ve got a bridge in Brooklyn I would like to interest you in.  Obviously, if there was no risk, the next level of financier would want in now.  The only way they would get taken out is if the company was successful enough to be more attractive to investors at the next level in a year or so.  Otherwise, they would lose everything.  That’s not only a risk, that’s taking all the risk and is really nothing more than an equity investment, not a true loan.

Jason then again mentioned the only expense to me would be his direct costs to host the party at his offices.  Whatever that might be was never mentioned.  I asked if there wasn’t something illegal about borrowing money that way.  He assured me this was all perfectly legal.  After all he was a licensed business advisor and had worked with one of the larger investment houses (which he named and I recognized but cannot now remember).  But it was sounding a lot like dealing in unregistered securities to me.  And that was a definite no, no.

Jason wasn’t sharp enough when I had gone over my background to realize I knew a lot more about the Securities & Exchange Commission than the average person he worked over. After all, I had worked on over a dozen filings with the Commission on some pretty big companies years earlier.

Selling an interest in my company to Ed or one of his group of investors, people that did this for a living and knew a whole lot more about what they were doing than I did was one thing.  Selling any kind of interest, even a debt interest to friends and relatives was another story altogether. These guys were exempt up to certain limits as sophisticated investors or “angels”.

I politely got myself out of the situation by showing respectful interest, but only did this   to avoid ruining any chance I might still have with Ed.

Jason called again a few days later offering further help in setting up the investment party.  I told him I would have to think about it.  Actually, I had already decided that I wanted no part of that deal.

I called Ed to ask him if he had any further interest.  He again said he was relying on Jason.  I cautiously explained the investment party Jason had described to him.  He didn’t seem very concerned and showed no sign of changing his mind about my company or his reliance on Jason.  I then realized I had closed both doors.  Surely they would now discuss this.

About a year later, I was reading the morning paper and noticed that there was a huge fraud case discussed in it.  Seems a swindler had been in town for several years posing as an investment adviser.  He had bilked people out of well over $500,000 that they would admit to, let alone the untold people who were too embarrassed to come forward.

Oh well, I didn’t get my money but I wasn’t a victim.  I lost a few hours of time I could have spent better, but at least it hadn’t cost me any money.  Or so I thought.  A few days later a follow-up story featured a company that had been put out of business by Jason.

The company was owned by a couple that had paid Jason finders fees to secure them a loan.  This was a different scam than he tried on me, but the end result would probably have been the same had I bought into his scheme.  In fact, Jason would probably have collected the investment party expenses from me up front and then done nothing.  Or else he would have hosted the party and somehow expanded the scam to the people I brought in.  I’m sure he had something quite clever in mind.

But the real irony from my point of view, about this company Jason had scammed was that Buck, my local sales rep, had invested many, many hours trying to sell this couple a computer system for their high-end photo printing business. They were just a few days away from making the commitment to him for months.  They were, per them, about to get a sizable working capital loan that would put their business over the top.  All the time, Jason was their source.  Actually, they had no chance whatsoever of ever getting a loan through him.  So, in a way, he got me after all.

A few more stories appeared in the local paper about Jason and the people he had fleeced.  Some of the stories hinted that he had bilked his clients for much more than the $500,000 that people admitted.  Through it all, Ed Caughman maintained that Jason had not taken anything from him.  In fact, he claimed that Jason had actually made him money, even mentioning the figure of $1,500,000.  He was never implicated in any way with Jason’s wrongdoing – – and probably was in no way involved.

The FBI and others were looking for Jason, but he had already disappeared.  Several years went by and I heard nothing more about Jason.  Then in August 1994, he was arrested in New York.  He had been running similar scams in Boston for about three years.  Up there, because he was the subject of a nationwide securities fraud search stemming from his activities in Columbia, he was operating under an alias.

The alias he had chosen was Gedne Howe, very close to the name of Charleston, SC attorney Gedney Howe III.  He was living in the Beacon Hill section of Boston driving a fancy car, working out of a lavish office furnished with borrowed antiques (likely the source of his office of furniture here).

Same old Jason by a different name.  He’s now pulling time for his Boston and Columbia antics.