Alleged architect of Ponzi scheme cast a 'spell'

Amid news of billion-dollar Ponzi schemes from Wall Street to Wayzata, the $10 million fraud allegedly run by 32-year-old Kalin Dao of south Minneapolis barely moves the needle.

But the story of Dao, a Vietnamese immigrant who walks with a profound limp and has a taste for high-stakes gambling, offers a window into how easily such schemes flourish, and how tough it can be for investigators to shut them down.

Ponzi schemes promise investors high returns, and in the early stages the architects of those schemes make good on that promise through "lulling" payments to initial investors, using fresh money from new ones.

It takes a special talent to persuade strangers to part with their hard-earned savings. Investigators say Dao had it.

"She's got this kind of spell," said Robert Strande, a U.S. Postal inspector leading the investigation. "She's this little, diminutive woman who no one suspects is going to rob them of their life savings."

Investigators say Dao's investment program lured more than 500 clients. Some claimed to have given her more than $100,000, but most typically invested $10,000 or less. Through companies called TD Financial Services Inc., NLC Financial Services Inc., and others, Dao offered high returns on investments in securities, real estate, entertainment promotions and commodities, the government says.

Investors include a former stock broker from the Stillwater area, an NCAA basketball referee in California, a Nevada helicopter pilot and his brother-in-law, the young owner of a Las Vegas window-washing company, a computer expert in Dallas, and African, European, and Southeast and East Asian immigrants around the country.

"There's quite a few that are going to lose homes, file for bankruptcy," Strande said.

Among them is Bienvenida Urena, a 59-year-old Dominican immigrant in Miami, Fla. Urena says she invested $56,000 with Dao on a tip from a friend. "I took from my equity, from my house, and now I'm almost losing my house," she said Friday.

The Star Tribune first reported details of the investigation in January 2008. By then, federal authorities already had seized what they could find of Dao's bank and brokerage accounts. She remained free until she turned herself in nine days ago to face, along with her parents, a 50-count federal indictment that had been issued in secret on Feb. 19.

The intervening months have left her investors with unanswered questions, tax problems and hard feelings.

Among them is Jason Rothen, 38, a former Schwan's salesman from southwest Minnesota. He met Dao three years ago after responding to a classified ad in the Star Tribune offering investors $200 to $500 a week "without risk to your principal." Rothen, now living in Springfield, Mo., said that after a small initial investment paid off, he gathered his savings and borrowed heavily to invest something "less than $100,000" in what he believed were Dao's short-term, high-yield programs.

Rothen said the initial returns were so good -- 10 percent a week, paid bimonthly -- that he spread the word. Five of his family members invested, he said. "And all my friends, too. Lots of friends."

A policeman in Idaho said he invested $12,000 from his retirement savings and money he had made doing security work in Iraq. His wife put in $40,000 that her children had inherited from their late father. An agent with National Credit Builder's Group in Edmond, Wash., figures that he, his associates and clients put in $1 million.

Christa Lepore of Clifton, N.J., invested $6,000 that she'd been saving for her wedding on the recommendation from someone in an investment forum on Craigslist.org.

"I'm telling you, I feel so dumb," Lepore said. "It really just looked legitimate to me."

Until word of the investigation broke 14 months ago, investors said Dao was readily available by phone, e-mail or in person to discuss her investment program. She responded promptly and intelligently whenever payments were late or when her checks failed to clear, even as those occasions became more frequent.

Some investors said Dao told them she had a degree in finance. Records show she was enrolled at the University of St. Thomas from 2005 but school officials said she never completed a business course there.

Regardless, "She's very smart," said Kent Warnberg, a Minneapolis police sergeant who dealt with her on a liquor license application. "She really has a knack for the numbers."

Investors also said Dao appeared legitimate because she sent them income tax Form 1099s and held periodic investor meetings, such as one at Mystic Lake Casino in 2006 and another at the MGM Grand in Las Vegas in 2007.

Sam Bodea of Springfield, Mo., said he was skeptical as he entered the Mystic Lake Casino to meet Dao, joking to others that, "This lady is probably gambling our money and we're stupid enough to give it to her."

But Bodea said he ultimately invested about $10,000 with her "because, you know, she actually met everybody in person. She explained how everything worked." Bodea eventually grew suspicious and withdrew his investment, but he said his brother and a number of friends never got their money out.

Dao allegedly began soliciting investors in 2005, advertising in newspaper classifieds and on a Web page. Several investors said she told them her program was limited to a few hundred select people, a pitch she had in common with Bernard Madoff, the Wall Street money manager who last week pleaded guilty to a $50 billion Ponzi scheme.

As Dao's investment programs grew, investors said, she offered new opportunities with higher minimums and larger investor pools. They figured that's why checks started bouncing and statements became irregular.

Federal investigators were alerted to Dao in late 2006, when Strande said several Twin Cities banks suspected irregularities in some of her accounts. Jackie Tschida, an IRS criminal investigator, signed on as co-lead agent for the case.

