“…Connie “Chip Armstrong was a Texas entrepreneur whose presence could fill a room instantly. Rising from the ranks of fireman to that of corporate “white knight”, when Armstrong walked into a boardroom, all eyes were on this tall, blonde-haired Texan and his diamond-studded cufflinks and alligator cowboy boots. Chatter would cease instantly, and people could tell that he was ready to do business. So great was his demeanor, his presence and his cunning, that he was able to take over Hamilton Taft & Company, a payroll tax processing firm with a very unusual history, with little more than the price of a handful of stock shares and a clean suit. Taking a departure from mainstream modern corporate wisdom, Armstrong never was one to play by the business school rules. To him, a corporation was more than just a business, it was a responsibility, it was a calling…”
By Dan Blacharski
As posted at www.hamiltontaftandcompany.com
Connie “Chip Armstrong was a Texas entrepreneur whose presence could fill a room instantly. Rising from the ranks of fireman to that of corporate “white knight”, when Armstrong walked into a boardroom, all eyes were on this tall, blonde-haired Texan and his diamond-studded cufflinks and alligator cowboy boots. Chatter would cease instantly, and people could tell that he was ready to do business. So great was his demeanor, his presence and his cunning, that he was able to take over Hamilton Taft & Company, a payroll tax processing firm with a very unusual history, with little more than the price of a handful of stock shares and a clean suit. Taking a departure from mainstream modern corporate wisdom, Armstrong never was one to play by the business school rules. To him, a corporation was more than just a business, it was a responsibility, it was a calling.
But in the grander scheme of corporate America, despite the fact that he built Hamilton Taft into a company doing $7 billion worth of business a year, Armstrong was still a minor-league player compared to the multinational corporations and their political and mass media allies that eventually took him down in order to cover up their own misdeeds. And one major difference between Armstrong and the bigger corporate powers in America: Armstrong still believed in the American dream. He believed that anyone could rise up from nothing, compete in the business world, and succeed. And for a time, his strategy for success worked wonderfully.
Armstrong’s strategies worked. Hamilton Taft & Co. went from near bankruptcy to doing nearly $7 billion worth of business annually. Within two years, it had become the largest payroll tax processor in the nation.
The Business Model
Hamilton Taft & Co. worked like many financial institutions, it made money from other money. A bank, for example, does not take deposits and stack up all the money in a safe; it retains only a portion of the cash, and invests the rest in order to earn a profit. Hamilton Taft did the same. The company’s service was to handle payroll tax paperwork and deposits for large corporations. For companies with presences in all 50 states, the payroll tax paperwork could be immense, and a service like Hamilton Taft’s was invaluable. In addition to doing the paperwork, Hamilton Taft would advise each client of the amount due for each period. The client would remit the amount to Hamilton Taft, which would then use those funds to pay the various taxing agencies on behalf of the client.
In between the time when the funds were received and paid out, Hamilton Taft was able to enjoy contractual use of those funds. In other words, they “played the float”. It was contractually allowed, the clients understood this, and this use of funds was the basis of why Hamilton Taft was able to offer its services to these large clients at very low fees. Although there were a few clients that required their funds to be held in a separate trust fund for internal policy reasons, for the most part, client contracts were written such that Hamilton Taft had discretionary use of the funds, and were allowed to commingle those funds for the purpose of maximizing investment return. As such, although Hamilton Taft had a contractual and legal obligation to pay its clients’ payroll taxes, during the time those funds were in Hamilton Taft accounts, the funds legally belonged to Hamilton Taft.
A Ponzi Scheme?
Because Hamilton Taft took in funds, commingled them, spent some of them on investments, and then paid out clients’ tax liabilities out of its general fund, it was questioned more than once whether or not the companys operation was something akin to a Ponzi scheme.
Neither Armstrong nor his predecessors ever attempted to hide the fact that they were using money that was destined for the taxman for investments, it was seen as a normal part of business by Hamilton Taft & Co. Nonetheless, because the company’s business model was unusual, it did cause some raised eyebrows.
