On the 30th anniversary of their spectacular trial, Artful Living takes a look back at swindlers Bill Rubin and Janet Karki.
It was the go-go eighties, and United States v. Rubin captured all the flavor of the decade. One of the defendants, 37-year-old Bill Rubin, drove a late-model Lamborghini and wore tinted aviator glasses and diamond signet rings. Another defendant, Janet Karki, was a 50-year-old frosted blonde with exquisitely painted nails.
Their federal court case had it all: sex, money, intrigue. Two months into the trial, the recently divorced Rubin ran off to South Dakota to marry his manicurist. Karki was heartbroken; she and Rubin were having a steamy affair. The rest of the proceedings included not only the drama of mounting evidence but also the pained stares of a jilted lover.
“It got pretty surreal,” remembers Dan Oberdorfer, who covered the spectacle for the Star Tribune. “At one point, the defense attorney straight-up dared the prosecutor to bring in a certain witness. I remember thinking, ‘What is going on with this trial?’”
It started with a simple flight school owned by a group of former military pilots. Among them was Russell Lund Jr., the only son of grocery magnate Russell Lund Sr.
“We thought the flight school was a great idea, but we just lost money and lost money,” says Ward Montgomery, one of the original investors. The school managed to stay afloat with regular cash infusions from Lund, but after nine years, it was still just limping along. “Russ kept us going, but he really didn’t have the business sense of a noodle,” Montgomery adds.
Then, six years into the venture, Lund brought in a consultant who said he could turn it around. His name was Bill Rubin, and he boasted that he had rehabbed many businesses, from lumber distribution and taxis to pet food and prophylactics. The owners liked that he had been a pilot for United Airlines. Montgomery found Rubin so charming that he shrugged off his many eccentricities, like his constant cigar smoking and the way he wore his shirts partially unbuttoned to show off his gold chains and chest hair.
Within two years, Rubin was running the flight school outright, and in 1976, he brought in his own numbers person, Janet Karki. She told the owners she was a Stanford-educated CPA who had previously done estate planning for wealthy widows. Montgomery thought she seemed kind of rough. “But I really didn’t think too much about it, because I was just happy we were finally going to pull the business out of the gutter,” he says.
Rubin outlined his vision for the company: vast horizons far beyond a simple flight school. He was thinking aircraft sales, charter flights, package deals to tropical hot spots. Montgomery was so energized by the pitch that he remortgaged his house — the one he had paid off in full — to get in on the action.
The newly renamed Flight Transportation Corporation opened on the stock market at $3.25 a share in November 1979, earning about $1 million. But that was only the start.
By 1981, FTC had a new 67,000-square-foot headquarters with racquetball courts, a steam room, a swimming pool and a constantly ticking stock-market machine. With its new fleet of 44 planes, the company could rightfully claim to be the seventh largest charter outfit in the country. Rubin signed an exclusive deal with the West Indies island of Montserrat to develop and operate its only airport for 99 years and build a 221-acre resort, complete with condos, shops, a hotel, a golf course, a boardwalk and a yacht club. He worked out a $3.7-million deal with the Cayman Islands government to build 22 executive vacation homes and 200 condos. The company owned property in eight U.S. cities, with plans to build stopover hubs for refueling and maintenance.
The numbers looked incredible. The company’s revenue rocketed from $3.1 million in 1979 to $71.2 million in 1982. During the nine months prior to March 31, 1982, earnings jumped 400% and sales 450%.
Plus the company had rock-solid underwriting. When FTC went for its second stock offering in March 1981, worth $7.2 million, it did so with the backing of the esteemed Fifth Northwestern National Bank of Minneapolis. When the company went for another offering in March 1982, worth $6.5 million, it got endorsement from three major Wall Street firms: Laidlaw Adams & Peck; Alstead, Strangis & Dempsey; and Drexel Burnham Lambert. For outside accounting, it hired the well-known Denver firm Fox & Company.
The business press was paying close attention to the rising star in Minnesota. For two years in a row, Inc. listed FTC as a top 100 fastest growing company. In its April Fool’s Day 1982 issue, Financial World published a glowing profile of the twosome at the top: “To date, nearly everything Rubin and Karki have touched has turned to gold,” it read. In the article, Rubin predicted the company would have half a billion in revenue by 1983.
