”Michael Douglas is an immature Christian. When and if he shows evidence of true repentance, he will be welcomed back into the church, just as any fallen brother or sister in Christ would be welcomed back.”
-Pastor Doug Halsne, Lakeland Evangelical Free Church, Gurnee
Last year, Michael S. Douglas earned $2.4 million, so it surprised few who knew him that he often commuted to his Loop investment firm by helicopter, that his Antioch home was equipped with an indoor swimming pool, or that he traveled to places like Madras, India, doling out huge sums to favorite Christian charities.
Indeed, so profitable were his investment schemes that Douglas made a $1.6 million interest-free loan in 1989 to a stock options trader so he could buy and sell contracts at the Chicago Board Options Exchange. In 1988, he donated $150,000 for construction of a chicken hatchery for the poor in Kampala, Uganda. He started a side business, purchasing 38 collector automobiles at up to $120,000 a car.
”The investor money was coming in too fast-so fast, in fact, that I couldn`t find a place to invest it,” the soft-spoken Douglas reflected during an interview in his current home, the federal Metropolitan Correctional Center in the Loop.
Dressed in a government-issue blue jump suit and canvas shoes, Douglas talked about D&S Trading Group Ltd. and two other now-defunct companies that he once owned and which, he admits, defrauded about 300 mostly small Midwestern investors of the better part of $21 million.
”I could see the handwriting on the wall, but I did not want the train to stop. The money`s coming in at $2 million a month, and I`m stretched nine ways to Sunday, $15 million in the hole at one point,” he said.
”People want to know how I slept nights. It was easy, because I am a winner. I`m goal oriented, and in my mind I`m saying, `One more trade. I can make up the difference. I can be all things to all people.` ”
Douglas is awaiting disposition of the federal charges filed against him for engineering what authorities say is one of the largest investor scams ever put together by one person in Illinois. Meanwhile, a court-appointed receiver is suing to recover much of the $2 million-plus he donated to charities.
Douglas says he will plead guilty to his wrongdoing at a hearing Thursday and is hoping to strike a deal with Assistant U.S. Atty. Matt Bettenhausen on how much prison time he should serve. Bettenhausen declined to comment, but Douglas says that under a tentative agreement with the government, his sentence will be 12 to 15 years in prison.
In the meantime, the husky, sandy-haired defendant is helping Steven S. Scholes, a court-appointed receiver, determine how much investor money remains in the coffers of his financially shattered companies-D&S Trading, Analytic Trading Service Inc. and Analytic Trading Systems Inc. So far, Scholes has identified or recovered cash, real estate and other assets worth about $7 million, but there is little hope of finding much more.
Moreover, Scholes and an accounting firm have been paid more than $1 million for their work and expect to bill the estate another $500,000 before the case is ended.
Douglas kills time in the correctional center scanning the financial pages of the newspapers, watching stock reports on daytime TV and working out in the weight room twice a week. In keeping with what he says is a deeply religious bent, the Roman Catholic-turned-evangeli cal Christian leads a Bible study class for fellow inmates on Friday evenings.
Before his most recent incarceration, Douglas says he enrolled in a Christian-sponsored counseling center in Wheaton, where he was diagnosed ”as having a controlling nature,” a trait that accounts for an abiding compulsion to create investment fraud schemes.
Talking freely about his criminal past, which includes two prison stretches for defrauding two employers and former Chicago Bear quarterback Bobby Douglass of more than $100,000, is therapeutic, he adds.
”This whole business has been both bizarre and a tragedy, there`s no question about it. Many of these investors trusted me because I am so religious, and now they are thinking, `If you can`t trust a Christian, who can you trust?”`
The story of Michael Douglas and his three companies, which operated from a suite of fancy, computer-equipped upper-floor offices on LaSalle Street from August 1987 until November 1989, when they were shut down by federal court order, is indeed bizarre, and a tragedy for his investors.
During his time at the helm of the three companies, Douglas donated $2.2 million to a Christian retreat in northern Wisconsin, a 150-bed children`s hospital in Haiti, the Trinity Evangelical Divinity School in Deerfield and more than a dozen other charities and not-for-profit entities.