Dao's track record

Strande said the banks told them that several years earlier, Dao had cost them about $130,000 in bad checks, but the case was never charged. About this time, the Minnesota Department of Commerce also notified federal authorities of a civil complaint involving TD Financial Services. Dao signed a consent decree as president of the company in December 2006, saying she'd stop dealing in securities and pay a $1,000 fine.

Before the investment scheme, Minneapolis police investigated Dao in 2002 after she applied for an on-sale and Sunday liquor license for La Nouvelle Paris, a restaurant her family had started the previous year at 1835 Nicollet Av. S.

Warnberg said he began the routine task of reviewing the company's finances when he learned that several credit card companies had accused Dao of running a scam that cost them about $100,000. Two of the companies got judgments against her, Warnberg said, but the others just wrote off the losses. City records show that the liquor license was denied Aug. 28, 2002, because of insufficient financing.

April 15, 2003, Dao filed a Chapter 7 bankruptcy petition listing debts of $66,853 to three credit card companies. Her bankruptcy petition also hinted at another problem: She owed $10,000 to the Venetian Resort in Las Vegas, Nev.

"After I figured out what she was doing with the credit card companies, I told coworkers that I believed she was a crook, and I wouldn't trust her. And they all thought that she was the nicest person in the world and was very believable," Warnberg said.

He recalls that Dao told him she walks with a limp because she was injured by a land mine in Vietnam as a child. An investor says she told him that she'd been hit by a car. And Strande said she recently told him that she had polio.

"She is very convincing," Warnberg said. "Very -- I don't want to use the word 'meek' -- but just very polite."

Police ran across Dao again in November 2004 when investigating a gambling operation at the Blue Eyes Cafe, which was owned by her parents and managed by Dao. City police seized several video gaming devices and thickets of sports wager sheets from the cafe and at the Dao family residence. But Lt. Travis Glampe said the city "sacrificed" its case to avoid jeopardizing an organized crime investigation that was underway involving other suspects.

After working on the latest case off and on for a year, Strande attended an investors meeting that Dao held Dec. 15, 2007, at the MGM Grand in Las Vegas. The investors seemed infatuated, he said.

"Kalin had people eating out of her hand."

Three days after that meeting, the government seized $162,820 from her accounts at U.S. Bank, Bank of America and eTrade, precipitating the unraveling of her investment business.

But the federal investigation languished as Strande met resistance from some investors who continued to believe in Dao, and as other criminal cases occasionally took precedence. In July, prosecutors got an extension to hold Dao's money for 60 days. On Aug. 27, they got another extension.

Within days, an executive working for Minnesota businessman Tom Petters walked into the U.S. Attorney's Office in Minneapolis and alleged that Petters had overseen a Ponzi scheme measured in billions of dollars. Assistant U.S. Attorney John Marti got reassigned from the Dao case to the Petters prosecution.

Meanwhile, Dao's problems increased. Wynn Las Vegas casino filed a civil complaint in Nevada on Sept. 26 demanding repayment of $50,000 in markers that she's owed since February 2008. She now has two pending arrest warrants there for debts at three casinos, authorities said. In addition, the state of Delaware filed a securities complaint against her in October, and New Jersey has launched an investigation of a firm that had ties to her.

In late November, U.S. Magistrate Judge Franklin Noel gave the government until Feb. 23 to deal with the money it had seized from Dao. "No further extensions will be granted," he warned.

Investors, who kept tabs on the case on an Internet blog, grumbled about more delays. Strande responded: "Unlike Hollywood, crimes of this nature are not resolved in one hour."

The federal case

The first public event in the criminal case against Dao came Feb. 9, when prosecutors quietly charged Michael Pham, a former employee of MGM Grand in Las Vegas, with a single count of "aiding and abetting K.D." to launder money. Pham, 30, pleaded guilty Wednesday and is cooperating with the government.

Heavy gamblers at MGM Grand are assigned hosts who determine what kind of complimentary services are given, Pham said. He said the casino ranked Dao as a "platinum player." She favored Baccarat, a card game, and the sports book. Pham said he was her host from February 2007 to January 2008, when she'd often hit the casino several times a week, sometimes losing hundreds of thousands of dollars at a time.

Pham said Dao gambled with money she had wired to the casino from her investor accounts. On one occasion, she told him: "I got my butt kicked, so I have to go back and work extra hard because it's investor money," Pham recalled.

A federal grand jury handed up a sealed, 50-count indictment charging Dao and her parents, Nghia Trong Dao and Thu Nguyet Le, in the alleged scheme. The charges became public when she turned herself in March 6. The parents declined comment, as did Dao's attorney.

Last week, Dao asked for a public defender, claiming her only income is just over $600 a month from Social Security disability payments. She denied having any money anywhere. But Assistant U.S. Attorney James Lackner said that Dao was recorded saying that she had money overseas "that I don't dare touch right now." Assistant federal defender Lyonel Norris said she told him that's not true, however.

Investors figure their money is long gone.

Rothen, the former Schwan's salesman, echoed several others who said that although Dao needs to be punished, he doesn't wish her any harm.

"You know, she deceived a lot of people but I don't hate her. I forgive her," Rothen said. "It's money, you know?"

Dan Browning • 612-673-4493