US embassy cable - 05GUAYAQUIL1334

UNCLAS SECTION 01 OF 03 GUAYAQUIL 001334 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: KCRM, MOPS, PGOV, SOCI, KCOR, KFRD, EFIN, EC 
SUBJECT: PYRAMID SCHEME COLLAPSES, THOUSANDS LOSE LIFE 
SAVINGS 
 
 
1. Summary: The death of Jose Cabrera Roman, a notary in 
the City of Machala in El Oro province, exposed and 
precipitated the collapse of a massive pyramid scheme he 
had run for over a decade.  Reports indicate that 
anywhere from 26,000 to 37,000 people made deposits with 
Cabrera, reportedly totaling in the hundreds of millions 
of dollars, in return for monthly interest payments of 
seven to ten percent.  Cabreras clients/victims include 
individuals from all walks of life and every province in 
Ecuador, and the public outcry (for protection from the 
victims, for prosecution of the beneficiaries) in the 
month since his death has been vocal and persistent. 
The trail of those who invested in this illegal 
operation, were aware of it but took no action to halt 
it, or tried to steal their money back after Cabrera 
died, continues to lead higher in civilian government, 
police and military ranks  fueling a full-blown scandal 
of major proportions which has thus far claimed victims 
mainly in the military. End summary. 
 
The Way it Worked 
 
2.  It appears that at some point in the mid-1990s, 
Machala-based notary Jose Cabrera Roman began his 
pyramid or Ponzi scheme taking in deposits and paying 
interest rates from seven to ten percent per month, 
which, calculated on a yearly basis, would be about nine 
times the legal maximum rate established by the Central 
Bank of Ecuador.  His clientele grew over the years, and 
at the time of his death, he had an estimated 26,000- 
37,000 depositors and his staff was seeing about 400 
people a day.  Press accounts suggest that the average 
deposit was $13,000 dollars although there were many 
including military and police who reportedely had 
deposits in excess of one hundred thousand dollars. 
Ecuadors highly regarded news magazine, "Vistazo," 
claims that at the time of his death, Cabrera may have 
had $320 million in his possession. 
 
3.  Attracted by the high interest rates, past banking 
failures and the confidence-inspiring longevity of the 
operation, people and groups from throughout Ecuador 
were depositing their life savings (or mortgaging their 
properties) to buy into this get-rich-quick scheme. 
Individually and by groups, farmers, soldiers, police, 
families receiving remittances from abroad, rich and 
poor alike were clients of notary Cabrera.  Some 
reportedly quit their jobs and simply lived off the 
interest payments.  The scheme was able to finance 
itself as long as the money base was expanding and more 
deposits were coming in.  Although there is much 
speculation about money laundering, counterfeiting or 
possible investments that generated profit, none has 
been confirmed to date and there may be no more to this 
operation than the scam itself. 
 
The House of Cards Falls 
 
4.  Press accounts describing Cabrera as being in the 
company of an eighteen year-old woman at the time of 
death added spice to the incredible story that unfolded. 
He was buried and mourned by many in Machala and for a 
few weeks his "business" continued.  The notarys son 
and daughter, who had no apparent direct connection to 
the scheme previously, took over the business and 
assured people that things would continue as before.  An 
Ecuadorian attorney who has spoken to the Cabrera family 
in the U.S. told Guayaquil Consul General that the 
family had no real knowledge of the operations of 
Cabreras business and they had been shocked to find a 
room in his office literally filled with cash, and 
hundreds of people gathered outside the offices 
s 
demanding their money.  According to the attorney, they 
very quickly realized this was far beyond their ability 
to manage and they were fearful for their safety.  The 
lawyer also stated Cabreras children claim they were 
never given any of this money and took nothing from the 
money-filled room, if for no other reason than fearing 
the crowds outside who were searching anyone exiting the 
building. 
 
Family Connections 
 
5.  Cabreras wife, Ana Teresa Gallardo Moscoso, left 
for the U.S. on November 6 and her two children, forty- 
year-old Jose Cabrera Gallardo and thirty-five-year-old 
daughter, Carolina Cabrera Gallardo, departed the 
following day for the safety of a relative's house in 
Connecticut.  Despite speculation, no hard evidence has 
yet surfaced that the family members were ever part of 
the scam or were enriched by it.  Credit checks done by 
the Consulate confirm that neither of the two children 
has obvious wealth in Ecuador.  Jose Cabrera Gallardo 
o 
recently married but lived in his parents home.  The 
daughter appears to have a legitimate construction 
business, and she is current on repaying a bank loan she 
took out for her business.  The Cabrera residence in 
Machala appears to be nothing more than an upper middle- 
class home, and the Guayaquil attorney who met with the 
family in Connecticut told Consul General that the 
family members do not wish to stay in the U.S. because 
it is too expensive. 
 
