PYRAMID SCHEME COLLAPSES, THOUSANDS LOSE LIFE

UNCLAS SECTION 01 OF 03 GUAYAQUIL 001334

SIPDIS

E.O. 12958: N/A
TAGS: KCRM MOPS PGOV SOCI KCOR KFRD EFIN EC
SUBJECT: PYRAMID SCHEME COLLAPSES, THOUSANDS LOSE LIFE
SAVINGS



1. Summary: The death of Jose Cabrera Roman, a notary in
the City of Machala in El Oro province, exposed and
precipitated the collapse of a massive pyramid scheme he
had run for over a decade. Reports indicate that
anywhere from 26,000 to 37,000 people made deposits with
Cabrera, reportedly totaling in the hundreds of millions
of dollars, in return for monthly interest payments of
seven to ten percent. Cabreras clients/victims include
individuals from all walks of life and every province in
Ecuador, and the public outcry (for protection from the
victims, for prosecution of the beneficiaries) in the
month since his death has been vocal and persistent.
The trail of those who invested in this illegal
operation, were aware of it but took no action to halt
it, or tried to steal their money back after Cabrera
died, continues to lead higher in civilian government,
police and military ranks fueling a full-blown scandal
of major proportions which has thus far claimed victims
mainly in the military. End summary.

The Way it Worked


2. It appears that at some point in the mid-1990s,
Machala-based notary Jose Cabrera Roman began his
pyramid or Ponzi scheme taking in deposits and paying
interest rates from seven to ten percent per month,
which, calculated on a yearly basis, would be about nine
times the legal maximum rate established by the Central
Bank of Ecuador. His clientele grew over the years, and
at the time of his death, he had an estimated 26,000-
37,000 depositors and his staff was seeing about 400
people a day. Press accounts suggest that the average
deposit was $13,000 dollars although there were many
including military and police who reportedely had
deposits in excess of one hundred thousand dollars.
Ecuadors highly regarded news magazine, "Vistazo,"
claims that at the time of his death, Cabrera may have
had $320 million in his possession.


3. Attracted by the high interest rates, past banking
failures and the confidence-inspiring longevity of the
operation, people and groups from throughout Ecuador
were depositing their life savings (or mortgaging their
properties) to buy into this get-rich-quick scheme.
Individually and by groups, farmers, soldiers, police,
families receiving remittances from abroad, rich and
poor alike were clients of notary Cabrera. Some
reportedly quit their jobs and simply lived off the
interest payments. The scheme was able to finance
itself as long as the money base was expanding and more
deposits were coming in. Although there is much
speculation about money laundering, counterfeiting or
possible investments that generated profit, none has
been confirmed to date and there may be no more to this
operation than the scam itself.

The House of Cards Falls


4. Press accounts describing Cabrera as being in the
company of an eighteen year-old woman at the time of
death added spice to the incredible story that unfolded.
He was buried and mourned by many in Machala and for a
few weeks his "business" continued. The notarys son
and daughter, who had no apparent direct connection to
the scheme previously, took over the business and
assured people that things would continue as before. An
Ecuadorian attorney who has spoken to the Cabrera family
in the U.S. told Guayaquil Consul General that the
family had no real knowledge of the operations of
Cabreras business and they had been shocked to find a
room in his office literally filled with cash, and
hundreds of people gathered outside the offices
s
demanding their money. According to the attorney, they
very quickly realized this was far beyond their ability
to manage and they were fearful for their safety. The
lawyer also stated Cabreras children claim they were
never given any of this money and took nothing from the
money-filled room, if for no other reason than fearing
the crowds outside who were searching anyone exiting the
building.

Family Connections


5. Cabreras wife, Ana Teresa Gallardo Moscoso, left
for the U.S. on November 6 and her two children, forty-
year-old Jose Cabrera Gallardo and thirty-five-year-old
daughter, Carolina Cabrera Gallardo, departed the
following day for the safety of a relative's house in
Connecticut. Despite speculation, no hard evidence has
yet surfaced that the family members were ever part of
the scam or were enriched by it. Credit checks done by
the Consulate confirm that neither of the two children
has obvious wealth in Ecuador. Jose Cabrera Gallardo
o
recently married but lived in his parents home. The
daughter appears to have a legitimate construction
business, and she is current on repaying a bank loan she
took out for her business. The Cabrera residence in
Machala appears to be nothing more than an upper middle-
class home, and the Guayaquil attorney who met with the
family in Connecticut told Consul General that the
family members do not wish to stay in the U.S. because
it is too expensive.

