Deals we didn’t Do: The $1B ATM Ponzi Scheme

Welcome back to the Invest Like a Billionaire podcast. Today is going to be fun. We've got some of the Aspen leadership team, Bob Fraser, Jim Maffuccio, joining on this episode today. We're bringing you our second episode in a new series we're doing called Deals We Didn't Do. So the last one we did got a lot of buzz. It was talking about preferred equity and when to run like hell from it. So you want to check that out if you haven't listened to it yet. Today we're going to talk about another deal that we really saw a couple of years ago. And there's a lot of buzz around this. There's a lot of intrigue around it. And we're going to break down the whole story of how this happened. Now, At Aspen, we talk a lot about the deals that we do, but we do a very small fraction of the deals that come across our desk. And looking back, we're very grateful we never stepped into this one, though Bob and Jim are going to share some more personal story because the deals that we do at Aspen has a whole different framework and decision-making matrix than what my investment personally. Sometimes we'll invest in things personally just to try it out, see if it, you know, what they say it's going to be. In this case, it did not work out. So this is all about the ATM fraud scheme that has now come to light really a few months ago. And rewinding the clock back to when we first were presented this deal a few years ago, we're very intrigued. But over time, there were a lot of yellow flags, a lot of red flags. And as it's come out now, it appears that it is a Ponzi scheme, or at least a pseudo Ponzi scheme. And we'll get into what that means later. But with that, Bob and Jim, glad to have you back on this series. This is going to be fun.

Yeah.

Thanks a whole lot, Ben. You know, you got it entitled, you know, Deals We Didn't Do. But the fact of the matter is, is deals we did do, just that you didn't do and our investors didn't do, thank God. But right.

Yeah. So I think let's talk about that. Right. So Let's rewind the clock. Obviously this was getting a lot of buzz. It came through probably 3, if not 4 or 5 different people that we knew, kind of third-party capital raisers that were all presenting this deal. And for me personally, I was pretty intrigued by it because these are ATMs and the idea is they're going and buying ATM machines. It's a very high cash flow business, supposedly. And cash is still used by a lot of especially lower-income folks. And it was a high-cash business. We're giving out really strong returns. In fact, they had a fixed return of 24% IRR basis. So it was a very high return. It had a long track record. And for me as a former commercial banker, I actually had underwritten and did a deal on an ATM business. It was a purchase of an ATM business, a small portfolio. And I remember seeing the cash flows are being generated from this. So I was immediately intrigued by it, but I'd love to hear from your guys' perspective what your recollection is of, you know, what was intriguing to you, what eventually made you write a personal check just to kind of dip a toe into this investment.

I actually remember I was speaking at a conference years ago, the first time I ever heard about it, and talking about what are the best investments to be making in this time. And literally one of the speakers, one of the panelists up there, respected panelist, said, there's only one investment you should be making right now. And it is these ATM funds. This is the best investment in the world. It's the only one you should be making. I'm like, what? So I actually looked into it a little bit and saw the super high returns. And I remember turning to one of the guys repping the fund, you know, this was several years later. And I said, how is this not a Ponzi scheme? I guarantee you this is going to turn out to be a Ponzi scheme, you know? So, And it was more tongue-in-cheek, but there was a lot of warning flags. And for me, I wasn't doing the same level of due diligence on my personal investments as I would do on an Aspen investment. You know, when I go take money from third-party investors, the level of due diligence and confidence we have to have is pretty enormous. But a lot of times I will dip a toe personally, and it really is more like, I want to see if there is anything here for my investors. So I'll personally take the risk. Before I will go and think about raising money from investors. But there were some significant red flags.

Well, before we get there, I think a lot of these things are not black and white. There's a reason I think they raised $1 billion of equity from investors, $1 billion. So this was something that was not just a small mom-and-pop thing that showed up in your inbox and you're like, "I'll take a flyer on it. We'll see." this was being from multiple angles, hey, this is great, this is awesome. Had a long track record. Let's first talk about the things that were attractive about it because a lot of times it's not so easy to say, oh, this is definitely a bad deal. There can be this nuance.

