Double Injustice
A con man squeezed $26 million out of 140 victims. Then a U.S. bankruptcy trustee squeezed them again.
By Peter Byrne
published: July 12, 2000
The fat man crept across an Orinda lawn in the early hours of March 30, 1999. Lifting the doormat, he slipped a letter under it. Then, turning heavily in the suburban night, Edward A. Mueller, age 35, plodded back to his parked car, pondering his next move.-
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Peter Byrne
Edward Mueller during a recent interview at federal prison camp in Sheridan, Ore.
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Jennifer Hale
A San Carlos home from which Mueller operated some of his scams.
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Jennifer Hale
A San Carlos home from which Mueller operated some of his scams.
"My world crumbled," Jewell later wrote. "I could no longer understand what was fact or fiction. I told my family everything."
Jewell's recognition that his son-in-law had bilked him of $20 million marked a turning point in an all too familiar story of American business life: Mueller, a 300-pound man with an interest in aviation, had played his family, friends, and business associates for suckers. After conning them out of their savings by promising to pay interest rates as high as 60 percent, Mueller went bankrupt, defaulting on the "loans" he'd received. Although the amounts of money involved were not insignificant, Mueller's brand of confidence game was, in essence, a common Ponzi scheme.
But if his scam was ordinary, there is something unique about how Mueller was finally brought to justice.
As the U.S. Justice Department took its sweet time pursuing Mueller, allowing him to fleece additional sheep while the terms of a plea bargain were being finalized, the victims of the con looked to the United States Bankruptcy Administration for relief. But instead of helping them recover their money, a U.S. bankruptcy trustee sued these same victims, alleging that they had charged Mueller excessive interest rates -- that is, that they had committed the felony crime of usury. The federally appointed trustee demanded that these victims -- people who had, in some cases, lost their entire life savings -- pay thousands of dollars more to Mueller's bankrupt estate, or risk imprisonment.
Brian O'Neill of San Mateo lost $51,000 to Mueller's game. Then, he had to pay $8,500 to the bankruptcy trustee to escape a usury charge. "It was like being run over and maimed by a truck," O'Neill says, "and then being sued by the truck's insurance company for damaging the truck!"
"I knew Ed Mueller since he was a kid," says Sheila Klopper, age 53, who supervised campus security at Palo Alto's Gunn High School in the early 1980s, when Mueller went to school there. "Ed grew up in a privileged home in the Los Altos hills. He was estranged from his parents for some reason. His world was cars, planes, gambling. He seemed like he was trying to prove something, maybe because he was overweight."
Klopper admired Mueller's entrepreneurship. While in high school and college, he owned a profitable window-washing business. In 1988, he opened Discount Auto Center in a commercial strip in the Belmont area. His specialty was dealing luxury used cars; he soon branched out into real estate speculation.
Over time, Sheila Klopper became a private investigator. Like many of Mueller's victims, she seems comfortable on the seamy side of the street. (In the early '90s, she gained a minute of local fame when she pled guilty to bribing two San Jose police officers to pass on privileged information.) She used her contacts to "check out" Mueller before making a deal with him in 1989. For better or worse, he passed the Klopper Test. "We went skiing, and on the slopes I sold a station wagon to Ed and bought a truck," Klopper remembers. "Then I sold my ski cottage and invested $50,000 with him."
During the next few years, Klopper did $250,000 in business with her former student, and helped him to expand his web of sucker connections. Klopper's mother and aunt, both in their mid-90s, invested their life savings with Mueller. Her husband, her lawyer, and her friends who were cops -- they all put cash with Mueller on Klopper's recommendation. And for a while, the returns were ... fantastic. Mueller paid people 30 to 60 percent compound interest, says Klopper, who maxed out her credit cards to lend him money.
Typically, investors-cum-suckers raised capital for Mueller by taking second mortgages on their homes and raiding their savings and retirement accounts. They thought their loans were secured by Mueller's assets. There really weren't any meaningful assets; Mueller's operation simply took money provided by newcomers to pay returns to earlier "investors." Of course, at some point, such a circular Ponzi scheme collapses. When the bust came, Mueller simply declared bankruptcy.
But the investors had to pay off their second mortgages and maxed-out credit cards, and some lost their homes to bank foreclosure.
Mueller's pool of suckers was mostly confined to San Mateo and Santa Clara counties, although he once ventured south to Salinas to con the parents of his office manager -- and their neighbors, their relatives, and their other children, too. Mueller didn't target strangers. Like a virus inside an e-mail program, he infected the personal and business networks of friends and relatives.
There were danger signs, but people ignored them.
