Regulators Seize Investment Firm in Surprise Raid : Financial Dynamics Ran a ‘Ponzi’ Scheme, State Says

In an unusual action, state regulators took over a Covina-based investment firm with no advance notice Tuesday, claiming that it broke securities laws and made false promises to individuals who had invested $60 million in recent years.

State Department of Corporations officials, accompanied by local police, arrived at the offices of Financial Dynamics at 10 a.m., led about 30 employees into a seminar room and established a court-appointed receivership to protect the assets of 11,000 investors, mainly from Southern California. On Tuesday, Los Angeles Superior Court Judge Warren Deering had granted the department’s request to take over the company.

The state officials were unable to say later how much of the $60 million was recoverable or to comment on how much money investors may get back.

“This is highly unusual,” said Diane Coleman, an attorney with the Department of Corporations. The surprise takeover “is a drastic form of relief which the court would only grant in circumstances where the violations were egregious.”

Marketed Many Programs

Financial Dynamics is one of several investment firms operated by Richard E. Donovan, described as a tall, charismatic entrepreneur who recruited clients at public seminars and allegedly promised to back up their investments with his own cash. Efforts to reach Donovan and other Financial Dynamics officials Tuesday afternoon were unsuccessful.

During the past few years, Donovan is believed to have marketed 40 investment programs through Financial Dynamics and also companies known as Dynamic Investments, Mortgage Dynamics, Dynamic Equities and Progressive Properties.

The investment programs included interests in trust deeds, wind energy production programs, real estate and condominiums--in which Donovan routinely promised returns in the range of 22% to 27% annually, according to the Department of Corporations.

In a statement, the department claimed that its investigation shows that Donovan conducted a “Ponzi”-type scheme in some of the programs, in which the money of new investors was used to pay earlier investors. They also made allegations that he misrepresented and omitted important facts, grossly mismanaged and switched investments between funds without notifying clients.

“Thus far, none of Donovan’s programs have been successful,” Department of Corporations officials said in a statement. “Donovan has denied any liability to investors and has not fulfilled any of his personal guarantees.”

Coleman said investors appear to have lost “hundreds of thousands of dollars in various cases.” She added: “Some investors have received a return which appears to have consisted of later investors’ money. I don’t know if any received a profit.”

Donovan also allegedly promised some investors that their money would be lent to utilities and even the Navy for a big return. “The record will show that no money went into any utility companies or government agencies or big corporations,” said David Chang, another attorney with the Department of Corporations.

Firm’s Assets Frozen

Under the terms of the court order, the investment network’s assets have been virtually frozen while the receiver, attorney Nancy R. Schauer, takes control and assesses the complex situation.

In addition to taking control of the two-story Covina offices and all bank accounts, Schauer moved Tuesday to secure six of Donovan’s airplanes at airports in Orange County and Long Beach, Department of Corporations officials said.

According to employees with the Department of Corporations, complaints about Donovan’s programs were first heard a few years ago, surging late in 1985.

After police and state regulators arrived at Donovan’s offices early Tuesday, they led some 30 employees into a seminar room where they waited for two hours as records were secured, recalled J. H. Doocy, an investigator with the Department of Corporations.

Doocy said the decision was made to establish the receivership without prior notice in order to protect the investors. “We were very concerned what might happen to the books and records and assets had 24 hours’ notice been given,” he explained. “We had to err on the side of caution.”