The Beauty of White-Collar Crime: Do the Crime Not Much Time

Oct 10, 2009 - by Ronald J. Lawrence - 0 Comments

Could a Midwestern resort town with a struggling economy be bamboozled out of $25 million by a chain-smoking, fancy-dressing New Yorker? Yes. So how much time did this flimflam man get? Six months.

by Ronald J. Lawrence

Prologue

When Harvey Martin Zelin came to the Lake of the Ozarks in central Missouri in 1984, he was heralded, not only by others, but by himself, as a Messiah who would lead the people of this extensive recreational area into financial paradise. He would replace the bitter taste of disappointment and deprivation many of its residents knew with the sweet taste of prosperity. Economic revival with its accompanying wealth, he assured them, was just around the corner and he would make it happen.

Zelin, a well-dressed high roller in his late 40s, was flamboyant and glib. He maintained a high profile, dressing himself in the affluence of a successful venture capitalist. He gave the common people of the lake a glimpse of the opulence he promised them. The jewelry, real or fake, that adorned his fingers and wrist was dazzling. The new white Cadillac he drove bore personalized license plates with the initials "HMZ." He bought a lavish house along the wooded shoreline of the lake and called it "Harvey's Hideaway." They, too, someday could share in that lifestyle.

For the lake people, many of them not far from the poverty line, the chain-smoking Zelin was the Music Man gone corporate. He told them what they wanted to hear, that he was no different than they. As they had, he had come from humble beginnings. He had been a dude ranch manager in the Catskills, a medical supply salesman on the East Coast and, of late, a real estate investor in Houston. After all, he was "just a small businessman." Not long before he also had been poor. A friend of his would confide that when Zelin left New York City only a few years earlier, it was with a one-way bus ticket and a $20 bill in his pocket.

Harvey Martin Zelin's covenant with the people was his word – trust me and you will prosper. But was Harvey Martin Zelin the financial wizard, the benefactor, he claimed to be?

From Rags to Riches

"It was almost as if he had so much money to get rid of that he bought everything he could get his hands on." A businessman

Zelin's arrival at the Lake of the Ozarks was like a massive shot of adrenaline in the struggling economy. Within months after his arrival, the rugged terrain around the Lake of the Ozarks began taking on a new face. Construction crews were busy and the din of bulldozers, jackhammers and saws echoed throughout the countryside. He set about creating a corporate image. Comp-Tech Companies, Inc., became highly visible. Signs bearing the corporate name and emblazoned with a blue and white flying eagle were everywhere. A fleet of cars and trucks with the same logo only added to the congestion of tourist traffic.

Zelin didn't think small; his plans were of epic proportions. There wasn't a piece of income-producing property he didn't like. Before long he became a real estate mogul, acquiring land and numerous small businesses, many of them entertainment oriented. A bowling alley, a delicatessen, an appliance store, a discotheque among many others came under his domain.

He purchased three vending machine companies, a local one and the largest ones in Kansas City and St. Louis, for more than $2 million. He placed the Kansas City company, B & G Amusement, under the control of Jeffrey P. Aboussie, an associate of the politically powerful south St. Louis Syrian-Lebanese faction. Not long before, Aboussie had pleaded guilty to four federal charges of mail fraud involving $26,000 in phony insurance claims. He had been sentenced to six months in jail on a work release program and placed on five years' probation.

Zelin built the plush Lake Club Café. On opening night, he feted 300 guests with a sumptuous dinner and an open bar. But it did not stay open for long. Not long after the gala, he closed it for remodeling, the first of three such projects in 18 months.

Forty acres of land were purchased for an industrial park. Among the industries he planned locating there was a plant to make house trailers. Even before work on the facility began, Zelin announced that he had $5 million in orders.

Two other large land acquisitions were to be used for construction of time-share condominiums – Holiday Shores and Lake Club Resort. Zelin soon began soliciting apartment purchasers at $2,000 a week each. Over the next months, several million dollars would be invested. Within a year or two, he promised, the projects would net at least $60 million a year.

He established a labyrinth of corporate entities, a conglomerate with Comp-Tech Companies as the parent. This reporter identified more than 60 chartered corporations, most using the name Comp-Tech, Zelin created and business enterprises with which he became affiliated. Only about 10 of the new corporations were active; the remainder only shell companies. In almost all, Zelin was the sole owner, shareholder and principal officer.