Mueller is not charming, or endearing, or very intelligent. He's a standard-issue schmoozer, an ordinary salesman full of shallow bonhomie, possessing one fatal attraction: a twinkle of the eye that winks seductively to the little grifter hiding inside us all.
"What's a little extra profit between friends?" the confidential sparkle promises.
Blinded by Mueller's high interest rates, the suckers tended not to ask questions about where their money was being "invested" -- until it was gone. Today, their common wail is: "I should have known it was too good to be true."
And that's how a good con works: It co-opts the conned.
In other words, Mueller's victims helped scam them- selves. They came to believe that Mueller was "a rich man who wanted to help his friends," as one said. They believed in Mueller's genius and good intentions because he dressed well, drove fancy cars, flew fancy airplanes, lived in a fancy house, and picked up the tab in gourmet restaurants. He smelled of wealth. He giggled like a rich kid. And they believed, in part, because they wanted to believe.
"They came to me," said Mueller in a jailhouse interview, no longer giggling. "They were greedy. I got pushed in. They would say, 'I have $10,000. How much interest will you pay?' I'd say 35 percent. It was like a wheel that could not be stopped."
The key to the making of a sucker is to determine what the mark wants to hear, and then tell it to her; to pay profits on increasingly large "investments" until -- bleary-eyed with avarice -- the mark pumps all of her capital into the Ponzi in one huge attempt to hit the jackpot. Then the schemer kisses the mark off and repeats the swindle with the next sucker, using the previous sucker's money as bait.
The pyramid scheme collapses when the con man runs out of cash to make the payments necessary to string the suckers on. Some con men choose that moment to leave town. Mueller stayed, hoping that his father-in-law would bail him out, or that lightning would strike him in the stock market, or on the blackjack table.
Mueller was, in reality, a business fool. His only talent was that he knew how to fool other fools.
"He was brilliant at money math," says Brian O'Neill. "He could instantly calculate amortization tables and interest rates. You just felt like you were in good hands."
O'Neill, a realtor who shared offices with Mueller, was an unwitting shill for the con man. He roped his own parents into Mueller's network, along with his ex-wife, his brother, and numerous business associates. O'Neill chose to believe, as they did, that Mueller would bless him with his magic dollar wand, showering him with money because they were friends.
When anxious investors asked for their money back, Mueller pacified them with worthless collateral, such as unrecorded deeds of trust on heavily mortgaged real estate. When they could no longer be soothed by smooth promises, Mueller stopped returning their phone calls.
In total, Mueller conned $26 million from 140 suckers, including his father-in-law. He threw much of it away on gaming tables, or bad stock purchases. The rest bought a Me Decade lifestyle adorned with recreational aircraft. Then, in December 1994, the party pooped: Mueller declared bankruptcy. Horrified creditors scurried about, figuratively looking under the con man's couch cushions for pennies, pesos, drachmas -- anything of value that might offset their unthinkable losses. When they learned that Mueller had borrowed $18 million from his wealthy father-in-law, Dr. Jewell, hope for repayment blossomed -- only to wilt when it became obvious that Mueller had squandered everything, including Jewell's largess.
The federal bankruptcy court in San Francisco seized Mueller's estate. Forty-three volumes of legal papers piled up as a dozen law firms circled the bankruptcy, sniffing the carcass for fees. Finally, the nearly asset-free case was assigned to U.S. bankruptcy trustee Jeffry G. Locke for liquidation.
Locke quickly realized that the estate was so utterly broke it couldn't afford to pay him. So he concocted an ingenious -- if morally brutal -- method of pulling in legal tender. He decided to "churn" the estate, which is akin to deep-plowing a barren field to force a second harvest from it.
Mueller was financially dead, Locke appeared to reason, but his victims were only wounded.
The California Constitution makes it a felony to charge more than 10 percent interest on personal loans. There are exceptions. Credit card companies can charge as much as the market will bear; real estate loans can be pegged higher.
Although they didn't know it at the time, most of Mueller's victims violated California's usury law simply by accepting the con man's promise to pay a higher-than-allowed interest rate. So, using a law intended to protect consumers from predators, Locke sued three dozen victims, threatening to heave the book at them for committing usury if they did not return loan repayments received as part of Mueller's Ponzi scheme.
Because the interest rates were usurious, the interest still due on the debts was canceled. The victims also became liable to pay Mueller's estate three times the amounts of excessive interest they had been paid, and also faced being sentenced to five years in state prison for loan-sharking.
Mueller's records were so fragmented, however, that the amounts Mueller had returned to investors could only be guessed at by Locke -- and crudely, at that. The FBI had confiscated piles of checks Mueller had written to his debtors. But Mueller hadn't actually mailed the checks, because he couldn't cover them.