Chaos breaks out in Machala


6. When the news of the familys departure hit, chaos
ensued. On November 14, a frenzied crowd in Machala dug
up the body Cabrera after a rumor surfaced that he had
not died but had instead fled the country. TV news
viewers were provided with graphic footage of the corpse
being poked with sticks by crowd members trying to
determine if the body was really Cabrera and not a
dummy. The fact that onlookers were holding
handkerchiefs to their noses supported the view that the
e
cadaver was real. Jilted clients of the ex-notary have
continued to turn out in hundreds to demand their money
back by marching through the streets, throwing stones at
the radio station, calling for the ouster of the Mayor
and Governor of Machala and demanding that the
government of Ecuador intervene and make restitution.
Police and military intervened, but their apparent
motivation was more to try to get their hands on as much
of the money as they could before it disappeared than to
restore order. On November 16, the government of
Ecuador declared a state of emergency in Machala but the
atmosphere of insecurity has continued.

Military and police officials involved in the scheme


7. Cabreras client list was impressive, and not only
for its length. Newspaper accounts of the case reveal
that depositors represented a cross-section of
Ecuadorian society. Nicolas Castro Patino, a candidate
for the Supreme Court, had deposited $15,000 with
Cabrera, which resulted in his disqualification as a
candidate. A major Ecuador daily newspaper estimates
that 20% of Ecuador's Armed Forces personnel (about
6,000 people) gave Cabrera money. Teodoro Codero
Jaramillo, president of the Supreme Court of Machala,
resigned from his post when it was discovered he had
given money to Cabrera after initially claiming he had
no knowledge of the scheme. Congressional deputy
Guillermo Haro is leading an investigation of the
scheme, promising to reveal military and civilian
political participants by January.


8. In another twist, on November 11 two military
flights, including the Ecuadorian equivalent of Air
Force One, were dispatched to Cabreras office to
collect personal deposits made by high military
officials in Quito. Upon arrival, the military
officials clashed with police guarding Cabreras office.
A police officer sent to the office of the ex-notary to
recover money was caught stuffing $25,000 into his
bullet-proof vest. During the early hours of November
r
12, military Special Forces soldiers were reportedly
taking boxes and bags of money out of Cabreras office
building after again clashing with police who were also
taking cash away. Machala Attorney General Alberto
Caiviguana confiscated $346,000 from various civilian,
police and military looters. As of December 2, 23
arrests have been ordered of various police and military
officials for their involvement in the scheme or their
attempts to recover (or simply steal) money. The
Machala police chief and his deputy are already in jail.
The employees of Cabrera have also been detained.

Illegal pyramid schemes continue


9. The Machala newspapers continue to be full of
classified ads offering high interest rates in return
for deposits and dozens of people have reportedly
withdrawn their money from the Bank of Machala fearing
general financial instability.


10. Comment: It is still uncertain how many people made
deposits with Cabrera, how much money was lost, and what
Cabrera did with the estimated hundreds of millions of
dollars. Rumors abound that Cabrera was involved in
money laundering, drug trafficking or other illicit
activities. One newspaper has reported that the U.S.
Drug Enforcement Agency had cleared Cabrera of
involvement in drug trafficking, which came as a
surprise to DEA personnel at post. A month after his
death, the press continues to be filled with new
revelations about this strange and sensational case. On
December 2, the body of Cabrera was exhumed again, this
time legally, to determine officially if it really was
him. There have been unofficial calls for the
extradition of the Cabrera family members from the
United States. Today saw the sacking of several senior
military officials in Quito, including the Chairman of
the Joint Chiefs, presumably in connection with this
case. The whole story has not yet fully played out and
the scandal could still reach higher. End comment.

HERBERT