In 1994, the year he turned 53, Carl Gambello was diagnosed with multiple sclerosis. Gambello knew that his income as an independent management consultant would not be enough to support his medical expenses in retirement. So he decided to invest his savings with Philip Barry, whose Leverage Group firm promised reliable returns of 12 to 16 percent. Seventeen years and $400,000 in investments later, Gambello said, “I’m not far from being on the dole.”
Barry, a native of the Brooklyn neighborhood of Bay Ridge, operated one of the longest-running Ponzi schemes in history, defrauding Gambello and more than 800 other investors of roughly $40 million over 30 years. After a year-long investigation by the FBI and a one-week trial that found him guilty of one count of securities fraud and 33 counts of mail fraud, Barry is currently serving 20 years at a federal prison in Fort Dix, New Jersey.
Many of the investment advisor’s victims were working-class residents from his neighborhood who—by the time his scheme was discovered—were retired. Similar to Bernie Madoff, who exploited the trust of his friends and associates in the Jewish community as part of perpetrating a $65 billion Ponzi scheme, Barry used his position as a native in the Bay Ridge area to gain—and betray—the trust of investors there.
“These types of neighborhoods are fertile ground for what sociologists call ‘primordial ties,’” said Colin Jerolmack, an assistant professor of sociology at New York University, explaining the fabric of trust that exists in neighborhoods like Bay Ridge. “That is, associations in which trust or overlapping social interests are assumed because of shared ethnicity or community identity. What this means is that, rather than trust having to be earned, it is more likely to be given unless there is clear reason to be suspicious.”
The impact of the fraud on many of the Bay Ridge investors has been compounded by the fact that they referred their parents, siblings, and children to Barry as well. Linda Poluha—whose mother, father, brother, sister, daughter, and son also invested a total of $289,000 with Barry—now starts her day at 4 a.m. and works three jobs until 11 p.m. so she can pay off her daughters’ student loans and wedding fees. Poluha’s parents moved into government-subsidized housing, where her father died after suffering from Parkinson’s Disease, when the family lost its collective investment to Barry’s scheme.
In addition to the financial impact, many of Barry’s victims have experienced psychological damage. The government, in its sentencing memorandum, noted the impact on several victims: “Diane Jacobs, who is 70 years-old and recently widowed, suffers from depression and anxiety attacks after having lost her entire life savings and having been forced to sell her personal possessions.”
In 1978, Barry, the host of a little-known political radio talk show in New York, created the Leverage Group and began his career as an investment advisor. Barry guaranteed his clients reliable returns between 12 and 16 percent and developed a following of working-class investors from the neighborhood. Many of Barry’s clients were not experienced investors trying to make a fortune. Rather, they wanted a safe investment to supplement their modest retirement savings or to pass on some money to their children. As Barbara Grebin, a 70-year-old retired secretary in Bay Ridge who would send Barry checks for as little as $50, said, “I knew nothing about investments. All I knew was checking and savings.” Reflecting on the money she and her daughter would not be able to pass on, Grebin said, “I’m just upset about my granddaughter.”
In hindsight, some investors, such as Poluha, say they should have known Barry’s operation was illegitimate. Explaining that Barry told her sister not to bother reporting the interest she was allegedly earning on her income tax returns, Poluha said, “The red flag should have been that we weren’t paying any taxes.” But the doctored account statements that investors, such as Gambello, say they received sporadically over the years showed fraudulent numbers that proved difficult to walk away from.
In reality, Barry did not produce the impressive returns that he promised. In fact, as investigators and prosecutors ultimately determined, Barry didn’t even disclose the funds that he was investing in. As in most Ponzi schemes, so long as he was able to pay off current investors with new investors’ principal investments, Barry was able to satisfy his clients and continue his fraud unnoticed.
That the operation survived for nearly 30 years is due, in part, to the intentions of the investors—many of who were waiting until retirement to pull on their savings—and the condition of the economy. FBI agent Mark Petruzzi, who investigated the Barry case, said, “In a good economy, people don’t need to reach back to get money they’ve already invested.”
Oddly, Barry did not use his victims’ investments to support a lavish lifestyle. The Bay Ridge native operated out of a tiny storefront office on 82nd Street in the neighborhood where he had grown up and lived in a $700-a-month walk-up apartment. His visible trappings didn’t reflect the excellent returns he promised his investors. At Barry’s sentencing in June 2011, Lisa Hoyes, his attorney, noted, “He never lived in a nice place. Never had nice clothes, nice jewelry, nice electronics. He never took a vacation.”
Ironically, Barry’s lackluster appearance may have encouraged many of his working-class, Bay Ridge clients to invest with him. “I grew up in a small town and Bay Ridge had the same feel,” said Grebin, who invested roughly $60,000 with Barry “I felt I was investing with someone that matched my values.” News of Barry’s operation was spread by word-of-mouth, between co-workers, neighbors, and family members. Grebin referred six associates to Barry, including her daughter. Poluha was introduced to Barry through a co-worker—Barry’s sister-in-law. Remembering his decision to invest with Barry, Gambello said, “A lot of my family members invested with him. I asked them and based upon them being involved for so long it gave me confidence that this would be a sound investment.”
Like a reliable babysitter, Barry drew legitimacy from the trust he received from friends and family in the neighborhood. Grebin, who would often invite Barry to dinner parties at her house, said, “I got to know him personally and I considered him a friend.” Gambello explained, “There were so many of us that were in this plan, how could I not partake of something that could be beneficial?”
It wasn’t until the economy began to falter in 2008 and more investors attempted to withdraw money that Barry’s operation stumbled. At that point, investors realized something was wrong. “Anytime I tried to take out money,” Gambello said, “he had an excuse.” Gambello was never able to withdraw any portion of his investment. When, after much effort, Poluha got Barry to agree to pay her roughly $6,000 of her investment in installments, the third check—for $3,000—bounced.
With more clients trying to withdraw money that didn’t exist, and others, like Paluha, reporting him to the Better Business Bureau, Barry evidently decided he could no longer maintain his fraudulent operation. On August 1, 2008, Barry visited the United States Attorney’s office and voluntarily told government officials that he owed investors roughly $50 million. Three months later, Barry filed for bankruptcy. After a year-long investigation and a one-week trial, Barry was tried, convicted, and sentenced to serve 20 years in a federal prison and ordered to pay restitution of $24 million.
Given Barry’s bankruptcy claim and the fact that he will be in his 70s when he is released, it is unlikely that his victims will receive any portion of that money.
Contending that he did not intend to defraud investors, Barry said at his sentencing hearing, “The road to hell is paved with good intentions.” At the same hearing, Gambello, who estimates that he will be broke in two years, addressed the court: “I thought at one time I was a pretty smart guy. I realize this man was smarter. He duped me and that is a price I have to live with forever.”