This didn't stop Locke from using the rubber checks to estimate amounts already paid to the victims, hoping to force them into settlements. He even went after interest that hadn't been paid out, but had been "rolled over" -- that is, added to the debt. In other words, under this usury theory, an investor who had never been repaid a cent by Mueller could still owe the trustee money.
The victims were astonished by Locke's audacity -- and his cruelty. Most -- including many elderly and infirm people -- settled with him out of court. Some lost what was left of their retirement nest eggs to Locke. Some had to declare bankruptcy to save their homes from Locke. To their disgust, Locke jumped into the bankruptcies he had caused to list the Mueller estate as a creditor.
The trustee was remorseless: He even took money from the small trust fund of a mentally disabled man and the estate of a victim who had died.
Eugene Camillon, a retired contractor from Salinas, was pulled into Mueller's scheme by his daughter, Christine Holetz, who worked as Mueller's office manager. Camillon started by investing small amounts, which brought immediate, large returns. Then, drawn like a fly to flypaper by the sweet scent of 60 percent interest rates, he sold two houses and put in $200,000. When Mueller went under, Camillon lost $80,000. He also had to bail out his children, who were financially crushed. His sister-in-law lost a bundle, too. It was a family affair. The worse hurt, says Camillon, was that he convinced his best friends -- a couple he had known for many years -- to pony up $10,000. They lost it all and have not spoken to him since.
But the most bitter of Camillon's feelings are reserved for Locke -- "a rotten dog, a no-good son of a gun" -- who took $15,000 from him, adding to the misery of his family and the unfairness of the universe.
Other Mueller prey fared even worse. One man had to disgorge $125,000 to Locke. Another puked up $100,000 to the bankruptcy trustee. And Herbert and Lois Petersen, a retired couple impoverished by their dealings with Mueller, were compelled to pay $2,500 that they could ill-afford to get Locke off their necks. Petersen had a heart attack after going back to work to pay off the family debts. His wife wrote, "I am 71 years old. I grew up in a time that believed policemen were our friend and protectors. ... We were paying our debts, the rent, and had food on the table. We really felt victimized when the Trustee charged everyone who had lost so much with fraud and demanded cash payments. ... We are very close to losing our house. This is not the happiest of times."
By the middle of 1999, Locke had managed to extract $420,000 from Mueller's victims. Of this, $211,000 -- half -- went to pay Locke and his attorneys, Stromsheim & Associates of San Francisco, for the time they spent tracking down and suing the victims. The rest went to pay other lawyers involved in various stages of the aging bankruptcy case.
Ed Myrtle, an official at the U.S. Bankruptcy Administration, supervises Locke, a real estate broker with Byron Partners Inc. of San Rafael. Myrtle acknowledges that the bulk of real value in Mueller's estate came from the usury settlements paid by the victims, and that it was "unfortunate" the victims were hit twice, once by Mueller, and then by Locke. It was, he says, up to Locke's discretion whether or not to sue. Myrtle cheerfully admits, however, that he could have put a stop to it. He says he did not because he wanted the private-sector lawyers he hired to be paid.
Locke could have simply closed out the Mueller case and left the victims alone. Instead, he chose another road, using, as his reason, a supposed "fiduciary duty" to bring money into the estate. But the money he brought in did not go primarily to original creditors, but to lawyers who billed the dead estate half a million dollars. And to ... well ... to Jeffry G. Locke.
As trustee, Locke is paid a percentage of the money he distributes. Every dollar he forced the creditor-victims to disgorge, therefore, increased the amount of his fee.
After Mueller filed for bankruptcy, his creditors were reluctant to file criminal complaints against him because, in early 1995, Mueller's father-in-law, Dr. William Jewell, promised to pay them nearly $5 million if they held off pressing charges. The creditors naturally feared that if Mueller went to prison, they would lose all chance of recovering money from Jewell.
A retired professor of industrial engineering at the University of California at Berkeley, Jewell has served on the boards of directors of Teknekron Industries Inc., a large electronics company, and Creance Capital Inc., an offshoot of a business that specializes in insurance fraud detection. Jewell's professional expertise is in actuarial statistics and risk theory. His mathematical insights earned him millions when they were applied to telecommunication technology in the 1970s; he claims he put most of his earnings into family trusts.
In 1986, Mueller married Jewell's quiet daughter, Miriam, and began steadily borrowing money from his father-in-law. By the time Mueller declared bankruptcy in 1994, Jewell had given him most of the family's wealth, without telling his wife or children that their trusts were empty.
As repayment of his loans kept being postponed, Jewell chose to believe his surrogate son's lies: that he was due a big settlement from a bonding company; that a judge had imposed a gag order on the affair. Jewell kept his mouth shut and his hopes up. He paid the rent and utilities on a Hillsborough house for the Muellers and their infant daughter. In addition to promising to make good on debts Mueller owed to his "investors," Jewell doled out another $2 million to his son-in-law between 1995 and 1998.
