Ill. Man Sentenced To Prison In $340 Millionfraud Scheme

Dec. 14--It's not that Wayne Touchstone believed he would ever get his money back, but house arrest wasn't what the 71-year-old had in mind for the swindler who defrauded him and thousands of other investors out of hundreds of millions of dollars.

"As far as I'm concerned, his last breath should be behind bars," said Touchstone, who lost close to $500,000 with Michael E. Kelly's schemes. "I think he should stay in jail until he has been dead for about three days."

Touchstone was reacting to an unusual deal Kelly worked out with federal prosecutors in which he pleaded guilty to one count of securities fraud and would be released to his wife's residence in Indiana on house arrest to allow him to fight his colon cancer with chemotherapy treatments for up to four months. The sentencing clears the way for some $50 million recovered from Kelly to be distributed to 7,000 investors

U.S. District Judge Ronald Guzman called the swindle "unbelievable" Thursday as he handed Kelly a five-year sentence -- the maximum allowed under the circumstances. Kelly has already served six years in prison, but he still faces 13 additional counts of mail, wire and securities fraud and the potential for a much stiffer prison term, authorities said.

The judge had delayed the sentencing a day in order to be assured that electronic monitors would make it difficult for Kelly to flee after he is released to house arrest. As added insurance, several relatives co-signed a $10 million bond and posted properties in Indiana and Alabama.

Kelly's attorney, Jeffrey Steinback, sought the release from custody, saying he would get better care at home than in the Metropolitan Correctional Center.

"The best he can hope for is maybe another three years or four," Steinback said.

Moments before the sentence was imposed, Kelly, 63, who used a wheelchair to get around in the courtroom, offered a brief apology.

"I would like to again apologize to the victims, to my family for destroying their lives," he said in a clear, authoritative voice. "That's about all there is to say."

Prosecutors have called Kelly's scheme one of the largest investment frauds ever in federal court in Chicago, saying the 7,000 victims from throughout the country lost more than $342 million.

"It was simply, judge, a fraud of massive proportion," said Assistant U.S. Attorney Daniel Gillogly.

About a decade ago, Barbara and Robert McDermott were living in a retirement community in Florida when a salesman connected to Kelly's enterprise made an enticing pitch: Put a little money into rental properties in the Mexican resort of Cancun and watch your investment grow.

"At the time it didn't sound like something illegal," she said Thursday in a telephone interview from her residence in Ocala, Fla. "We figured, well, why not?"

The next week she checked with the attorney general in Florida and Securitiesand Exchange Commission to make sure the company was "on the up and up."

A few months later, McDermott, now 81, and her husband, 90, invested about $200,000 in the Cancun properties and were pleased to quickly see a small return on their investment. But things took a dramatic turn a couple of years later when she tried to get their money back after her husband had gotten sick.

"It got increasingly more difficult to communicate with them," she recalled. "Then the money stopped coming."

It would be years later before she learned the full extent of the Ponzi scheme.

The couple said they lost almost their entire investment -- money they had saved for decades and planned to use for travel and improvements to their house. But now they survive on about $1,700 a month, mostly from Social Security, she said.

"We don't have any money in the bank," she said. "Now I play this shuffle game: 'Who do I pay this week?'"

Touchstone, of Laurel, Miss., said he invested close to half a million dollars in the scheme in the late 1990s at the recommendation of his financial planner, who had gone down to Mexico to see the property. Prosecutors said Kelly often paid all the expenses for investment advisers to travel to Cancun for his pitch.

In a telephone interview Thursday, Touchstone said he had hoped to retire on some of his investment earnings and give a little to charity and his church. But since losing the bulk of his investment, he said he has cut his expenses significantly.

"I don't hate anybody. I just don't think he should have any freedom," Touchstone said. "He shut down my freedom in terms of what I could do with that money."

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