When the company’s previous owner, Max Pharma, Inc., was still in possession of the firm, the FBI investigated an allegation and looked into just how Hamilton Taft made its money. On September 23, 1988, the FBI closed its investigation, noting in a memo to the United States Attorney that there was “insufficient evidence to support a violation of federal law,” clearly concluding that Hamilton Taft’s business model, and how it used the funds, was not illegal. The agent writing the letter then advised that the FBI was declining prosecution, and would close the investigation.
The subject came up again when in 1991, the company’s former controller, who had been dismissed for use of cocaine on company property, made the same claim of Ponzi scheme. Again, the FBI, and this time the IRS as well, declined to prosecute, since there was no apparent violation of law, Hamilton Taft was investing client money just like any other financial services company would, and all client taxes were getting paid.
A Collective Corporate “Oops”
When the former employee, having failed to make any progress with the FBI and IRS, made direct contact with everyone from Hamilton Taft’s client list and made the allegation directly, several clients took him at his word because of his former position, and immediately electronically withdrew their funds from Hamilton Taft, amounting to millions of dollars each. When the largest clients, which included FedEx, Stanford University, and Sun Microsystems, took action, the rest soon followed, causing the equivalent of a bank run.
Then the dust settled.
The clients had broken their contracts, removed funds from Hamilton Taft without notice based on hearsay from one individual, and caused the insolvency of what had been a flourishing company. The allegations against Armstrong and Hamilton Taft were proven wrong, time and time again. But if the true facts of the case were to be made public, FedEx would be held liable for the demise of a company doing $7 billion worth of business a year. It was a liability FedEx and the others could ill afford.
Questions soon arose as to whether the allegations were legitimate, but it was too late. The only way those clients could protect themselves would be to deep-six Hamilton Taft, and fast.
Political and Media Allies
What followed was one of the most remarkable examples of power brokering ever seen in corporate America. On February 8, 1991, the U.S. Attorney’s office filed an internal memo asking for a prosecution opinion. The memo gives a history of the earlier investigation which had been closed, and also references the law firm of Baker and McKenzie, a lobbying organization and law firm representing Federal Express.
A subsequent memo dated March 8, 1991 notes again that the FBI was reluctant to re-open this investigation, and told the accuser this in no uncertain terms, stating that even re-opening the case and initiating an investigation could cause the government itself to be held liable for Hamilton Taft’s ultimate demise. The memo then notes that the former controller took matters into his own hands, believing that the government was taking too long to take action. According to the memo, “He (the controller) was told that the government had to have a victim before any process would be forthcoming. He was further advised on more than one occasion by the writer of the potential civil liability which might attach to the revelation to the general public that the FBI was conducting or may be conducting an investigation into certain alleged criminal activities on the part of Hamilton Taft.” The FBI understood well that moving forward with prosecution could well result in severe liabilities on the part of those who brought suit. Unfortunately, the FBI did not impart this wisdom to FedEx, who worked closely with the accuser to bring a quick demise to Hamilton Taft and put Armstrong in jail before the truth could be brought out.
In short, the FBI advised the former controller that he was barking up the wrong tree, no apparent crime had been committed, and furthermore, his actions, if they were to cause the demise of Hamilton Taft, could result in severe liabilities for the government and himself. Those liabilities still exist today.
But despite being advised by the FBI to the contrary, FedEx caused the issue to be discussed directly with the offices of Congressperson Nancy Pelosi and Senator Barbara Boxer, who then used their influence to cause the Wall Street Journal to file a prominent, front-page report, based largely on hearsay and speculation, and assuming wrongdoing even before any criminal or civil prosecution took place. After being contacted by the Wall Street Journal, the FBI again “reminded (the controller) of the potential civil liability problems that might ensue from the publication of the possible interest of the FBI with respect to Hamilton Taft.”
