Vintage Fraud: When Liquid Assets Leak Away
No one knows for certain who figured it out or where it happened, but somewhere in the centuries from before the year 6000 B.C., humans discovered that the juice from grapes could ferment into wine. We know that wine was produced and enjoyed in Georgia (the European country, not the Southern U.S. State) by then, and by 1000 years later in the western part of Azerbaijan. And in another 900 years, i.e., by 4100 B.C., there were wineries with large-scale production in Armenia. Not to be left aside, by 4000 B.C. that same technology had been used in Sicily. Hence, it is hardly surprising that with increasing trade in the Mediterranean basin, wine became a desired beverage from Egypt to the Middle East to Greece. Thus, we have the celebrations of the gods Bacchus and Dionysius, by the ancient Greeks, and later by the Romans, who adopted these celebrations and the indulgence of imbibing, sometimes even to excess. Wine also played a part in the rituals of the Jewish faith starting in Old Testament times, and became a key part of the Christian Church’s Communion in a remembrance of the Last Supper. Wine was a “lubricant” of faith and celebration. Its use in the sacraments of the Christian Church probably played a major role in the survival of wine-making technology in the monasteries, even after the collapse of the Roman Empire and the dissipation of knowledge in the early Middle Ages.
But the story of wine was not yet finished. By the 1500s, wine making had advanced as part of the general explosion of technical knowledge brought on by, first the 12th century Renaissance, and then some 300 years later (with the discovery of ancient knowledge by the philosophers and early scientists as part of the Renaissance in Italy and then the rest of Europe), wine had become a regular part of the daily diet, especially in the South of Europe where grapes grew in abundance.
Wine Production in the U.S.
Concerns for quality and technique eventually led to the 1855 Classification in France of wines from Bordeaux, with vineyards ranked as first growth, second growth, etc. Then in 1887, the plant insect phylloxera devastated European, especially French, vineyards. It was only the discovery that Native American grapevines were immune to the pest that saved the European wine industry after hybrids were created using American roots. Ah, but America would face its own devastating attack on wine with the passage of the 18th Amendment to the U.S. Constitution authorizing Prohibition in 1919. Only after repeal of that social experiment in 1933 could the nascent American wine industry begin to recover.
Most American wine and a good many of the imports were of low quality, and hardly were products to be treasured in a wine cellar, let alone invested in as an appreciating asset. But by the 1970s, pioneer winemakers in the U.S., and especially in California, produced wines ready to challenge the best that even the greats of France offered. This led to the famous “Judgement of Paris” of 1976, where selected California red and white wines were judged by French tasters to surpass the first growths of France in quality and flavor.
During this same period, as the general economic conditions of Americans rose, especially those involved in technology and investment banking, fine wine became not just a status symbol, but a viable investment for those with excess cash. That situation was enhanced with the institution by the Board of Governors of the Federal Reserve System of Qualitative Easing in the wake of the Great Recession of 2007-2009. That action by America’s central bank drained yield from the country’s financial system, so that persons fortunate enough to have capital to invest sought out all kinds of unusual “opportunities” to make money. I have previously written about the search for higher returns in my Jan. 9, 2023 blog “Investment Esoterica: A Stockless Triptych,” so it should not startle anyone to learn that there are now any number of websites on the Internet extolling the upside potential of wine investments.
These websites range from Vinovest, to Forbes, to Morgan Stanley, to Investopedia, to FinanceBuzz, just to name a few. And FinanceBuzz mentions specifically that wine investments historically yield annual returns of 10.6%, a sharp contrast with bonds (until 2022) yielding less than 1% per year. Given those factors, it is hardly surprising that wine presents a potentially attractive investment both for the economics and for the status. And what better way to convey the status of an American (quite possibly nouveau riche) wine investor than to have the investment “opportunity” presented by a well-spoken Englishman (or at least a person with a “plummy” upper crust English accent), conjuring images of bespoke tailoring and establishment elitism? Consider the article from the Dec. 18, 2000 issue of Investment News “Investment Snob Appeal Spurs Exotic Investment Demand” by Jeff Benjamin; or “Persuasive Techniques in Advertising: Your Guide to Proven Tactics” by John Bogna in a Feb. 4, 2021 piece from Business 2 Community.
