Three men indicted this week for allegedly running a complex half-fake, half-real Ponzi scheme used the promise of high returns from buying, selling and collecting collateralized subprime and defaulted consumer loan portfolios to defraud doctors, lawyers, accountants and small business owners of more than $364 million, according to indictments filed by the U.S. Attorney for Maryland district.
At a joint news conference held by the Securities and Exchange Commission and the Department of Justice, FBI special agent in charge Gordon Johnson said the fraud was uncovered based on a tip.
“Most of these investors are just learning that they have been victimized,” U.S. Attorney Robert Hur said at the conference. “The effects of this kind of fraud can be devastating. We urge anyone who thinks they may be a victim to contact the FBI.”
A collateralized loan obligation purchases pools of bank loans made to individuals and businesses. CLOs raise funds received by issuing issuance of debt and equity to acquire diverse portfolios of loans.
From at least 2013, Kevin Merrill, Jay Ledford and Cameron Jezierski, along with six affiliated companies also named as defendants, allegedly peddled the CLO scheme to investor groups, investment funds and special purpose vehicles organized by investors in Dallas, Chicago, Maryland, and Colorado, as well as from individuals. More than $90 million was invested by over 200 individual investors, approximately $52 million by family offices, and nearly $203 million by feeder funds, largely made up of groups of individuals.
The SEC alleged Merrill and Ledford used the money on $10.2 million on at least 25 high-end cars, $330,000 for a 7-carat diamond ring, $168,000 for a 23-carat diamond bracelet, millions of dollars on luxury homes, and $100,000 to a private fitness club.
Lance Wade, who represents Kevin Merrill, did not respond to a request for comment. Attorneys for the other two men were not listed in court filings.
The defendants offered and sold various forms of securities to the investors with the promise of significant investment returns from a mix of real and fake buying and selling of consumer dept portfolios— generally auto, credit card, and student loan debt—that is often sold in portfolios made up of thousands of individual debtors’ accounts.
Daniel M. Portnov, counsel at the Law Office of Sara Kropf PLLC, told MarketWatch, “Consumer debt has replaced residential mortgages (RMBS) as this decade’s hot securitized investment vehicle and certainly caught the notice of feeder fund and family office investors trying to outpace the market.”
During the time they were allegedly operating the fraud, they did sometimes actually purchase, service, and sell a limited amount of real consumer debt. They also made payments to investors of approximately $197 million, but most of that money was just money received from other investors, according to the SEC’s complaint.
The actual business and the payments were used to support the fabrication of much more fake activity that could deceive investors into believing that their investments were generating a return. As a result, the SEC’s complaint says, “many unsuspecting investors were victimized repeatedly and referred other prospective investors” to the defendants. T
The trio’s securities offerings included $1.5 million raised by Ledford beginning in 2014 using one of the indicted companies, Riverwalk Financial Corporation, which he controlled. Ledford filed a Form D with the SEC, a form of securities offering which is exempt from typical registration requirements.
An SEC spokeswoman declined comment on any further actions regarding the equity raised by Riverwalk using the SEC’s Form D.
Targets of Riverwalk Financial’s debt collection business have filed 330 complaints about its tactics, according to the Consumer Financial Protection Bureau’s consumer complaint database. Two complaints filed in 2018 are still pending. A CFPB spokesman did not respond to a request for comment on Riverwalk Financial.
The SEC’s complaint says that the offerings contained numerous misrepresentations, lists of fake debt and debtors, forged signatures, fake wire transfer documentation. The defendants allegedly offered and sold investments in the same and often fake debt and debt portfolios to multiple victims.
The documentation fraud was made easier because Ledford, who lives in Westlake, Texas and Las Vegas, Nevada, also operated an accounting firm, Ledford & Associates, PLLC, and a credit repair business. Ledford is a certified public accountant licensed by the Texas State Board of Public Accountancy and is a member of its trade association, the AICPA.
One group of investors based in Boulder, Colorado invested in $116 million of investment contracts via Global Credit Recovery, LLC, based in Towson, Maryland, and controlled by Merrill.
The investors attempted to conduct due diligence on GCR and Merrill and requested a letter from GCR’s CPA, a copy of its Schedule C, the tax form used by a sole proprietorship or single-member LLC to report its profits or losses to the IRS, and proof that Merrill’s income taxes had been filed properly.
Since GCR did not have an outside independent accounting firm checking its accounts, Merrill asked Ledford if one of the female employees at Ledford’s accounting firm, referred to as his “girl” in the criminal indictment, could sign a letter for the investors. If Ledford himself signed as the CPA, it might create a “snag,” Merrill allegedly told Ledford, according to the indictment.
So Ledford sent a letter that was allegedly written by a female employee of his accounting firm to respond to the request. And instead of acquiring any portfolios from third parties, Ledford directed his staff to fabricate two debt portfolios from lists of consumer debts already owned by another affiliated company.
Ledford sent spreadsheets containing fake lists of the consumer debt accounts for the two supposedly newly purchased debt portfolios to the Boulder investors, stating that “both files look great and that he was “very confident we can get the sales prices I projected in the write-ups.”
Source: U.S. Attorney, District of Maryland A 2008 Bugatti Veyron owned by Kevin Merrill
Portnov told MarketWatch, “This sophisticated scheme catered to these larger investors by incorporating the basic indicia of legitimacy: websites, financials, purchase agreements and even a filed Form D. Demanding independent corroboration of custodians of assets and auditors of financial statements for the funds are two fundamental steps that should be taken when making an investment under these circumstances.”
To conceal the fraud, the defendants created imposter companies with names similar to actual consumer debt sellers or brokers and opened bank accounts in the names of those imposter companies. They even created a new entity “SCUSA Financial, Inc.,” a Texas corporation with Jezierski serving as the sole director and president, and a bank account designed to mimic Santander Consumer USA SC, +0.00% The consumer credit unit of the Spanish bank Santander is often referred to in the industry as “SCUSA.” The “Fake SCUSA” opened a bank account at the same bank where the real Santander has accounts. Jezierski was the sole signatory on the Fake SCUSA account.
A spokesman for Santander Consumer USA did not reply to a request for comment on its awareness of or involvement in the investigations.
The defendants also allegedly created false portfolio overviews, sales agreements which used the names and forged signatures of actual employees of the sellers, false collections reports, and falsified bank wire transfer records and bank statements.
For the SCUSA fake portfolio, Ledford allegedly prepared a forged purchase-and-sale agreement bearing the signature of Santander’s CFO, as well as a notary’s signature. The SEC complaint says the CFO’s signature and the notary signature were fake and had been copied and pasted from a previous Santander agreement.
“Such fraudulent schemes will continue to occur and evolve, but investors, investment advisors and other gatekeepers should heighten their due diligence - especially where the investment vehicles are not bound to frequent public reporting and positive returns are guaranteed,” said Portnov.