Yeah. High returns, monthly cash flows, and yeah, long track record.

There was depreciation. I remember a lot of write-off.

And if the cash flow too, if you think about it, the cash flow is not coming out of one asset in one location. I mean, it's coming out of tens of thousands, supposedly, machines. So if a machine breaks, you know what I mean? It's like when we're in apartments, if you have 10% vacancy, you're in trouble. But, you know, are 10% of the machines all over the country going to stop producing cash flow that they've been supposedly consistently producing? So from all of that standpoint, comparing it to some of the other verticals, yeah, everything makes sense except for the kinds of returns they were projecting and paying And like Bob said, from the beginning, I remember we had conversations that it smelled like a Ponzi scheme. It's like the kind of thing you would do if you were inventing a Ponzi scheme, but the people upstream that had done pretty deep dive due diligence, including, I believe, a bank, you know, underwriting this at some level. And it just, you know, you kind of keep your eye off the ball and it smelled like a Ponzi scheme and, you know, had some of those warnings and lo and behold, Yeah.

And I think, you know, there's obviously the attractive dynamics of the deal itself, but I will say the other attractive thing is that it came through a lot of what we would've perceived trustworthy sources that were saying they had done due diligence, right? And this is like, if you look back at the Bernie Madoff Ponzi scheme, for example, and you know, I watched the Netflix series, I'm sure a lot of people have as well. It's very, very interesting to see the level of confidence that he was able to build from the SEC. The people that are supposed to regulate these things were actually giving him the rubber stamp of approval. So it's sometimes we use trustworthy sources or credible sources that we think are that as a proxy for, well, if they think it's okay, then I think it's okay. It creates a herd mentality. Right? And so I think this is, in some ways it was attractive thing, but also can be a yellow flag. It can be something that you need to ask some harder questions sometimes. So Bob, you want to start sharing some of the yellow flags that you started seeing as you started digging in?

Yeah. And the reason I finally got in was, yeah, it was a guy who was a good friend of mine, was one of the main guys repping this. And I really trusted the guy. I mean, he's an honest man and he looked right in my eyes that I did the due diligence personally. I verified this. And I'm like, you did, because if you actually run the numbers of a 24% IRR and you run that out for 10 or 20 years, I mean, the returns are insane. And that's one red flag. That's one warning sign of a Ponzi scheme is very, very high returns and high cash flows. And especially, you know, that's after paying presumably the profits of the company and paying all these capital raisers. For raising capital. But for me, the reason I finally invested was because of my friend. I mean, that was it. That was the only reason. Even though, I mean, all my yellow flags, all my red flags were blinking, were going off. I'm like, ah, you know, I'm going to ignore everything. And because of my friend, I'm going to put some money in. And that is actually a sign of a lot of Ponzi schemes, right? Is that they have trusted third parties. So I'm familiar with some early Ponzi schemes that happened years and years ago. And what they would do was the fraudsters would hire, in this case, a bunch of pastors. So these were people who, by their nature, engendered trust, right? And they had relationships. And these pastors were utterly convinced. They were completely clueless that anything was not 100% up and up. They didn't know. And one, they're a little bit unqualified, right? What's the pastor doing ripping an investment, you know? But they were utterly believable. They could have passed a million lie detector tests. Why? Because they weren't doing anything fraudulent.

They weren't lying.

So they were utterly believable and just engendered trust just by their personality and their character and reputation, everything. And so they're basically credible frontmen. And same with— there was a carbon capture deal, and I remember meeting this wonderful young man at a conference who was repping this carbon capture that turned out to be a Ponzi scheme. And he was just the most delightful man, but again, a little bit out of his depth, right? Not necessarily qualified for that which he was repping, but utterly believable. The other thing that was probably the biggest red flag to me besides the returns was they would not share numbers.

Yeah.

And they would say, oh wait, it's, you know, proprietary information. I want to see a list of ATMs. I want to see production of these ATMs by location. I want to see third-party due diligence reports. I want to see an audit. I want to see certainly financials, right? And there was nothing. It literally was, trust me. It literally was, trust me. And I'm like, come on.

