Ballroom Dancer Gets 18 Years In Financial Scheme; Wayne ‘Twinkle Toes’ Puff Case In New Jersey Combined Mortgage And Ponzi Fraud

His case signaled that things were desperately out of control in the U.S. mortgage industry, and Wayne Puff was sentenced yesterday to 18 years in federal prison for swindling investors and banks in a massive mortgage and Ponzi scheme that operated between 1998 and 2005.

Although Puff had been disciplined by regulators in New Jersey (2002) and Pennsylvania (2004) in a complex mortgage and securities scheme that featured unregistered offerings, the fraud continued. His New Jersey Affordable Homes empire, which had been propped up by fraudulent loan paperwork and real-estate appraisals that had been inflated by as much as 900 percent to create value where none existed, collapsed in 2005.

Investors and banks lost tens of millions of dollars. The U.S. mortgage meltdown occurred two years later, owing to the types of schemes that fueled Puff’s New Jersey operation. Lenders found themselves holding worthless mortgages, and Wall Street found itself holding worthless bundles of securities.

Puff, 61, enjoyed ballroom dancing. Commenting in the New York Times, a fleeced investor said, “We used to call him Twinkle Toes.”

Investors were promised guaranteed annual returns of between 16 percent and 22 percent. “Money finders” — people who recruited investors into the scheme — were paid commissions of 4 percent. The purported business model was the buying, renovating and selling of real estate at a profit, but investigators discovered Puff was monumentally upside down because of skimming and institutional corruption.

Among other things, the Puff case demonstrated the complexities that accompany Ponzi schemes and the enormous effort it takes to reverse-engineer an epic fraud. The SEC, for example, identified “at least 82 entities that are owned or controlled by, related to, associated or affiliated with, NJ Affordable and Puff,” according to court filings.

Among the screaming advertising claims:

“DOUBLE YOUR MONEY IN LESS THAN 5 YEARS.”

“A FIRST MORTGAGE LIEN IS EXACTLY THE SAME COLLATERAL THAT A BANK GETS WHEN THEY LOAN YOU MONEY TO BUY A HOME. IT’S THE BEST, SAFEST COLLATERAL THERE IS. IF A BANK COULD DO ANY BETTER, THEY WOULD. BELIEVE THAT! IT’S THAT SIMPLE.”

“A SAFETY NET OF 25% OR MORE BETWEEN THE APPRAISED MARKET VALUE AND THE FIRST MORTGAGE.”

Appraisal values, however, were so grossly overstated that they almost were comedic, according to court filings. In one case, a property acquired for $60,000 was said to be worth $2,085,000; a property acquired for $7,500 and said to be worth $750,000; and a property acquired for $85,000 was said to be worth $3,900,000.

In yet another nearly comedic example, a property acquired for the nominal sum of $1 was said to have an appraised value of $165,000, but NJ Affordable issued mortgages on the property totaling $261,068.03, according to court filings.

Screen shot: From SEC complaint in Puff case.

“Out of the $333 million in real properly sales that NJ Affordable recorded between January 1, 2004, and May 1, 2005, at least 90% ($30.4 million) was generated from sales to people closely connected to NJ Affordable, such as its investors, employees, insiders, affiliates, or nominees who had previously bought a property from NJ Affordable or one of its Affiliated Entities and transferred it to NJ Affordable Affiliated Entity,” the SEC said.

“By selling to investors, insiders and nominees, NJ Affordable has generated ‘revenues’ while maintaining control over ‘sold’ properties,” the SEC said. “NJ Affordable has sold and resold the same property to different investors, and has also used a series of sales (or ‘flips’) to escalate a property’s sales price.”