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January 23, 2013 at 07:00 PM
Serving nearly 400 days in federal prison wasn’t what Justin M. Paperny had in mind when he became a stockbroker fresh out of the University of Southern California, psychology degree in hand.
But a “focus on short-term rewards led to the rotting of my inner core,” Paperny writes in his book, Ethics in Motion (APS Publishing, 2010).
Once a top UBS Financial Services producer, the former broker, now 37, went to jail for conspiring to commit fraud with a hedge fund client.
From 2002 through 2004, Keith G. Gilabert, manager of GLT Venture Fund, swindled investors out of more than $8 million. Convicted of aiding and abetting Gilabert’s Ponzi scheme, Paperny in 2008 was sentenced to 18 months at Taft Federal Prison Camp in California.
Since his 2009 release on three years’ probation, he has reinvented himself as a speaker on the advisor lecture circuit warning of the consequences of white-collar crime. A partner in the consulting firm Etika, his clients have included Morgan Stanley Smith Barney, Wells Fargo, New York University and the FBI. Further, the Studio City, Calif.-based Paperny is a consultant to white-collar defendants headed to prison, and he is executive director of The Michael G. Santos Foundation, which helps at-risk youth and adult offenders.
Reared in the upscale L.A. suburb of Encino, Paperny trained at Merrill Lynch but because of a dispute over commissions, left after only a year. Crowell, Weedon hired him. Then, at age 25 he moved to Bear Stearns before joining UBS in its Century City, L.A., office.
That’s where he collected payments from Gilabert for encouraging folks to invest in the GLT fund. In 2007, Paperny pled guilty to one count of conspiracy to commit mail, wire and securities fraud.
Here is his story of crime and redemption, as told to Research in December:
There will always be people who dismiss me as a felon, a cheat, a thief and a liar.
You never get over that, and any guy out of jail who says he has is lying.
My descent was gradual. I couldn’t resist temptation. It was just too easy.
I decided to become a stockbroker while cold-calling at Prudential one summer when I was at USC. I liked the excitement—the thrill of soliciting business.
I was an arrogant, entitled stockbroker in my 20s, one of the youngest brokers Bear Stearns hired. I had Bear, and I thought it was a big deal. But even though I was bringing in the lion’s share of production, I was getting a much smaller percentage of commissions than my senior partner, Kenny. I got only about 25%. When I told Kenny I was entitled to a raise, he said I didn’t deserve one and took credit for my work. That made me very angry.
So I took matters into my own hands. This is where my lack of judgment began. It wasn’t greed—it was vengeance that led me to take advantage of my partner.
I found a glitch in the Bear accounting system that let me keep 100% of the production. I didn’t think I was stealing. I convinced myself what I was taking was rightfully mine. Then fear of getting caught set in. Every time the phone rang, I thought: “Did Bear find out? Did Kenny find out?” I had to get out of Bear Stearns and start anew. Fortunately, Kenny wanted to leave too. The firm never had any idea that I was stealing from him.
In June 2001, UBS offered us a 7-figure bonus to move our book. A year into our tenure, they were pressuring us because we weren’t proving worthy.
We were afraid we’d get fired since UBS had a two-tier system: Brokers who weren’t living up to their bonuses were let go; brokers who were producing big numbers—regardless of how—kept their jobs.
An opportunity arose for Kenny and me to work with Keith Gilabert of the GLT Venture Fund. I didn’t know he was running a Ponzi scheme. But I did know he was dishonest because at Crowell, Weedon, I worked in the cubicle next to him and heard him talking to clients. I told Kenny that we needed to be careful with this guy—he’d say anything to close a deal.
Despite knowing this, in June 2002 I accepted the $6 million he transferred to us. I wanted his money and knew the commissions would grow. Kenny and I split the account 50/50.
Things started to go awry when, within the first year, Keith lost almost all of the $6 million. In the interim, he generated hundreds of thousands of dollars in commissions. The following year, he raised another four or five million from investors! Kenny and I knew that nobody raises that kind of money unless they’re lying to people. But we reasoned it wasn’t our responsibility or our job to police clients.
Eventually, Keith began struggling to raise money and needed help from the big bank. Because we felt beholden to him for saving our partnership, Kenny and I attended some prospecting meetings with him. That gave him a great deal of credibility.
He told the prospects that his hedge fund was making 27% a year. Like a coward, unwilling to lose the account and production, I kept my damn mouth shut and said nothing. The prospects turned over their money—and Keith lost it.
I told my branch manager: “We have a client losing millions but raising new money. I fear that someday he’ll sue us all. Let’s protect ourselves.” So we created a disclosure document stating that if an investment in GLT lost money, we couldn’t be sued. UBS loved the idea, and I felt we were truly protected from any fallout.
Actually, I was doing a good job of dodging responsibility. My manager and compliance manager told me exactly what I wanted to hear—and I told them exactly what they wanted to hear. None of us would accept the truth.
A couple of months later, it all got out of control: Keith issued a press release announcing that he was speaking at an investment conference. He said his hedge fund was averaging 27% a year. The release came into the UBS email system. All of us read it, but we deleted it and acted as if we never saw it.
In October, I sat for an interview with the FBI. They asked if I ever saw a press release that discussed a GLT average annual return of 27%. I lied and said no.