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Bankruptcy fraud is one of the hardest crimes to prove. Until someone like R. Douglas Krotzer comes along.

Krotzer, an eccentric millionaire businessman whose hobbies included nude gardening, told creditors he was broke when his company went under and filed for bankruptcy in 1991.

His West Seneca swimming pool company owed $16 million to as many as 33,000 creditors, a group that included hundreds of his former workers and thousands of people who bought pools they never got.

Sorry, said Krotzer, I have no money left for refunds.

But two years later and a few hundred miles south, park rangers at the Ocmulgee Indian Monument National Park near Macon, Ga., caught a man digging a hole.

It was Krotzer up to his elbows in the Georgian red clay, burying $500,000 in cash and another $800,000 in rare coins. He said he didn't trust banks.

Krotzer pleaded guilty to bankruptcy fraud, forfeited the cash, paid a $135,000 fine and was sentenced to a year's probation, including six months home confinement.

Krotzer got caught red-handed. But he's by far the exception in a system where some investigators estimate that at least one of every 10 people who file bankruptcies in Western New York try to defraud the system.

Bankruptcy is designed to help honest debtors get a fresh start. Investigators say it has also become fertile ground for fraud artists who want to file bankruptcy without giving up anything to people they owe.

Because the system is largely based on trust, bankruptcy can be exploited by those who fail to report all their income and assets. FBI agents say some of the cheats put possessions like luxury boats and cars in the names of spouses or friends. Or, like Krotzer, they just don't report all they own.

Perhaps the most common -- and least detected -- form of bankruptcy abuse involves people who run up huge credit-card debts, knowing they will never pay the bills and will use bankruptcy to wash away the debt.

"It is a good system in most ways, but it is open to abuse," said Alan J. Bozer, a Buffalo attorney. "In some cases, bankruptcy is used to provide a safe haven for criminals and fraud artists."

The Buffalo FBI office knows this, but has just one agent, Michael Vincent, specializing in bankruptcy fraud, although other agents are assigned to help on big cases.

The FBI seldom goes looking for bankruptcy fraud. Agents investigate when someone -- usually a lawyer, angry creditor or disgruntled ex-spouse -- complains.

"We can't take everything," said
David Todtenhagen, Vincent's boss in the White Collar Crime Squad. "The FBI has so many cases and only so many agents. We have to be selective."

U.S. Trustee Christopher Reed works with the FBI as the Justice Department's watchdog on bankruptcies. But while filings here more than doubled in the 1990s, the trustee's Buffalo staff has shrunk. Attorneys and accountants are half the number they used to be, and the overall staff has gone from nine to six since 1991.

A law enforcement official said Reed's staff is competent and hard-working but pointed out the obvious: As the cases filed here soar, more people should scrutinize bankruptcies, not fewer.

"To me, a lot of these cases are legalized theft," the official said. "I don't think I've ever seen a bankruptcy without some element of fraud in it. When a person claims he only owns $200 in clothing and $500 in furniture, it's false on the face of it."

But when authorities try to crack down on bankruptcy fraud, they often come up against elusive scam artists like Archie and William Karijanian.

The father and son team, who ran an Amherst company selling metal buildings, hid behind the cover of U.S. Bankruptcy Court while they bilked hundreds of people for more than $1 million.

Even with dozens of FBI agents tracking fraudulent sales across the country, and a skilled prosecutor using computer spreadsheets to document the cheating, it took seven years before the Karijanians went to prison.

The Karijanians found a sure way to make money: They got people to pay thousands of dollars for buildings, and never delivered.

When too many people complained, the Karijanians would file a bankruptcy, shut down their company and open up another scam business under a new company name. They changed the companies four times and stole from dozens of farmers, homeowners and businesses.

Bill Karijanian, 28, learned how to lie and cheat from a master. His father, Archie, 63, was Western New York sales manager for Metropolitan Life Insurance Co. in the 1980s before he was convicted of swindling $100,000 from the savings of elderly customers in Erie and Niagara counties.

A decade later, victims of the Karijanians' bankruptcy scam say they are as disgusted by the system as they are at being taken. They are angry and upset that the Karijanians were able to use bankruptcy to avoid repaying the money they stole.

"I'm against bankruptcy," said James Hoopes, a vegetable farmer in northern Pennsylvania who is still making payments on the $68,000 the Karijanians cost him. "It's legalized stealing as far as I'm concerned."

Martin F. Littlefield, an assistant U.S. attorney who presented enough evidence to persuade the Karijanians to plead guilty, called bankruptcy fraud one of the toughest crimes to prosecute.

How do you tell an honest executive filing bankruptcy for legitimate reasons from a pair of crooks who use the law's complexity to their advantage?

"Proving the lie is a very difficult thing," said Littlefield. "We went back and canvassed every one of the individual victims. That took a tremendous amount of time by the FBI."

Gary Rotundo, a West Side dry cleaner who was cheated by the Karijanians, didn't need a lawyer to know what happened to him.

"I knew I had been taken," Rotundo said. "I've always considered myself a pretty good business person. He had a little extra advantage. He befriended me."

Only 21 at the time, Bill Karijanian was a husky, good-natured young fellow who spent the summer of 1989 helping Rotundo race offshore power boats.

Karijanian went with Rotundo and boat driver Matt Wagner as they raced up and down the Eastern Seaboard. They spent long hours on the road together, traveling to races in Florida, South Carolina and Michigan.

"He just seemed like the nicest guy you ever met," Wagner, a medical supply salesman, said of Karijanian.

Rotundo ordered a metal building from Karijanian, but then waited months for it. The same scenario was playing out between the Karijanians and other irate customers across the country.

Through the complaints of Rotundo and others, prosecutors finally had enough to put the case before a grand jury.

"I was in the waiting room with another gentleman," Cheryl Canadas, one of the victims from California, said after she came here to testify before a grand jury. "This one man got taken for $100,000. Another one for $200,000."

The Karijanians both entered felony guilty pleas. Archie Karijanian got 30 months in federal prison. His son got 25 months.

They were ordered to repay $1 million to their victims, but both claim they are penniless. The victims may never get their money.

In fact, Archie Karijanian was represented at taxpayer expense by attorney Kimberly A. Schechter of the Federal Public Defenders Office. Ms. Schechter said the Karijanians did not plan to cheat customers, but did so after their business went sour.

Rotundo never moved up to the next stage of power boat racing. He was so soured by the experience he never raced again.

"The only time I ever saw him again was in court," Rotundo said of Karijanian. "I was sitting there next to some Amish people who had been taken. I said, 'Bill, you got a lot of brass.'"

WEDNESDAY: The alternatives to bankruptcy.

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