I remember this because it was the biggest red flag to me. We're looking at this and it was, a different answer depending on who you asked, right? Because they would say, well, we can't reveal the PIN numbers or locations of the ATMs because then they're a target for a robbery or something. And so it kind of makes sense, but then also at the same time, then just redact the number, redact the location. Like, there's all these responses that seem to make sense on the surface, But the only answer you would get was, well, if you fly out to— I think it was in Pennsylvania as the headquarters— we can take you into like the back room and we can give you some paper copies. And, you know, you can't leave the room with anything.

But what about financial data? I'm not asking for anything proprietary. I'm asking for financial data. What's your balance sheet? What's your P&L? Show me an income statement. That's all I'm looking for. And I want to see trends over time and I want to see— and it's just numbers. And I mean, if you were a lender, then you're a banker, right? So if somebody comes to you for a loan, this ATM company comes for a loan and says, oh, we're not going to share, what's your answer going to be? We're not going to share any data. We're not going to share any financial information. You're like, I mean, are you freaking joking?

Let me redeem us a little bit on this because you said a couple things. One, you talked about the middlemen or the people that were promoting this. Then you gave examples of pastors promoting business ideas. The fact of the matter is the people that we really kind of rode on the coattails of their due diligence, they really are legitimate, sophisticated players. And I'll just personally say I still trust those guys and I would still invest alongside or with the people that were involved, at least in my transaction. But I just would not get involved with deals that I don't understand, that I can't go put eyes on the— that's why I like real estate, you know. If someone tells me they've got 100,000 ATM machines around the country, I can't go touch every one of them, and neither can the people whose due diligence I trusted. But from what I understand, the intermediaries on this did a ton of real due diligence, including a bank was involved. And so, I mean, this wasn't just the guy that's out promoting and you can sniff out that he's not very deep in the investment world. These are guys that are very deep in the investment world. So I don't want to say anything that casts any shade on those guys.

Okay. Here's what they didn't do. And they're my friends too, but here's what they didn't do. Okay. You and I, Jim, run a giant income fund, right? And that income fund is audited every year. Now you don't deal with the auditors. But I deal with the auditors and you know what they do? They literally get all of our bank statements and they reconcile those. They go talk to our loan servicers and they verify that everything adds up. And then they go test a bunch of loans. They go pick, they go do a random selection of loans and they, you know what, they do it every year. They do it every year. And that's what didn't happen. So what happened is the due diligence that happened happened 8, 10 years ago. And actually, most Ponzi schemes don't start as Ponzi schemes, right?

Exactly.

What happens? You start to get behind. Your outgoing cash starts to overtake your incoming cash, and you just fudge numbers a tiny bit, and you think, I'll make it up next quarter. But once you start, there's no coming back, right? And that's what happened. So I think 8, 10 years ago, it wasn't a Ponzi scheme.

I think what most people think of when they think Ponzi scheme is a con artist who's going out with the intention of defrauding people from day one with a false business plan. But in this case, it appears that there was a legitimate business, like they did actually have real ATM machines. So to your point, most Ponzi schemes actually start as legitimate businesses, but then they start to get behind. And now you're in this, you know, rock and a hard place where you have to keep keep the fraud going or you have to throw your hands up.

So let's paint a picture. So this guy, he had a, you know, maybe he had $50 million in ATMs and they're working great and he had $50 million in investment capital or whatever. All of a sudden one of these big capital raisers comes and dumps another $50 million on him and said, here. And then so the operator's going, oh my God, this is awesome. But then he is like, what do I do? I can't buy 50 million ATM machines in a month, you know? So, but you're not gonna refuse the capital 'cause he's been so successful at putting money out there. All of a sudden the investment went viral a little bit. He gets investment interest. Now you've got 24% per year of cash going out of the business on the $50 million you just accepted of new capital, but you didn't buy ATM machines. You, you go start to try, but it takes 6 months and 9 months to go buy some ATMs. Meanwhile, you still got all that 24% every month going out, going out, and all of a sudden you hit a cash crisis where you're distributing more in a month than you took in in profits, you go, oh guys, it's all right. It's all right, dude, because I'm going to go, I'm going to be buying these ATMs. And you start doing that and then you start taking investor capital and you send it to other investors as investor distributions. That's a Ponzi scheme. Just poor operators, right? People who don't know how to say no to capital, people who suck at operations. You know, all of a sudden they just, they don't have the staff or whatever to go do the acquisitions and the due diligence. And they didn't think about scaling, how to scale this. They're not doing the repairs. So a bunch of these things go offline. They stop paying some bills, more go offline, so their income drops. But meanwhile, their investor outflows don't stop. What started as a fine little business becomes a complete full-on Ponzi scheme.

