Byzantine Land Fraud

In Florida, where land scandals date back to the 1920s, state officials have uncovered what could be the biggest and most Byzantine fraud of them all. As many as 80,000 investors and buyers of lots may have been bilked of $1 billion by development companies and mortgage brokers in Southern Florida. According to investigators, the Ponzi-like scheme worked this way: the developers bought nearly worthless tracts of land, subdivided them and sold homesites at inflated prices; they used the proceeds to pay high interest on bogus notes sold to investors under a false claim that the notes were secured by first mortgages on the homesites. When the recession slowed lot sales, many developers defaulted. Investors who tried to foreclose discovered that the real first mortgages were held by banks and other original lenders, so that they had no claim. Last week TIME Atlanta Correspondent Jack White talked with victims and investigators in Florida. His report:

Many of the victims are self-admitted patsies, whose usual wariness evaporated in dreams of heady 12%-14% interest. "Sure I was a sucker. I thought I could double our money," concedes Philip Profita, 60, a Fort Myers machinist who bought $21,000 worth of promissory notes from now defunct Homestate Investments Inc. Even though a local banker warned him against it, Floyd Campbell, 69, a retired service engineer, invested $35,000 in what he thought was first mortgages in a Continental Investments Inc. development. "The banker said he couldn't afford to pay interest like that," Campbell recalls, "so I said what the hell." Many victims were lulled into a false sense of security by newspaper advertising. One of Homestate's ads read, 10.85%-12.85% EFFECTIVE RETURN . . . EVERY DOLLAR INVESTED IS 100% SECURED BY FIRST MORTGAGES AND CONTRACTS FOR DEEDS.

According to the victims, state authorities might have stopped the bogus deals long ago. In April 1974, Richard Booth, then an assistant state attorney general, outlined the schemes to four state law-enforcement officials and warned that they could result in "the loss of millions of dollars to many innocent parties." Little action was taken on the warning. Instead, complaints appear to have been bucked from one state agency to another, while each tried to determine if it had jurisdiction. Last week State Representative H. Paul Nuckolls called for a legislative investigation of the "coverup" by agencies.

Assistant State Attorney Louis St. Laurent has begun probing alleged security violations by 36 interlocking development and securities sales companies that did business in the Fort Myers area. By his estimate, investors in Lee County alone were bilked of $50 million. The loss by noteholders throughout the U.S. could reach $350 million. Even that sum could be dwarfed by the losses suffered by people who bought lots. In many cases, developers sold lots for about ten times the $200 to $400 they had paid for them in new "developments" that could not be built because they are partially under water even during the dry season or zoned for agricultural purposes.

Until last week, state officials had taken only one case to court. During the proceedings, Equitable Development Inc. of Miami Beach, which had sold some $8 million worth of notes to 700 investors, agreed not to sell any more without the state's consent. Controller Gerald Lewis is now seeking to have the firm put into receivership. Equitable President Bernard Horowitz says the state is indulging in a "witch hunt" and claims that "all land-development companies work in the same fashion."

Many prosecutors contend that civil actions of the kind brought against Equitable are ineffective. Joseph D'Alessandro, state attorney in Fort Myers, says the companies involved "just take off one hat and put on another." Last July the Securities and Exchange Commission forced Homestate to stop selling notes, but within a few days, three of Homestate's officers had opened new securities-sales companies. Apparently the authorities will use more forceful tactics now. At week's end they were preparing criminal prosecutions in both West Palm Beach and Fort Myers.

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