Meanwhile, the Wall Street Journal, after being requested to do so by Boxer and Pelosi, began an “investigation”, despite the fact that both the FBI and IRS had declined to prosecute.
On March 13, a meeting was held between Federal Express, Sun Microsystems, the former Hamilton Taft employee who had made the accusation, and a representative of the US Attorney’s Office. That same day, FedEx filed a civil action against Hamilton Taft for diversion of funds, requested an immediate Temporary Restraining Order, and the freezing of all of Armstrong’s and Hamilton Taft’s funds. The Federal court appropriately denied the petition due to lack of evidence, and set an evidentiary hearing for August of 1991.
This is where the concept of due process falls by the wayside, due largely to Federal Express’ enormous political influence and PR machine. The story concocted by the controller and disseminated by FedEx had taken on a life of its own.
With no evidentiary hearing, FedEx filed Hamilton Taft into involuntary bankruptcy on March 14, just one day before the Wall Street Journal published a series of front page, sensationalistic stories accusing Hamilton Taft of fraud. Well timed, indeed. Not only did the Wall Street Journal publish a biased and unsubstantiated story, it also coordinated its release with those who would benefit from its publication.
After being tried and convicted on the front page of the Wall Street Journal, the rest was easy. On March 20, Hamilton Taft was placed into involuntary bankruptcy by FedEx, based on nothing more than a highly debatable theory of law that had not been proven. And on May 21, the company was formally shut down by the court appointed trustee, Frederick Wyle, known informally around the financial district as “The Hatchet” for his penchant for shutting down companies in reorganization. But still, there had been no evidentiary hearing, nor had there even been any claims that money was owed to the clients or to the IRS.
Where’s the Money?
It is certainly possible within the realm of corporate America to make $80 million appear, disappear, and even to seem as though it never existed. With the proper amount of slight of hand, it’s possible to make it appear greater or lesser, or appear in one pocket or the other, depending on what suits at the time. But it wasn’t Armstrong who was doing the shuffling.
The trustee cited a “hole” in Hamilton Taft of $80 million, and the Wall Street Journal had a field day, calling it the “biggest white collar scandal of the decade.” Two things are important to note: first, Armstrong had been up front all along as to where the money was; he had made investments with a certain percentage of the cash flow in order to maximize Hamilton Taft’s profits. As such, some of Hamilton Taft’s assets were in the form of corporate bonds, real estate holdings, and oil and gas leases, and that was the substance of the $80 million “hole.” Whether those investments were wise or not is a subject that can be discussed at length in college seminar rooms and golf course clubhouses, but it is not the point. They were investments that Hamilton Taft was contractually allowed to make.
Federal Express said after the fact, that Hamilton Taft’s investments should have been only placed into short-term government bonds, but such a restriction had never been placed on Hamilton Taft. And in fact, the FBI had already known about Hamilton Taft’s investment strategy, and decided that no crime was being committed. Secondly, until the first quarter of 1991 when the clients themselves caused a “run” and Hamilton Tafts subsequent insolvency, all client taxes were paid. Whatever taxes ultimately were not paid, was due to the clients’ own actions, not because of any scheme perpetrated by Hamilton Taft.
But if those Fortune 500 clients were to admit that, they would be held liable. Nobody wanted that to happen. The stakes were simply too high. Hamilton Taft would have to be sacrificed on the bloody altar of corporate capitalism.
Whose Money Was It?
The criminal case against Armstrong hinged on a handful of arcane legal points that differentiated between trust funds and corporate funds. Trust funds are funds that are typically held in separate escrow accounts. If Armstrong were to have taken funds from individual escrow accounts, he certainly would have been guilty of diversion. But, the funds were commingled. Contracts with clients stated that Hamilton Taft was allowed free use of the funds, so long as taxes got paid. As such, legally, the funds belonged to Hamilton Taft once they reached Hamilton Taft’s account. This was the basis of Hamilton Taft’s existence; without enjoying free use of funds, the company would not have been able to earn a profit.