And then a situation like this beyond even those dynamics where now you're raising money with your left hand and paying it out with your right hand, you know, just some money coming in the door. The problem with this one is, and I think where it maybe turned a little bit dark or maybe darker, is apparently some of the machines and a pretty good percentage of them, quote, disappeared or got encumbered by creditors that were pressing a little bit harder because they weren't getting the promised 24% returns. So it's a perfect model if you want to create a Ponzi scheme, because it's like, who's going to know if we encumber 10,000 machines you know, to get this guy off our back. And then now you're really in trouble. Now you're not only upside down and because you're raising more than you can deploy, but even what you're raising against, you don't have that asset anymore. It's like showing up at the apartment building you didn't realize, and somebody is like, cut off half the building and moved it down the street. It's not even our collateral anymore. So by the time everybody realized it was fraud, man, the discovery isn't a pretty thing.

Yeah. And you think about at a 24% rate of return, they're basically, if they're paying that out annually, they don't invest that capital, that money's gone in 4 years pretty much, right? Not including the overhead that they have to pay with that. So it's probably gone in 3 years. This is the part to me from a financial standpoint that I look at, because this is so weird to me too. It was 24.1% annualized return. I was never thinking Why the extra, you know, 10th of a percent or whatever? It just, it always felt weird to me that it was like this predefined rate of return that was a random number, which I don't know if there's any correlation to makes it a Ponzi or not, but it was weird. And then as we started digging in with these third-party promoters, we found out they were also getting paid 10% on the capital that they were raising for this deal. And so now you think, okay, for every dollar that comes in, they're paying out 34% on that capital before they ever pay overhead. And that's a really high burn rate, right? So what business can generate— you have to probably generate 50% returns to be able to pay overhead and to pay all that load just to have a break-even business. There's not many businesses that generate 50% returns. And then you add in the issue of scale and having all this extra capital that they're getting. And the rest is kind of history at this point.

You know, you always look down in the rearview mirror when you look at a deal that you did that didn't go right. But, you know, this is how we learn, too. And that's why we're doing this podcast. And again, that's why, to Bob's point at the beginning, it's like we wouldn't have even thought about putting this deal out on the Aspen platform and endorsing this to our investors. So Bob said, you know, I wouldn't use somebody else's money to do that. And the thought occurred to me like, Well, maybe I should have a conversation with my kids before I invest, because in a sense, I took part of their money, right? So I did invest other people's money. But anyway, you know, thankfully we didn't bet the farm on this. You know, I mean, it wasn't anything to sneeze at, but my investment was a very low six-figure investment. And yeah, I'd like to have that back, but it didn't affect what I ate for dinner one single day. And we did get— I mean, before the Ponzi caught up, we did get about, as I recall, like 45% of our initial investment did come back in. Through these monthly payments before they stopped coming. And that's how we knew, you know, okay, we didn't get April's payment. I wonder what went wrong. And oh, and there was always an excuse and this and that. And, you know, by the time a few months of that went by, it became pretty evident that this thing had turned pretty dark.

Yeah. So what would be some of the takeaways that you would say, or that you would do differently going forward, or what are some learnings that you've got from this?

