In 1994, Indianapolis real estate entrepreneur Mark Ristow read some investment advice that changed his life.
In the book "Beating the Street," Peter Lynch, the former star mutual fund manager, described a "can't lose proposition (almost)" called bank-conversion investing.
The game: Buying stock in mutual, depositor-owned banks when they convert into public companies. Depositors get in at the initial-public-offering price, often a discount. So "the next time you pass a mutual savings bank or an S&L that's still cooperatively owned," Lynch wrote, "think about stopping in and establishing an account."
It's advice Ristow embraced-overzealously, it turns out. So much so that he's about to spend 20 months in prison.
According to the Securities and Exchange Commission and federal prosecutors, Ristow used a cousin and his wife's sister as fronts in a scheme to buy more stock in the IPOs than he otherwise was entitled to purchase.
Investigators say the fraud circumvented banking regulations and the terms of the offerings. Those terms limit how much one depositor can buy, with the largest depositors receiving the maximum allocation. Frequently, banks also stipulate that a buyer live within state lines.
In September, Ristow, a retired real estate investor and property manager, pleaded guilty in Newark, N.J., federal court to conspiracy to commit securities fraud in connection with 23 U.S. bank conversions, including the 2001 IPO of City Savings Financial Corp. of Michigan City. Under the terms of his plea agreement, he forfeited $2.8 million, representing the gains from his illegal activities.
Last month, New Jersey federal Judge Peter G. Sheridan ordered Ristow to turn himself in on March 10 to begin serving a 20-month sentence at the Federal Correctional Institute in Milan, Mich. Attorneys for the 63-year-old Ristow have asked the judge to allow the defendant to do time instead at the Federal Prison Camp in Terre Haute in order to make visits more convenient for his wife and three minor children.
Court records show that from 1994 to January 2007, Ristow traveled the country opening as many accounts as possible at mutual banks that were candidates for conversion. To maximize buying power, he set up three credit lines and tapped them for cash to fund accounts.
A single deal could make an eye-popping return. Stock in one bank Ristow bought into, Provident Financial Services of Jersey City, N.J., rocketed 55 percent on the first day of trading. The Michigan City bank jumped 20 percent on its first day.
"It was an industry he really enjoyed being part of, and he is sorry that he abused it," said one of Ristow's attorneys, J.P. Hanlon, a partner at Baker & Daniels.
He wasn't the only one. The SEC or prosecutors have launched cases against a handful of conversion investors in recent months, with the most high-profile being Bert Fingerhut, a former top-ranked analyst on Wall Street who now lives in Colorado.
Fingerhut, former research director for Oppenheimer & Co., opened accounts at 400 banks and made $12 million from the strategy, according to court records. He used a New York schoolteacher and others as fronts. A judge last August sentenced him to two years in prison.
"He clearly was considered by those in the conversion industry to be the pinnacle," said Fingerhut's attorney, Larry Mackey, a Barnes & Thornburg partner. (Mackey wouldn't discuss how he came to represent Fingerhut).
Here's another curious wrinkle: Fingerhut and Ristow "have been good friends. They remain good friends," Mackey said.
Both men share a passion for environmental causes and served together for years on the board of the Southern Utah Wilderness Alliance. Ristow, who has an MBA from Harvard Business School and is a longtime contributor to Democratic political candidates, also is a life trustee of the Nature Conservancy of Indiana.
Each likely could have made a bundle playing by the rules. Bank conversions frequently are so profitable that legions of investors specialize in them. Virginia-based research firm SNL Financial even sells proprietary lists of conversion candidates. "There are still about 750 mutuals remaining, but with that number shrinking each year, it is more important than ever to open accounts at these institutions as soon as possible," an SNL marketing flyer says.
According to investigators, Ristow out of the gate schemed to get more than his fair share of the stock, a move that left other depositors with less stock than they should have had, or none at all. In return for the right to keep some shares, cousin Andrew Crabb and sister-in-law Susan Gitlin went on a multi-year account-opening spree. At one point, Crabb, an engineer who recently moved from New Jersey to Ohio, and Gitlin, a medical school professor in Virginia, had more than $1 million of Ristow's money in nearly 150 mutual banks.
Prosecutors did not bring criminal charges against the pair. They settled SEC civil charges by forfeiting their $263,000 in profits and paying $175,000 in fines.
Investigators say all three knew what they were doing was wrong. More than once, the SEC says, Ristow forwarded profit-and-loss statements to the pair instructing them to "DESTROY THIS."