Zelin set his sights on government as a potential source of income. If and when the state of Missouri approved horse racing, a proposal being debated at the time, Zelin would build a track. He began exploratory negotiations with the state to finance construction of a new prison. With the lottery recently approved in the state, he suggested that he could assemble ticket-dispensing machines. However, these discussions went nowhere.

He had cultivated powerful political allies in his effort to gain state business. E.J. "Lucky" Cantrell, a Democratic state representative from the St. Louis area and president of the Missouri State Building Trades Council, was a "personal friend."

Another was John F. "Jack" Martorelli, who as president and business manager of Operating Engineers Local 513 was considered a power broker in politics and the labor movement. Until a few years before, the local had been under the influence of organized crime.

It was a quid pro quo arrangement. Contractors in the Lake of the Ozarks region for years had rejected organized labor and used independent, unaffiliated workers. That changed with Zelin's arrival. He hired only union members.

A Few Skeptics

"The only way I feel I'm going to overcome some of the negative things … is giving out factual information." Harvey Martin Zelin

But there were detractors, the skeptics who wondered about this intruder in their quiet, simple way of life. They were those who were not motivated by the greed upon which Zelin preyed, but those who stood to gain little from him.

Observed Richard Windsor, a businessman:

"It was all too high-class for this hillbilly to understand. They just don't fit in."

Zelin was quick to answer those who questioned his sincerity and his aggressive business practices. He told a reporter:

"The people who criticize us are people who really don't know us. If you talk to the bankers and the attorneys and all the businesses that know us and do business with us, I don't think you'll hear any of that. The only way I feel I'm going to overcome some of the negative things that have been said about Comp-Tech is giving out factual information."

Zelin did just that. He made public Comp-Tech's financial statement dated March 11, 1985, a year after he had appeared on the scene. It stated that the company had $7.5 million in assets, of which $3.3 million was in cash. All of the associated companies had earned $6.3 million. The statement projected sales of at least $20 million in a forthcoming quarter.

But Zelin wasn't completely forthright. He had incorporated Comp-Tech only five months before with a mere $500. Within six months, its capitalization had increased to $20,000 through the sale of common stock.

Skepticism grew further when it was learned that Zelin and Comp-Tech had reneged on a promise to rescue Dunn's Steel Buildings Systems, Inc., from bankruptcy. When Dunn was unable to pay $320,000 it owed to other businesses, it sought protection from creditors. Zelin agreed to lend Dunn that amount. But he backed out when he said he "discovered that the assets Dunn was supposed to have weren't really assets."

Ben Epifanio, executive vice-president of Comp-Tech, had negotiated the arrangement. He promptly resigned, telling creditors in a letter:

"As a result of my personal integrity being jeopardized and tainted, I have no choice but to say that I cannot operate as executive for this organization. There comes a time in life when integrity cannot be purchased with any sum of money."

Zelin explained that he had resigned over a disagreement in "corporate philosophy."

A Kiss and a Promise

"Zelin bought everything in sight. The trouble was, it wasn't with his own money." A government investigator

Zelin paid little in cash for the property he acquired. His currency was his promise to pay. For awhile, his word seemed as good as gold.

He paid only $100,000 in cash for the three vending machine companies, with Comp-Tech giving long-term promissory notes for the balance of $2 million. Zelin paid $20,000 down on the $850,000 purchase price for Adisco, which had 900 machines in 450 locations in the St. Louis area; $50,000 down on the purchase for $850,000 of B & G Vending Co., in Kansas City, which owned 500 machines; and less than $30,000 down on the sale of G & M Vending at the lake for $350,000. Comp-Tech Vending Co. was created to operate them.

Zelin now owned almost 2,000 vending machines. They would return income estimated at $20,000 to $25,000 a week.

The debt continued to increase. It later was estimated that within a year, Zelin had pledged at least $4.2 million in promissory notes for the purchase of property, with $3 million due in 1987. In addition, he was committed to lease payments of $4.7 million, half of which were due in 1986, the balance the following year. There were mounting payrolls, supplies and materials.