You know, both Bob and Jim here, you know, I've just become a much more disciplined investor. I mean, if there's any red flags, I'm just not doing a deal or even yellow flags. It's like, it's just, there's too many really fantastic deals out there and anything that has yellow flags in it, I'm just not doing. So the big takeaways are just, it doesn't matter if your friends are doing it, don't do it. And just to really become disciplined, be a disciplined investor. In the book, I lay out really how to do due diligence, how to look at numbers, how to see the red flags, and really how to allocate your portfolio. Portfolios. And I'm just going to be a disciplined investor. I'm going to use the models that are the proven models that make your portfolio work. That's really my big takeaway. Hey, I just, I just ran the numbers on a 24% return. So if you take a $100,000 investment, 24% return for 30 years, do you know what you end up with? $63 million. And on 40 years, $545 million.

Well, I think they capped us at 10 though, right after 10 we were done or some, some amount. So yeah.

So $100,000 investment turns into half a billion dollars in 40 years. It's like, it's just, it's not sustainable. How can $100,000 in ATMs produce that much over 40 years? It just can't. It just can't. And, and so the numbers were just too good to be true from the beginning.

I think to your point on discipline too, I think this is another important thing to think about as investors is Obviously, discipline in the due diligence, discipline in trusting your gut, discipline in asking the questions that maybe no one else is asking. But the other side of it is that you don't always know. You don't always have 100% confidence going in, and you guys didn't, but you still invested. That's not the end of the world. It doesn't make you dumb. It doesn't make any of us, you know, faulty for trusting people that we thought were credible and still do think are credible. But you also measured your bet. In accordance with your confidence level, right? Because I have heard stories of people that invested in this deal. They mortgaged their house, they pulled money from all places they could find and went all in because it sounded like it was the best deal ever. And 24% return, I can go retire off this. I don't have to work anymore. And that's where I think it gets really dangerous, right? And there's always risk in investing. There's no guarantee you're always gonna get your money back, but you can have discipline in how you allocate and how much you allocate. In accordance with your confidence level. I think that's just another important layer to throw in there because there are going to be deals that you likely will invest in that won't work out. But if you didn't put in, you know, half of your life savings into it, then it's not going to be a complete wipeout.

Yeah. And don't make a more than 5% bet on anything. Don't put 5% of your net worth in any deal and under no circumstances put 10% in, under none. Zero circumstances ever, ever, ever. And that is, even if this wasn't a Ponzi scheme, you still don't want to do it. And because, okay, what if they have a partnership blow up and the whole thing evaporates? What if there's a regulatory change, right? Somebody starts to regulate ATMs and they become something, right? What if tariffs happen or a black swan event or something that you can't foresee, right? No one foresaw the dot-com crash. No one foresaw the great financial crisis. No one foresaw, you know, COVID, right? You don't know what's going to happen and you want to spread your risk out, right? Among multiple sectors, multiple asset classes. That's just smart. And the billionaires, that's what they do. Even if this was real, they would never put all their money in one deal like that, right? You just don't do it.

Yeah. I'd say the takeaway for me, all of that, and it really gets back down to sometimes simple is the best. I understand real estate and I understand hard assets. So even like we've invested, we've done really well in some oil and gas investments. There's an actual well there with actual hydrocarbons, with pumps and maintenance crews and everything else. And we can see the cash flow and we can go touch the thing. And the same thing with real estate-backed investments, you know, so, you know, how can you do enough due diligence in an asset class when you don't even really know what all the right questions to ask are? And you can't go put your hand on the collateral or what backs it up. So I'm kind of done investing in black boxes where I can't kind of understand the inner workings. So I like real estate, I like oil and gas. I love what we're doing in the industrial sector. You know, it's just this big box sitting out there and one of them's being used by a tenant and the other one just got sold. So, you know, I don't have to wonder and guess where it's at.

Love it. Well, hopefully listeners, you guys got a lot out of this. And, you know, sometimes these painful lessons can actually be the best times to reflect and learn from what will we do differently and what are the things that we didn't see, but in hindsight have become clear. And hopefully, you know, this series, you guys are enjoying it. We always will take suggestions for new things that you guys have if you Want to share those at thebillionairepodcast.com. Be sure to rate and review the podcast if you can. It helps us get this podcast in front of more people. Appreciate you guys listening.