Scholes, the receiver, contends the contributions constituted a fraudulent conveyance by Douglas, because the money was not his to give, and is suing for a return of most of the donations.
Named in the suits are Lake Forest Academy, where Douglas attended high school; Lakeland Evangelical Free Church in Gurnee, of which Douglas was a member and to which he donated nearly $300,000; and more than a dozen other entities, bearing such names as the Hindustan Bible Institute Inc., Food for the Hungry, World Vision Inc., Youth Ministries of Haiti, Heart Cry International and Proclamation International.
Lakeland Evangelical recently reached a settlement with Scholes, in which the church will pay the receiver just over $75,000 in three installments and surrender several assets it acquired with the donated funds. They include a VCR, two computers, a television and a tractor.
The receiver also is seeking return of nearly $1 million in mostly interest-free and undocumented personal loans Douglas made to more than two dozen friends and business associates and some strangers, who, as Douglas puts it, heard he ”was an easy touch.”
Also under scrutiny are Presidential Aircraft Inc., a Waukegan aircraft leasing firm that Douglas says once had a lucrative contract with the FBI to fly agents in the course of official investigations; a $1.2 million home construction firm called Westlake Building and Development Ltd. in Gurnee; and a $350,000 antique automobile company the defendant set up, called D&D Auto Investment Inc.
As Douglas awaits his fate, scores of men and women who invested money with him struggle to put their lives back on an even keel, some not so successfully.
Among his victims are fellow members of the Lakeland church, pensioners, an airline pilot, doctors, attorneys, small businessmen, theology students, his father, mother and other family members, and nearly 300 others, many of whom are now chained together by financial ruination and unyielding remorse for the day they first laid eyes on Douglas.
”I`ll tell you, you carry this sickness, this despondency, like the world is gone. Nothing makes any sense. You feel like you are working for a nickel to pay off a $10 bill you owe,” said one.
”Any inheritance I had planned on for my kids, not to mention their college education, is gone. . . . I refuse to file for personal bankruptcy. I have too much pride and too much respect for my creditors.”
Like so many others, the victim, who operates a small business along the North Shore, declined to speak for attribution. Like the others, he found it difficult to discuss his dealings with Douglas without lapsing into tears.
Some investors have sold their homes to pay off second mortgages, credit- card loans and other debt they incurred in order to raise funds to jump on the Douglas arbitrage-investment bandwagon. Retirees have seen life savings wiped out.
Many victims talk of filing personal bankruptcy petitions in federal court, while others apparently have chosen to solve the seemingly
insurmountable financial woes brought on by Douglas by seeking anonymity, moving without leaving a forwarding address.
Douglas` decision to cooperate has helped authorities solve many questions about how a twice-convicted felon was able to raise an estimated $21 million in investor funds and what he did with much of the money. Despite his candor, however, many aspects of Douglas` helmsmanship at D&S and his other companies remain unclear.
Where, investors want to know, were securities enforcement officials from the Illinois secretary of state`s office and the Securities and Exchange Commission during the 27-month period the defendant peddled unlicensed securities?
How, investors ask, were Douglas and Larry Schroeder, who had been convicted of a drug-related felony and whom Douglas met in a prison work-release program in Aurora in 1987, able to co-found D&S and collect millions of dollars without investors becoming aware of their criminal backgrounds?
Most important, how is it that when state officials finally shut down D&S in September 1988, the defendant was able to reopen-using the new name Analytic Trading Service Inc.-and operate for another 14 months, raking in another $14 million, before Analytic was closed by federal court order?
Pat Holland, SEC deputy regional administrator, noted that Douglas was never registered with the agency, nor did he attempt to do so. Moreover, she said, when the SEC learned that Douglas was peddling unregistered securities, the agency immediately sought an order from federal court Judge James Alesia to shut Douglas down and seize his assets.
A spokesman for the secretary of state`s office noted that the office moved aggressively against Douglas early, and on April 1, 1988, obtained a consent order against the defendant. Under it, Douglas agreed to return investor funds and never sell securities in the state again.