It was inevitable that Harvey Martin Zelin soon would founder in the sea of debt he was creating for himself and his companies. In the fall of 1986, less than two years after he had arrived, Zelin disappeared. He eventually was traced to Sarasota, Fla.

The euphoria Zelin had brought with him quickly turned to gloom. The connoisseur of high finance was unmasked as a master of deceit. No longer was he viewed as a benefactor; but as a swindler. His brief whirlwind romance with the lake people ended in bitter estrangement almost as quickly as it had begun.

The resort area was littered with broken dreams and lives. It would take months to tally the damage. In the end, it was believed Zelin owed at least $25 million, including $2.3 million in delinquent state and federal taxes. Much of the unpaid taxes were from the vending machine operations. "He owes just about everybody in town," said a former employee.

Gone was the fleet of cars and trucks. The vehicles had been repossessed. Boarded up buildings, some seized in lieu of taxes; half-completed abandoned projects; land where industrial facilities were to have risen made barren by bulldozers; broken dreams and lives became the legacy of Harvey Martin Zelin.

The caveat emptor, "Let the buyer beware," took on new meaning; "Let the seller beware." Windsor, one of Zelin's many creditors, summed it up best:

"The first two or three months, he paid real well. He got his foot in the door and then all of a sudden the bill got real big and the check didn't come. You get real angry at yourself for being so dumb."

Futile Litigation

"There has been a draining off of corporate assets for the benefit of Harvey Martin Zelin. The corporations are merely the alter ego of Harvey Zelin." A court document

Creditors eventually filed more than 60 lawsuits seeking recovery of $2 million in unpaid debts incurred by Zelin and his Comp-Tech companies. Most never went to trial and the plaintiffs won by default. Zelin answered few of them. The judgments were exercises in futility. There were no assets to satisfy them. Foreclosures on properties began in earnest.

But the litigation shed new light on his operations.

A group of musicians owed money by Zelin said in their suit:

"Zelin operated the affairs of the corporations on a personal basis rather than on a corporate basis, where the assets and activities have been intermingled to the point that those of Harvey Zelin … and the corporations are indistinguishable."

Another suit filed in U. S. District Court charged that Zelin used the Comp-Tech companies to "defraud his creditors … and to personally enrich himself.

Through the manipulation of his corporations, Zelin has committed a fraud."

Constructions unions that only a year earlier had hailed Zelin as their hero for opening the Lake of the Ozarks to organized labor now had a different perspective of him. He owed the painters, plumbers, carpenters and laborers organizations $170,000 in contributions to their welfare funds. As usual, Zelin declined to respond to the suits. U. S. District Courts in St. Louis and Kansas City awarded the amounts by default, but there were no unemcumbered assets to satisfy the judgments.

Not long after Zelin disappeared, a judge in U. S. Bankruptcy Court ruled that the subsidiary of Comp-Tech that was to build one of the time-share condominiums was insolvent. The Missouri attorney general also had filed suit, claiming at least 1,000 people were swindled out of millions of dollars when they bought time-shares.

Comp-Tech Vending Co. also was declared bankrupt in March 1987. Creditors of B & G Vending alone who were owed more than $416,000 had filed a petition for involuntary bankruptcy. Nothing had been paid on the $2 million Zelin owed the former owners of the three acquired vending companies. About this time, a fire of suspicious origin destroyed a warehouse at the Lake of the Ozarksin which vending machines were stored.

"Bust-Out" or Money Laundering?

"It was corporate suicide. I've never heard of a company doing what Comp-Tech did unless they intended not to make it." A government investigator

Zelin's wheeling and dealing and money juggling did not escape the federal government's attention. Not long after his departure, a federal grand jury in Kansas City and five government agencies – the Organized Crime Strike Force; the Federal Bureau of Investigation; the Internal Revenue Service; the Drug Enforcement Agency and the Department of Labor's Racketeer Section – began scrutinizing his activities.

Investigators said Zelin's operations fit the patterns of money laundering and "bust-outs," a classic organized crime practice of taking control of businesses, diverting their assets and revenue, then abandoning them.