On June 3, 1982, FTC brought out a $25-million stock offer. On June 14, the underwriters at Moseley, Hallgarten, Estabrook & Weeden increased the company’s stock issue of 650,000 shares by 10%. That was four days before it all collapsed.
On June 18, 1982, a suit of attorneys from the U.S. Securities and Exchange Commission stormed the Taj Mahal — Rubin’s affectionate nickname for the company’s lavish Eden Prairie headquarters. Two hours later, FBI agents showed up and confiscated more than 60 boxes of documents.
Inside, investigators found all the makings of a fake company, including an IBM Selectric typewriter along with a huge array of typewriter balls, handy for making documents appear as if they had been typed on different machines. They found piles of forged documents, including one from the Cayman Islands government declaring FTC the exclusive air charter company to the Caribbean archipelago. “They had a big white board, and they had written all of these phony flights on it, so if a banker asked where a certain plane was, they could say, ‘Oh, it’s in New York right now,’” says Oberdorfer. Investigators found 24 separate bank accounts under Rubin and Karki’s control.
The truth was, FTC didn’t really do any business. The numbers, the deals, the condos — it was all a mirage. In reality, Rubin and Karki used the money from the stock offerings to buy cars and jewelry.
During the three-and-a-half year investigation, federal agents uncovered the truth about the duo. Rubin was never a pilot for United; he was the son of a button salesman and a college dropout. Karki, born Eva Lu Wagoner, came from a tough background in central Iowa. Her father was a part-time boxing coach and fight promoter who owned a bait shop. Her mother was a traumatized housewife who filed for divorce on the grounds of inhumane treatment. When she was 16, Eva Lu gave birth to a baby girl who was raised by her mother. Her brother spent five years in prison for assault with intent to commit rape. Before coming to Minnesota, she had been a bartender, not an accountant.
Rubin and Karki’s charade might have gone on longer if not for Charles Aune, FTC’s chief pilot, who says the smell of rotten fish was all over the place. “Bill and Janet would come back from the Caymans in
the middle of the night, and the next day, she would be wearing a big diamond ring on every finger,” he says. Aune was glad to see them go down, especially Karki: “Janet would blow her top all the time. One time, she threw a phone at me, and the only reason it didn’t hit me was because it was hooked into the wall.”
Rubin and Karki’s trial started November 4, 1985. They faced charges of fraud (totaling some $52 million), check kiting and inflating revenues. Assistant U.S. Attorney Tom Heffelfinger knew the pair would shock the Northern sensibilities of the jury, and he poked that nerve every chance he got. He detailed Rubin’s exotic car collection: his Porsche, five Corvettes, 1946 Rolls Royce and 20 others. He took the jury to see the Taj Mahal, including the upper-level suite with its sliding wall between Rubin’s office, Karki’s office and a bedroom. The luxe sanctum had a king-size bed with a mirror above it, plush beds for Karki’s poodles, a hidden bar, and “one of the best views in Hennepin County,” says Heffelfinger. Even though Rubin was married with three young sons, the pair made no secret of their fling: “We all knew they had a big bedroom that connected their offices,” says Aune.
After tickling the prudish sensibilities of the jury, Heffelfinger went to work on the lies. He put United’s vice president of personnel on the stand to testify that Rubin had never worked for the airline. Rubin just shook his head and said the company must have lost his records. “The first person Bill Rubin deceived was himself,” says Heffelfinger. “He was one of those people who told lies so many times they became real in his own mind.”
In their defense, Rubin and Karki said they weren’t schemers; in fact, they themselves were swindling victims. The defense argued that James Bodden, a major party leader in the Cayman Islands, had stolen $8 million from FTC accounts. “It was the white-collar version of the SODDI defense — some other dude did it,” says Minneapolis attorney John Lundquist, who worked on a related case.