Douglas, who turns 37 in October, was born in Manitowoc, Wis., the youngest of two brothers and two sisters. His father, David, prospered as a manufacturer of plastic containers for household use and became a
multimillionaire later in life, when he sold out to another home-products firm.
Douglas graduated 6th in a class of 86 from Lake Forest Academy, a private boarding school, in 1972. He was captain of the track team and starred as a football linebacker.
In the fall, he enrolled at Drake University in Des Moines. A short time later, he married his high school sweetheart. He left college two years later. For the next six years, he worked for several Chicago area banks while attending night school at the College of Lake County and Loyola University, eventually completing, he maintains, enough courses to qualify for a degree in finance.
As a commercial loan officer at the Bank of Ravenswood in 1980, he had his first brush with trouble when he was fired by supervisors who accused him of stealing a $2,000 cash deposit a customer had left on his desk. The charge was never proved.
The same year, a Lake County grand jury indicted Douglas, alleging theft by deception, a charge that arose from two bad checks totaling $99,000 he had written to former Bear quarterback Douglass. He pleaded guilty and served 18 months in prison. On his release in 1983, he took a job as a sales manager for Lake Shore Computers in Lake Forest. Later, he was a sales representative for Plansmith Corp. of Palatine.
Douglas was returned to prison in 1985 for two years after pleading guilty to charges outlined in two indictments returned by grand juries in Cook and Lake Counties. The charges, theft by deception and illegal use of credit cards, stemmed from his employment at Lake Shore and Plansmith.
By now, Douglas was divorced from his first wife, with whom he had three children, and married a second time. They had two children, but they were divorced last month, because, Douglas said, ”When my wife found out about all this, she simply could not fathom how I was able to commit such a huge fraud and keep it completely hidden from her.”
About three months after his release from prison in early 1987, he got a job writing software programs for San Gregorio Partners, a Chicago Board Options Exchange member firm, where he learned stock options trading. In August of that year, he and Schroeder opened D&S Trading, offering investors huge returns through an arbitrage strategy that purported to capture differences between prices in blue-chip stocks and options on those stocks.
Schroeder declined to be interviewed. According to court documents, Schroeder played a minor role in the affairs of D&S, leaving trading strategies and order execution exclusively to Douglas. Nevertheless, Schroeder received more than $200,000 in ”finder`s fees” and other payments from Douglas for investors Schroeder brought into D&S.
The investment, sold by word of mouth, stipulated that Douglas and Schroeder would receive a management fee equal to 25 percent of monthly profits. Moreover, investor losses were personally guaranteed by the partners, even though their combined net worth at the time was less than $20,000.
By mid-1988, Douglas had taken in about $6 million from 104 investors, but mostly had abandoned his promised arbitrage strategy, instead taking
”flyers” on stocks the defendant says he had ”carefully researched.”
Moreover, instead of segregating customer funds, a statutory requirement, Douglas had just two bank acounts, through which all funds flowed-a D&S account and one under his name.
About the same time, Illinois, Wisconsin and the SEC undertook separate investigations of D&S, firing off letters to Douglas and his attorneys seeking more information on his investment program and himself after receiving inquiries from a handful of investors. In September, under the auspices of Illinois securities fraud officials, Douglas agreed to be barred permanently from selling securities in Illinois and made a full refund to all his clients. But at the very moment he was closing down D&S, the defendant admits he already had opened Analytic Trading Service-and Analytic Trading Systems, a software company-which would go on to pull in about $21 million from 300 clients, many former customers of D&S. As Douglas puts it, he ”was scoring right and left,” and boasts of the $4.2 million profit he made on 42,000 shares of RJR Reynolds Inc. stock he bought and sold during a three-week period in February 1989.
But Douglas` trading fortunes began to fade, and beginning in mid-1989 he began incurring huge losses. The SEC again moved against the defendant and on Nov. 13, 1989, obtained an order from Judge Alesia that permanently closed the firm and froze Douglas` bank accounts and other assets.
Douglas plans to plead guilty Thursday when he appears before U.S. District Judge William Hart. When he is sentenced, he says he is hoping for some leniency, because, as he puts it, ”At least I didn`t take the $10 million and run, like (a character played by) Eddie Murphy, to some place like Rio.”