It was a four-pronged investigation into these possibilities:

 

  • The Comp-Tech companies evaded more than $1 million in withholding taxes and millions in income taxes. Sandra L. Perry, secretary-treasurer of one of the Comp-Tech companies, said in a deposition in a civil case that there were no provisions for paying corporate or employee withholding taxes and that none were paid. Another source reported that payroll taxes were withheld, but not paid to the government.

  • That Zelin, himself, evaded taxes and that he had diverted company assets to himself and, in doing so, had understated his income.

  • That property and assets in Comp-Tech's financial statements and loan applications were misrepresented and inflated. In a deposition, an officer of the company said that despite the firm's claims of having $7.5 million in assets, including $3 million in cash, and revenue of $6.3 million, the holding company had very little cash flow and little income.

  • That Zelin committed labor racketeering, including embezzlement, by not making contractual payments to the four unions' welfare funds. A source said that although employee contributions had been withheld from their paychecks, the funds were not forwarded to the unions.

 

Unraveling Zelin's financial manipulations became a nightmare. IRS agents seized a "room full" of documents. It wasn't so much that the paper trail they tried to follow was complex. Rather, it was because there was little accounting of funds, those coming in or going out.

Complicating the attempt to create a profile of Zelin's business activities were the morass of shell corporations he had created. One corporation was dissolved six months after it was chartered in 1984 because, he said, it had not been "actively engaged in any business." As sole stockholder and officer, he voted himself all of the company's unspecified assets. Months earlier, he had testified in a deposition that the company in its first year netted $400,000 on gross sales of $6 million.

Much official attention was given to the vending machines, often a source of considerable, unaccountable and unreportable cash. Investigators said that revenues of at least $8 million were realized by Comp-Tech in a single year. However, it almost was impossible to trace the money. Deposits of revenue made in one bank were transferred to other banks the next day. The State of Missouri claimed that Comp-Tech owed $500,000 in sales taxes on these transactions alone.

Investigators were able to trace sizeable amounts to Zelin, himself. He sometimes lent corporate money to himself. According to a deed of trust, he lent $250,000 to the Lake Club Café, of which he was the sole owner. In return, the company, Lake Club Café, Inc., gave him its promissory note, using a piece of property as collateral. No terms of the loan were indicated in the note.

Comp-Tech Construction Co., of which Zelin also was the sole owner, even though he admitted he had no experience in that business, apparently was the albatross around his neck, either by mismanagement or by design. With the exception of two minor contracts performed for outsiders, all of its work was for other subsidiaries and for Zelin, himself.

Sandra Perry said in her deposition that Comp-Tech Construction billed subsidiaries for more than $2.5 million worth of work, some of which was not done. She said she prepared the billings, but no records existed indicating that they ever were paid.

Of the amount, $128,000 was billed for work on "Harvey's Hideaway;" $1,131,000 for work on the Lake Club Resort, which never opened; $544,000 for the Lake Club Café; $470,000 for Holiday Shores, one of the time-share condominiums that never was completed; and $234,000 for a night club which was open only a short time.

Comp-Tech Manufacturing, Perry said, lent Comp-Tech Construction money each week to meet payrolls. "We are talking in the millions," Zelin said in a deposition. But Perry explained there was little evidence that Comp-Tech Manufacturing generated much income. She said the loan procedures were unconventional, if not suspect. No interest had been charged on the loans, which she said never were repaid. Bank deposit slips of Comp-Tech Construction when it received the advances were the only documentation of most of the loans.

Perry also testified in her deposition that there were billings of large, unspecified, amounts for two other construction projects, but that she was unaware of any working being done.

Among the numerous perplexing questions was the source of Zelin's funds. A deposition by Dale L. Martin, controller and secretary-treasurer of Comp-Tech Companies, shed little light. He testified that there were no projects "that were producing income outside of the corporation" and that there was "very little cash flow."

But, indeed, there was cash flow into Zelin's pockets, and it only added to the mystery surrounding him.

This reporter learned that late in 1985, as Zelin was fast approaching financial crisis, a private lender had begun foreclosure proceedings on Comp-Tech when it became more than $100,000 in arrears on mortgage payments. The lender refused to accept a company check, knowing there were insufficient funds to cover it. The lender's attorney said that an hour before the foreclosure was to become final an out-of-state source wired Zelin money to cover the arrearage.