At first, Rubin and Karki were in solidarity. That is, until Rubin married his manicurist halfway through the trial. Then Karki wanted to bury him. “The prosecutor was willing to go easy on her if she just testified against Rubin, but she wouldn’t hear of it; she was absolutely in love with him,” says Joe Friedberg, Karki’s attorney. “Of course, after she found out about the marriage, she wanted to testify against him, but it was too late.”
Friedberg openly taunted Heffelfinger in court. He posited to the jury: If Rubin and Karki were so wrong about Bodden, then why oh why didn’t the prosecution bring him in to testify? The exchange went on for weeks. Then, at the end of the trial, the courtroom’s double doors swung open to reveal James Bodden, dressed in an exquisite double-breasted gray suit.
“It was unbelievable,” says Friedberg. “And then he answered all the questions in a crisp British accent, which instinctively sounds believable to Americans.” Bodden told the jury that he only vaguely remembered Rubin and Karki — when he had to have them “dispatched” from a reception at his home for being too inebriated.
All told, the jury heard from an unbelievable 47 witnesses. “[The trial] went on and on,” says Ronald Gernandt, a farmer from Lonsdale who was the jury foreman. “One of the jurors got sick with a 100-plus-degree temperature, and she was lying on the floor. They recessed long enough to take her to the emergency room, and then they came back and put her right back in that juror’s chair.”
After nine days of deliberation, the jury convicted Rubin and Karki on 12 and 11 counts of fraud, respectively.
When they returned to court for sentencing after a break, Friedberg was stunned to see his client. “I hadn’t seen her for quite awhile, and she looked 20 years older, he says. “She was completely destroyed by Rubin getting married.”
Rubin was sentenced to 35 years, a state record for white-collar crime until Tom Petters came along, and was sent to the federal prison in Sandstone. Karki got 25 years and was shipped off to the federal prison in Pleasanton, California. Coincidentally, one of her former underwriters, Michael Milken, joined her there in 1991.
When Rubin and Karki went into free fall, they took three former employees with them and unleashed a firestorm of civil suits against the accountants, auditors and bankers who should have smelled a rat, but didn’t. “The FTC case was one of the first times that professional service providers really got hammered for the acts of their clients,” says Lundquist. “That’s not unusual today, but in the eighties, it really was.”
More than 50 lawsuits were filed in connection with the FTC case. Drexel Burnham Lambert’s lawyers argued that Rubin had charmed their young banker, gotten him drunk, introduced him to some girls and taken him out on a yacht, thus unduly subverting due diligence. But it didn’t work. The firm settled for $5.2 million and was forced into bankruptcy in 1990. Fifth Northwestern National Bank lost a $4-million claim. The New York firm of Reavis & McGrath settled for $1.6 million, as did Moseley, Hallgarten, Estabrook & Weeden. Opperman & Paquin paid out $2.1 million. And Fox & Company shelled out $5.2 million.
But the real lesson, says Oberdorfer, is the power of a slick exterior. “The amazing part about the FTC case is that they invented a company out of whole cloth,” he says. “With Bernie Madoff, there was a very complex maze of real and fake businesses that prosecutors are still teasing apart — same with Tom Petters. But Rubin and Karki built a business with a stack of glossy brochures. And they fooled a lot of smart people.”
Rubin got out of prison in 1995, nine years before his November 2004 death in West Palm Beach, Florida. But Friedberg isn’t buying it. “I wouldn’t doubt for a minute that he faked his death,” he says. “When [attorney] Ronnie [Meshbesher] told me he had died, I said, ‘You better check; that son of a bitch never told the truth about anything.’”
Aune also believes that Rubin is out there somewhere. “More than once I heard him say, ‘Well, if it all goes bad, I can just die and show up somewhere else with a new name,’” he says.
After serving nine years in prison, Karki moved to Washington. She died of cancer last summer.
The one emblem of FTC that survives is the Taj Mahal at Flying Cloud Airport. Today, the building is owned by Minneapolis Community & Technical College and serves as a training center for future air-traffic controllers. All the luxe amenities were long ago ripped out — the pool, the indoor track, the chandeliers. The love nest is filled with beige cubicles.
In the end, some $25 million was recovered for investors by freezing accounts and selling off company headquarters and a few planes. But at least half a million dollars in jewelry was never found.