FINANCIAL CRIME NEWS
BUSINESS LOAN FRAUD NEWS STORIES
By Stephanie Ayres
18 October 2016
In April 2010 Westernbank, based in Mayaguez, Puerto Rico, was closed by the Commissioner of Financial Institutions of Puerto Rico. The FDIC estimated the loss to its bank fund at $3.3 billion. A review of the bank’s failure by the FDIC’s inspector general concluded that Westernbank’s officers had failed to adjust to the declining economic conditions in Puerto Rico and had continued real estate and commercial lending with declining prospects for repayment by borrowers. (1)
The FDIC later brought a costly lawsuit against the officers and directors of Westernbank for causing $176 million of losses which devolved into a lengthy and contentious fight with their insurance companies. The case was only settled in March 2015 with the insurance companies agreeing to a combined payment of $34 million. (2)
Meanwhile, the US Department of Justice (DOJ) went after one of Westernbank’s biggest borrowers, Inyx Corporation, an OTCBB pharmaceutical company, and its CEO Jack Kachkar, who was charged in a case in Miami federal court with eight counts of wire fraud for allegedly obtaining loans and credits from Westernbank with false information about the value of the collateral provided, false records of company accounts receivable, and false information about the prospects for loan repayments.
Kachkar was also accused of moving over $36 million of bank loan proceeds to his personal account and the accounts of his business associates. The federal case alleges that he used these proceeds to buy expensive real estate and other luxury spending. According to the DOJ’s September 30 statement on this case, the Inyx loans and credits cost Westernbank an estimated $100 million of losses and contributed to the bank’s failure.
(1) FDIC OIG, Material Loss Review of Westernbank Puerto Rico, MLR-11-007, December 2010
(2) Emily Field, “AIG, other insurers pay FDIC $34 million to settle D&O claims,” Law 360, March 31, 2015
By Stephanie Ayres
24 October 2016
Salt Lake City, Utah
Between 2005 and 2012 Edmund Edward Wilson of St George, Utah targeted real estate developers around the country with a proposal to fund their development projects through his company, Fountain Group.
Wilson described the developers as “investors” in Fountain Group. He claimed to have an Asian backer whom he called “The General” who was involved in a plan to repatrite Us currency from China via investments such as those in his Fountain Group. Wilson then claimed that the advance fees ranging from $80,000 to $150,000 that he asked his “investors” to wrie to Fountain Group were needed to pay taxes and fees in China to get the US dollar funds released.
According to a September 12, 2013 statement on this case by the US Attorney’s office in Utah, Wilson didn’t tell the investors that he had never provided any development financing and that he was using the so-called “investor” funds he received for personal spending.
Wilson pleaded guilty to charges of wire fraud and money laundering and was sentenced in October to 108 months in prison, three years of supervised release, and payment of $12,227,920 of restitution.
By Stephanie Ayres
6 September 2016
Before 2002, Fair Finance was an Ohio company that issued promissory notes called V-Notes to local investors in northeastern Ohio to finance the factoring of accounts receivable for local businesses. It was founded and run by the Fair family, which decided to sell the company that year to a pair of Indiana businessmen – Timothy Durham and James Cochran.
Durham and Cochran received financing for the purchase and proposed continuation of the company’s factoring business from Fortress Credit Corporation and Textron Financial. Durham became CEO of Fair Finance, Cochran became chairman. Years later it would be discovered that almost from the beginning, they had something in mind for Fair Finance that went beyond the local factoring business.
The growth in the totals of insider loans made by the company to Durham and Cochran told the story. From a total of $30 million in 2002 owed to the two insiders, this amount had ballooned to about $228 million by 2009, when the company failed and was forced into bankruptcy.
As the company’s traditional business was generally allowed to continue with the proceeds going directly to Textron and/or Fortress, Durham nonetheless increased the volume of the V-Notes that were being sold to investors. By 2009 Fair Finance had sold some $225 million of notes to investors, apparently without disclosing to them that their money was simply being “loaned” to Durham and Cochran or was being used to pay off other investors.
According to court documents, neither of the Fair Finance executives made any payments on their insider loans, despite promises to their lenders, Fortress and Textron, that they would do so. Unlike the investors, the lenders had received financial statements from Fair Finance and were allegedly aware of the looting of investors’ funds being carried out by its top executives.
In November 2009, the FBI raided the offices of Fair Finance and other entities controlled by Durham. The company went into bankruptcy owing about $200 million to its small investors. Criminal charges were soon forthcoming against Durham, Cochran, and the company’s CFO Rick Snow.
Review of the Fair Finance records by the bankruptcy trustee, Brian Bash, found that Durham had taken at least $54 million for personal luxury spending which included a yacht and a house with a 45-car garage. He also made generous political contributions in Indiana, some of which were reportedly returned after disclosure of the fraud scheme at Fair Finance. Millions more were used for ponzi payments to investors as their notes came due.
Bash did not hesitate to file lawsuits against people or companies who had appeared to have facilitated the looting of Fair Finance. Two of the most contentious cases were brought against Fortress Credit and Textron Financial.
Both companies had held liens on the Fair Finance factoring contracts and had continued to receive payments from these even as Durham and Cochran were selling promissory notes to investors and taking the proceeds for personal and other uses.
Bash argued that the two finance companies were aware of the insider loans and how they were being funded and could have put a stop to the fraud scheme by withdrawing their credit lines, but didn’t do so.
The two companies put up a fight in court that continued for a couple of years. Fortress reportedly settled in 2015 and agreed to a $35 million payment to the bankruptcy estate. (1) Textron continued the litigation until Bash’s case was dismissed by a federal court in July 2015. Bash appealed to the Sixth Circuit, which reversed the decision to dismiss as to some of his claims in August 2016, with the case thus going back to US District Court for trial on those claims. (2)
As for Durham, Cochran, and Snow, they were convicted at trial in June 2012 in US District Court for the Southern District of Indiana and sentenced in November 2012 (3):
- Durham: convicted on one count conspiracy to commit wire fraud and securities fraud, 10 counts of wire fraud, and one count of securities fraud; sentenced to 50 years in prison, two years of supervised release, and payment of $208 million of restitution;
- Cochran: convicted on one count of conspiracy to commit wire fraud and securities fraud, one count securities fraud, and six counts of wire fraud; sentenced to 25 years prison, two years supervised release, and payment of $208 million restitution;
- Snow: convicted on one count of conspiracy to commit wire fraud and securities fraud, one count of securities fraud, and three counts of wire fraud; sentenced to ten years prison, two years of supervised release, and payment of $208 million of restitution.
(1) Gary Andrews, “Fair Finance Trustee Reaches $35 Million Settlement,” Indianapolis Business Journal, May 12, 2015
(2) Bash v. Textron Financial Corp., Opinion, 6th Circuit Court of Appeals, Case No. 15-3854, decision recorded August 23, 2016
US Attorney, Southern District of Indiana, Press Release, November 30, 2012
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