Chaos breaks out in Machala 
 
6.  When the news of the familys departure hit, chaos 
ensued.  On November 14, a frenzied crowd in Machala dug 
up the body Cabrera after a rumor surfaced that he had 
not died but had instead fled the country.  TV news 
viewers were provided with graphic footage of the corpse 
being poked with sticks by crowd members trying to 
determine if the body was really Cabrera and not a 
dummy.  The fact that onlookers were holding 
handkerchiefs to their noses supported the view that the 
e 
cadaver was real.  Jilted clients of the ex-notary have 
continued to turn out in hundreds to demand their money 
back by marching through the streets, throwing stones at 
the radio station, calling for the ouster of the Mayor 
and Governor of Machala and demanding that the 
government of Ecuador intervene and make restitution. 
Police and military intervened, but their apparent 
motivation was more to try to get their hands on as much 
of the money as they could before it disappeared than to 
restore order.  On November 16, the government of 
Ecuador declared a state of emergency in Machala but the 
atmosphere of insecurity has continued. 
 
Military and police officials involved in the scheme 
 
7.  Cabreras client list was impressive, and not only 
for its length.  Newspaper accounts of the case reveal 
that depositors represented a cross-section of 
Ecuadorian society.  Nicolas Castro Patino, a candidate 
for the Supreme Court, had deposited $15,000 with 
Cabrera, which resulted in his disqualification as a 
candidate.  A major Ecuador daily newspaper estimates 
that 20% of Ecuador's Armed Forces personnel (about 
6,000 people) gave Cabrera money.  Teodoro Codero 
Jaramillo, president of the Supreme Court of Machala, 
resigned from his post when it was discovered he had 
given money to Cabrera after initially claiming he had 
no knowledge of the scheme.  Congressional deputy 
Guillermo Haro is leading an investigation of the 
scheme, promising to reveal military and civilian 
political participants by January. 
 
8.  In another twist, on November 11 two military 
flights, including the Ecuadorian equivalent of Air 
Force One, were dispatched to Cabreras office to 
collect personal deposits made by high military 
officials in Quito.  Upon arrival, the military 
officials clashed with police guarding Cabreras office. 
A police officer sent to the office of the ex-notary to 
recover money was caught stuffing $25,000 into his 
bullet-proof vest.  During the early hours of November 
r 
12, military Special Forces soldiers were reportedly 
taking boxes and bags of money out of Cabreras office 
building after again clashing with police who were also 
taking cash away.  Machala Attorney General Alberto 
Caiviguana confiscated $346,000 from various civilian, 
police and military looters. As of December 2, 23 
arrests have been ordered of various police and military 
officials for their involvement in the scheme or their 
attempts to recover (or simply steal) money.  The 
Machala police chief and his deputy are already in jail. 
The employees of Cabrera have also been detained. 
 
Illegal pyramid schemes continue 
 
9.  The Machala newspapers continue to be full of 
classified ads offering high interest rates in return 
for deposits and dozens of people have reportedly 
withdrawn their money from the Bank of Machala fearing 
general financial instability. 
 
10.  Comment: It is still uncertain how many people made 
deposits with Cabrera, how much money was lost, and what 
Cabrera did with the estimated hundreds of millions of 
dollars.  Rumors abound that Cabrera was involved in 
money laundering, drug trafficking or other illicit 
activities.  One newspaper has reported that the U.S. 
Drug Enforcement Agency had cleared Cabrera of 
involvement in drug trafficking, which came as a 
surprise to DEA personnel at post.  A month after his 
death, the press continues to be filled with new 
revelations about this strange and sensational case.  On 
December 2, the body of Cabrera was exhumed again, this 
time legally, to determine officially if it really was 
him.  There have been unofficial calls for the 
extradition of the Cabrera family members from the 
United States.  Today saw the sacking of several senior 
military officials in Quito, including the Chairman of 
the Joint Chiefs, presumably in connection with this 
case.  The whole story has not yet fully played out and 
the scandal could still reach higher.  End comment. 
 
HERBERT