In 1985, Zelin, in an interview, said that he was receiving considerable financial backing from Bennett Funding Group in Syracuse, N. Y. But Michael Bennett, chief of operations for the funding company, said the only business with Zelin and his companies was through its subsidiary, Aloha Leasing Corp,, which leased Zelin equipment and furniture for several million dollars.

The government investigator who described Zelin's business practices as "corporate suicide," added:

"There was a complete disregard for any of the normal responsibilities and procedures that even the most loosely run businesses would have."

Court documents explained further:

"Comp-Tech was destined to failure at the outset because its capitalization proved to be totally inadequate for the operation of the size which it quickly grew to."

"In operating Comp-Tech Construction, Zelin disregarded the corporate form. Since it was not paid for over $2.5 million … it was, itself, unable to pay for almost all of its debts as they became due."

A Bad Case of Amnesia

"I live there, but I don't know if I am the owner." Harvey Martin Zelin

In 1986, Zelin made two rare appearances in response to subpoenas for depositions in civil cases brought against him. If the petitioners' attorneys hoped to be enlightened, they were disappointed. Zelin displayed his arrogance. And he suffered from serious memory loss. There was this dialogue in one of the depositions:

"In what business is Comp-Tech companies?" an attorney asked.

"I don't know the answer to that one," Zelin responded.

"Do you know who does know the answer?" Zelin answered that he did not.

"From what source does it make its money?" Zelin said he didn't know.

The questioning turned to "Harvey's Hideaway." The lawyer asked, "Who owns the building that is your residence?" Zelin responded that he wasn't sure.

"Well, do you have a home at the Lake of the Ozarks?"

"I live there, but I don't know if I am the owner."

"What were the improvements on your home?"

"I don't know."

"Don't you know what they did in your home a year ago?"

"No, sir."

In the other deposition, a lawyer asked: "Did any company that you were ever associated with attempt to maintain the property known as Rainbow's End Condominiums (one of the time-shares)?" Zelin didn't answer.

"Do you understand that question, Harvey, when he says 'maintain'?" another lawyer asked.

""What time is it?" Zelin responded.

"It's a quarter until 12. Do you understand what he means?"

"No," Zelin answered.

Epilogue

The government investigation into Zelin's tangled finances extended over three years. In February 1990, he was indicted on charges of making improper payments to Martorelli, head of the Operating Engineers Union in St. Louis.

The payments to the union official included $5,695 in cash and a television antenna system valued at $1,272. The government alleged that the payments were made to ensure labor peace on his projects. Members of the four unions were threatening to strike because funds had not been paid by Zelin into their welfare funds and Zelin wanted Martorelli to intercede in his behalf.

The next month, Zelin pleaded guilty to the charge involving Martorelli and was placed on three-years' probation, fined $1,000 and ordered to do 100 hours of community service.

Martorelli was also indicted. A month later, he pleaded guilty of accepting the payments. He was sentenced to two years' probation, fined $1,000 and ordered to perform 240 hours of community service. The next month he was promoted to an international representative for the International Union of Operating Engineers.

Martorelli had an explanation for the money he had received from Zelin. He had taken out a bank loan to finance a restaurant owner at the lake. Zelin had expressed interest in acquiring the restaurant and had agreed to make the owner's loan repayments to Martorelli. Zelin later withdrew his offer. Martorelli said the money he had received from Zelin represented loan repayments Zelin had made. He did not explain how he had acquired the television antenna system.

Zelin also was indicted for income tax evasion. The indictment said that he owed the government $125,000, including interest and penalties. It alleged he "grossly understated his personal income on his federal tax returns," one year reporting income of only $6,000. He was sentenced to six months in prison.

When interviewed by a reporter shortly after his indictment, Zelin said he still couldn't understand why his enterprise at the Lake of the Ozarks had failed. "I guess it was just economic problems," he offered. "Comp-Tech was a very positive company."

In the end, many questions about the financial dealings of Harvey Martin Zelin would remain unanswered, including the elusive one: From where did the money come and where did it go. As a businessman put it a few years later:

"Every once in a while you'll hear somebody say, 'Harvey's gone and the lake's back to normal'."


Information for this article was obtained from stories by this reporter and others published in the St. Louis Post-Dispatch.

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