Was the money Hamilton Taft money or client money? The answer changed, depending on what suited Federal Express at the time. If the money was Hamilton Taft money, then no crime was committed. But heres where the trustee’s actions rival that of the best streetcorner three card monte dealer.
In 1993, the trustee sought to recover “preference payments” made by Hamilton Taft on behalf of client S&S Credit. A preference payment, in a bankruptcy, is a payment that was made by the bankrupt company just prior to bankruptcy, and can therefore be recalled by the trustee to increase the size of the corporation’s estate (and thereby, as a result, increase his personal fee). But, in order for the trustee to collect these payments, he had to prove that the money had belonged to Hamilton Taft, and not the clients.
Although the courts had earlier ruled that the funds were trust monies. In June of 1994 the 9th Circuit Court reversed that ruling, and found that the funds were indeed the property of Hamilton Taft. The ramifications of this ruling negated the entire proceeding up to this point. It meant that Hamilton Taft was justified in using the funds for long term investments, and that Armstrong’s indictment would have to be nullified. Why would the trustee do such a thing?
The fact is, the trustee never meant for this ruling to be permanent. With hands quicker than Houdini, after the 9th Circuit Court issued its decision, Wyle made a settlement agreement with S&S Credit, initiated collection proceedings to recoup funds paid by Hamilton Taft on behalf of several other clients in the amount of $39 million, and then as part of the settlement agreement, S&S Credit went back to the 9th Circuit Court and advise them that a settlement had been made and request that the ruling be vacated.
On October 12, 1995, the 9th Circuit did in fact vacate its opinion without reason or explanation, simply issuing a one-line ruling stating “The Court is advised that the case has been settled. Accordingly, the appeal is dismissed as moot and the decision . . . is vacated.”
But the ruling was anything but moot. It was a ruling upon which billions of dollars, and Armstrong’s freedom, was hinged. While the court may have been deceived into thinking a decision has been rendered moot by settlement, Federal Express and trustee Wyle knew very well that the whole of the case depended upon this ruling, and it was nothing more than a ruse used to collect additional funds.
In the end, Wyle liquidated all of Hamilton Taft’s assets, which he had spuriously referred to as “worthless” before, collected $110 million, a recovery far more than the $80 million figure quoted as being deficient. He admitted, at least temporarily, that the funds were in reality Hamilton Taft funds and not trust funds, and by implication, Armstrong’s investments were legal.
The FBI had declined to prosecute several times, stating that no crime was committed, until faced with media and political pressure to initiate yet another investigation that amounted to little more than a witch hunt. The prosecution and the trustee did an end run around a court-ordered fact finding. The conclusion is inescapable: The former clients, led by FedEx, jumped the gun and initiated a “run” on Hamilton Taft after being presented with unfounded claims of fraud. They caused the demise of a flourishing company, and faced with the liability of having done so, saw fit to manipulate the media, the courts, and the facts to save their own skin.
Chip Armstrong was stripped of his wealth and today still sits in a Texas federal prison, serving a 108 month sentence for “scheme to defraud”, based on Federal Express’ theory of law, which was proven incorrect. Armstrong had been investigated during this time for numerous crimes for which the government could not show cause including bankruptcy fraud, SEC fraud and tax fraud. When the IRS refused to prosecute (and never did), and none of these investigations bore fruit, the government went on a fishing expedition to try out a series of unfounded accusations, and even, according to Armstrong, attempted to lure him into committing an outright crime to make their job easier.
During the trial, the judge refused to give the jury the ruling handed down by the 9th Circuit Court that the funds were the property of Hamilton Taft, by reason of the ruling having been vacated. Armstrong’s was based on the total loss claimed by the trustee, ironically the loss that was partially recovered under the trustee’s temporary claim that the funds belonged to Hamilton Taft.
Dan Blacharski, a former employee of Hamilton Taft & Co., currently divides his time between South Bend, Indiana and Bangkok, and works as a freelance business writer and entrepreneur. You can reach him at firstname.lastname@example.org
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