Kyrone “Anthony” Collins and the Windsor Jones Scheme
In 1988, a boy named Kyrone Collins was born in England. After he reached maturity (in about 2014), he had his name legally changed to Anthony Collins and acquired a residence in Hammondswick, Hertfordshire, northwest of London. By 2017, he had decided he could make a comfortable living offering investments in wine to Americans, particularly older Americans. So, with some help from others, he organized Windsor Jones LLC in Delaware and set out to market investments supposedly in “fine wine” across the United States.
He and his confederates “cold called” on potential investors, usually to quote the February 3 Complaint (the “Complaint”) of the U.S. Securities and Exchange Commission (“SEC”) filed in Federal Court for the Central District of California- with the callers having “British accents.” Potential investors were told “that the selected wines would be stored in a secure, climate-controlled facility in France or the United Kingdom for the duration of the investment to preserve the wines’ value and minimize taxes.” The Windsor Jones sales people said that “they would recommend specific vintages of investment-grade wines.”
Investors were told that the company would profit only when the wines were sold, and the company received a commission of 6-10%. Investors were also told that they could expect the wine to appreciate from 10-30 % in value. This marketing approach succeeded. From November 2017 to September 2021, some 12 investors (two of whom reside in California), most of them elderly, “invested” $4,091,000 in the wine investment contracts offered by Windsor Jones. But of that over $4 million, no more than $1.3 million was used to purchase and store wine. The rest was applied as follows: $367,000 for credit card payments; $176,000 shopping at UK-based fine watch companies; $870,000 as payments to sales representatives and back-office employees; and $340,000 directly to Collins.
How did all this come to the attention of the SEC? Unfortunately for Collins and his associates, one of the investors was a senior citizen residing in Iowa. When he began a series of withdrawals from his regular brokerage account in 2019 to fund his wine “investments,” his stockbroker became concerned that the activity might evince “senior exploitation,” a topic previously discussed in the Oct. 13, 2022 blog “Lessons from an Elder Abuse Story with a (Relatively) Happy Ending” which I wrote with my colleague, Shana Siegel. That stockbroker contacted the Iowa Insurance Commissioner (the part of the Iowa government that regulates securities).
The subsequent investigation by the Iowa regulator led, in October 2022, to the issuance of a Cease and Desist Order against Windsor Jones, Collins, and two of his associates, which required them to pay over $2 million in restitution and $370,000 in civil penalties. The United Kingdom High Court of Justice ordered, in March of 2020, that Windsor Jones be “wound-up ‘in the public interest.,” and in April 2021, Collins was disqualified from registering a business with the United Kingdom Companies House for 10 years.
All of this led in turn to the SEC filing its February 2023 Complaint. The SEC Press Release accompanying the filing, in addition to recognizing the “assistance” of the Iowa regulator, also thanked the Texas State Securities Board and the Washington Department of Financial Institutions, emphasizing something of the nationwide scope of the Windsor Jones cold calling campaign.
The SEC action is in some respects anticlimactic, given all the other sanctions imposed on Windsor Jones and Collins. The Complaint alleges that Windsor Jones and Collins violated Sections 5(a) and 5 (c) of the Securities Act of 1933, as amended, (the “33 Act”) by selling securities without either registering them or selling them pursuant to an available exemption, as well as violating Section 17(a) of the 33 Act and Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder for using material misrepresentations and omissions in connection with the sales.
The Commission seeks an injunction against Windsor Jones and Collins forbidding either of them from future violations of the same provisions, as well as an order to disgorge all ill-gotten gains together with prejudgment interest, and the imposition of appropriate civil money penalties. The Commission also seeks a permanent bar against Collins serving as a director or officer of a public company. The fraud here is not a breakthrough of some new delict; it is literally a vintage fraud. But two aspects of the case are noteworthy:
- the apparent gullibility of Americans, and especially elder Americans, who would put millions into such a venture without adequate diligence; and,
- the professionalism and dedication of the stockbroker who had the Iowa investor as a client.
The SEC repeatedly cautions that when something is too good to be true, it is NOT true. That observation is equally applicable to fine wines.