Rugged individualism often goes hand in hand with cutting corners. Washington State's second-largest city is a prime example.
There's the diploma mill that sold 10,000 phony college degrees to buyers in 131 countries. The $31 million parking-garage bond hustle that snared fund firms Vanguard, Nuveen and Smith Barney. And the many questionable enterprises around the continent that turn for legal and accounting services to firms in the heart of the Pacific Northwest's Inland Empire.
Welcome to Spokane, Wash., a metropolitan object lesson in what can befall the unwary when rugged individualism is revered and consumers unsuspecting. The area's 460,000 residents make it the most populous region in the 1,400 miles between Seattle and Minneapolis. Situated between the Cascade and Rocky mountains, the area enjoys a good climate, great scenery and a colorful tradition. There's some evidence bank robber Butch Cassidy spent his final decades hiding out in Spokane before dying in 1937, the same decade Dashiell Hammett's novel, The Maltese Falcon, had a runaway husband popping up there.
The name (pronounced spo-can) means children of the sun in a Native American dialect. Children of the scam seems equally fitting. Some recent antics: A father and son were sentenced to prison for selling nonexistent railroad engine parts worldwide over the Internet. A Spokane man began serving a five-year federal sentence for his role in a $50 million Colorado Ponzi scheme. The SEC sued Spokanite Craig T. Jolly and his Quest Holdings, alleging Jolly was running a Ponzi scheme that collected $4 million by promising a low-risk return of up to 20% a month. He had no comment.
The SEC won an antifraud injunction against International Broadcasting Corp. ( IBCS.OB - news - people ) (now known as Copper King Mining) amid charges its radio network falsely touted its financial prospects. Another Spokane firm, BlueStar Technologies, settled a securities fraud case in California (without admitting anything) by making refunds to investors and paying $50,000 in penalties.
"It's like a runaway train," sighs Zan Deery, an investigator for the Spokane Better Business Bureau.
Con games are so much a part of the fabric that even an official City of Spokane press release carried a whiff of resignation last November when it warned that "another scam has come" to town. That one involved tricking mail recipients into cashing rubber checks and returning most of the proceeds to the sender.
"There's a lot of fraud here," says Marie M. Rice, head of the 60-member Spokane chapter of the Association of Certified Fraud Examiners.
Spokane has been infused with a Wild West flavor since its founding. The region was explored in the early 1800s and developed amid the gold and silver boom of the 1880s. After that trailed off, logging picked up the slack. Three railroads through town solidified its economy, and cheap electricity from the nearby Grand Coulee Dam encouraged manufacturing.
Dicey stocks are another longtime growth industry. Founded in 1897, the Spokane Stock Exchange was the country's last regional exchange devoted to questionable penny stocks when it was shuttered in 1991 amid SEC pressure.
Not that its demise stopped Spokane's stock touts from plying their trade. In January the SEC suspended trading for ten days in Future Canada China Environment, a Bellingham, Wash. firm whose over-the-counter shares soared from 92 cents to $28.50--a $1 billion market cap--despite the apparent lack of any underlying business. In its going-public prospectus last year, the firm said its legal counsel was Conrad C. Lysiak, a veteran Spokane securities lawyer who once served as the Spokane Stock Exchange's compliance officer.
After leaving the exchange Lysiak was censured, fined and briefly suspended in the 1990s by regulators after he was found to have been compliance officer for a brokerage office that committed fraud on his watch. Lysiak, whose client list has included a number of public companies, declined to comment to FORBES.
Two years ago the Public Company Accounting Oversight Board in Washington censured Spokane accounting firm Williams & Webster and individually suspended both names on the door after charging that they knew of financial problems at Utah insecticide firm Diatect International ( DTCT.OB - news- people ) but provided an unqualified audit opinion anyway. The firm now calls this "past events."
Lysiak and W&W teamed up to work for what became Arctic Oil & Gas. It had all of $155 in the bank, but its stock nevertheless rose 70,000% within weeks to $3.65 a share early last year. Investors, it would seem, were encouraged by the firm's claim of rights to 30% of all energy resources near the North Pole(FORBES, Feb. 11, 2008). In January Arctic, which now lists a California address, changed its name to Placer Gold Corp. Recent price: one cent.
Just what makes Spokane look like an overachiever in dodgy endeavors is a matter of debate. Some say it's the town's remoteness, or its proximity to the Canadian border. Another theory, posited by an academic study from an area college, is that economic success there is "more likely to be seen as an individual or corporate matter." Translation: Mind your own business. Maybe not helping is the century-old economic dominance of the Cowles clan, whose fourth generation runs, among many other things, the only daily newspaper and business weekly, a radio station and the NBC TV affiliate. The parking garage financial scandal, which ended when the city bought out the complaining bondholders without any single party's admission of wrongdoing, was a Cowles project.
"When you're visible, you're visible," says Cowles Co. Chairman Elizabeth A. Cowles. "We're proud of the role we play here."
One thing seems to distinguish Spokane con men from those in Salt Lake City, which likewise shuttered its penny stock exchange and has retained its reputation for chicanery. Spokane's seem to have fewer compunctions about preying on locals. Thus, convicted con man John E. Petersen was returned to prison for stealing from his 95-year-old aunt. Authorities warned about one man soliciting door-to-door for a kids charity but pocketing the proceeds. Suspected embezzlements hit Spokane's Meals on Wheels charity and an area ad agency.
The Internet diploma mill was run by Dixie and Steven Randock, both now serving three-year sentences. Degrees included those purportedly from Harvard University. The ringleaders' partners in crime were, of course, their customers. One was a Spokane deputy federal marshal seeking a promotion who knew what he was getting--and got convicted for it.
Source: www.forbes.com
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