Jewell declined to be interviewed for this story, but in a statement recently submitted to Santa Clara County Superior Court, he portrays himself as a "deluded academic" who fell under the "cult-like influence" of Mueller in a "will-negating relationship." Jewell says he cannot clearly recall why he wrote more than 100 checks to his "cunning, amoral" son-in-law.
In jail, Mueller remembers it this way: "We were friends. We talked every day. He learned to depend on me. I removed his self-control slowly."
According to Jewell, Mueller constructed an elaborate charade, going so far as to e-mail counterfeit court orders to him, convincing the professor that salvation was eminent. But salvation day never came, and Jewell reneged on his promise to pay the victims. In early 1998, a judge awarded $4.8 million of Jewell's money to Mueller's creditors.
Mueller muses: "I guess he failed to apply his risk theories to himself."
After he went bankrupt in 1994, and while Locke was squeezing money from his original victims, Mueller used the funds Jewell continued to loan him as seed money for more scams. This time, Mueller preyed upon friends in the world of flying.
Mueller had been bitten by the flying bug while in college. It is a very expensive hobby, and a lot of Mueller's ill-gotten gains went to supporting it. He flew small aircraft almost every day, commuting between tiny airports all over the west. One of his favorite landing strips was at the Sacramento Municipal Airport, where he hung out in aircraft broker John Didier's spotlessly clean sales hangar with other pilots.
"We knew him as an airman," says Didier, who looks like he just morphed out of a Chivas Regal advertisement. "He'd fly in and stop by for a cold drink. Sometimes he'd sit in the cockpit of one of the $5 million corporate jets we sell and read the manuals. He could easily have been a commercial pilot."
Didier says he declined to invest with Mueller, who was wont to float grand ideas, such as a plastic cards capable of electronically certifying potential lovers as having tested HIV-negative. Didier did, however, broker several planes that Mueller purchased. In fact, Didier may be the only human being (besides Locke) who has actually profited from a long-term relationship with the con man.
Paul Karmouche, one of Mueller's "best friends," was not so lucky. Karmouche pled guilty last year to the felony of using a false Social Security number to obtain a loan to buy an airplane for Mueller, who paid Karmouche $23,000 to act as his front man.
Tom Paroubeck made the mistake of starting a window-washing business with Mueller. One day Paroubeck woke up to find that Mueller had looted the corporation, leaving him only the name: Careful Clean.
Finally, in l998 -- four years after Mueller's Ponzi bubble was popped by bankruptcy -- the federal government accused Mueller of tax evasion and of defrauding 140 investors. Mueller pled guilty to reduced charges of mail fraud and money laundering and was promised a lenient sentence of three years in federal prison in return for cooperating with the federal government as it tried to locate millions of dollars that, it believed, Mueller had hidden, either in foreign banks, or, literally, underground.
Mueller's sentencing was postponed, allowing him to roam free for yet another year. Assistant U.S. Attorney Ross W. Nadel explains the lenient treatment of Mueller by noting that the plea bargain saved the government the cost of a trial.
Society at large got no discount.
Between the time he was convicted and the time the government finally got around to sentencing him to prison, Mueller shamelessly borrowed a credit card from a friend to buy medicine for his wife, but ran up $6,000 in aircraft maintenance charges on the card, leaving the startled friend to pay. Bragging to one of his pals that the IRS had not yet figured out how to track sales made on eBay, the auction Web site, Mueller bought and sold vehicles, art, and various items, racking up tens of thousands in profits, which he kept in cash so that the government and his creditors would not grab it.
By the end of 1999, though, the government finally tired of Mueller's shell game. District Judge Martin J. Jenkins revoked the plea bargain agreement and sentenced Mueller to nine years and one month in prison, and to $26 million in restitution to his victims. Mueller has appealed the severity of the sentence. Even if he loses the appeal, with time off for good behavior, he could walk out of the federal correctional work camp in Sheridan, Ore., sometime in 2007.
William Jewell has appealed to the victims who have sued him, saying he does not have the $5 million a judge has ordered him to pay, and begging them to individually accept $2,000 payments, and to drop their claims against him. Some of the victims have accepted that settlement; others, including Sheila Klopper, apparently do not believe Jewell's contention that he was just another victim of Mueller, and they are vowing to pursue the con man's father-in-law to the end.
Whoever wins the battle, one person will certainly benefit. Jeffry G. Locke, the bankruptcy court trustee who has be- come the bane of the victims of Edward Mueller, will receive 60 percent of any settlement.