State Suit Names Property Broker in Wide Abuses : Commercial Acceptance Corp. Accused of Pension Fund Borrowing Fraud
California securities regulators Tuesday filed a civil suit alleging wide-ranging abuses involving some $60 million borrowed by a so-called personal property broker from about 400 pension and profit-sharing funds of companies and individuals.
The Corporations Department alleged securities fraud against the broker, Commercial Acceptance Corp., and 10 other firms and 20 individuals. State investigators found no identification on the firm’s office doors in a downtown Los Angeles building at 411 West 7th St.
Among the individual defendants is John C. Ellsworth, who pleaded guilty in New York twice to grand larceny and once to possession of a forged document, according to the suit.
The pension and profit-sharing funds had made their investments on the understanding that the money would be used to make insured loans that were backed by adequate collateral in the form of personal property. The investors were also presumably promised an attractive rate of return.
Ellsworth-controlled firms allegedly borrowed $23 million of the investors’ funds. At the same time, Ellsworth headed up “alleged” European insurance carriers that purported to insure the investments, the suit said. However, the state said, no evidence of insurance was found.
Allegations about the central defendant, Commercial Acceptance, included:
- It lent another $20 million of the “insured” funds to other defendant firms, including those headed by Commercial Acceptance’s president, Barry Francis Gray, and its chief financial officer, David A. Facciani.
- The Corporations Department could not establish that the firm had even the minimum net worth of $25,000 required of personal property brokers by state law.
- As of Nov. 10, Commercial Acceptance was in default on more than $15 million in loans and interest payments.
- Some key records were missing and the rest poorly kept, the suit said.
- The firm was frequently overdrawn at its bank, a condition that was not reflected on its own records.
- Instead of personal property, the collateral on the company’s loans to defendants was of various types, some involving “great risk.” This category included $1.5 million in promissory notes to Ellsworth from a Saudi Arabian prince who was not named. It also included an airplane, a ship and a helicopter, which the suit said could be “easily removed from jurisdiction of the court.”
- An Ellsworth-controlled firm, U.S. Coal, identified as a borrower from Commercial Acceptance, and other defendant firms also are located at 411 West Seventh. A lawyer for Commercial Acceptance has offices at U.S. Coal, and it “appears that personnel from one defendant corporation may perform work for other and different defendant corporations.”
The 45-page suit did not name the firms and individuals whose pension and profit-sharing funds are invested with Commercial Acceptance.
Melinda Brun, senior trial counsel for the Corporations Department, said a hearing on her request for a restraining order and the appointment of a receiver would be held today in Los Angeles County Superior Court, where the suit was filed. The complaint seeks to tie up the assets of the defendants and to prevent alteration or removal of records.
‘Lot of Mistakes’
President Gray of Commercial Acceptance, asked late Tuesday about the suit, said he had just been served a copy and would confer with his attorney before commenting. However, he said that he had read the first page and, “I see a lot of mistakes.”
An attorney for one investor, Stephen J. Webb, said creditors are to meet today to form an official creditors’ committee. He noted that his client first became aware of a problem when the administrator of his pension plan failed to receive payment on notes due June 30.
In recent weeks, investors have held two meetings, Webb said. At the latest one, on Nov. 4, he said Gray and Ellsworth assured investors that their funds were insured. He said the trustee for the investors’ funds, United Security Trust of Santa Barbara, received information recently that the supposed insurers were dissolved last year and the funds went to Ellsworth.
Edith Erdmann, a bookkeeper for RRB Consultants Inc., Van Nuys, an investor, told The Times that one corporate pension fund represented on an investors’ committee has $4 million invested.
Some of the plans cover hundreds of employees, the state’s lawsuit said.
$1-Million Check
Up to 90% of the funds obtained from the pension and profit-sharing plans are “loaned” to “borrowers” composed of the defendant groups, the complaint said. It added that Commercial Acceptance issued collateral trust notes to investors who “are supposedly investing in blind loan pools administered by an independent trust company” for the purpose of funding personal property loans.
“In fact,” it continued, “the notes are issued by (Commercial Acceptance) directly to each investor.”
The suit also said Commercial Acceptance received and deposited a $1-million check drawn on Ellsworth’s account at a Belgian bank, Credit du Nord Belge N.V., that later was returned for “nonsufficient funds.” But Commercial Acceptance records still show the check as having cleared, the complaint said.
In addition, it said, the same Belgian bank returned unpaid to the investors’ trust five drafts totaling $1,375,000 that had been sent by Ellsworth to Commercial Acceptance and forwarded to the trust. Dates of these transactions were not stated in the suit.
The complaint alleged that Commercial Acceptance and several related individuals violated state regulations concerning keeping of records by a finance company.
Among other things, the suit said, there were at least 10 loan files in which no collateral can be identified. Further, no loan files were found to contain loan repayment records, and loan applications are “largely missing or incomplete” on files relating to the defendants, the suit said.
Also, it alleged, investors were not told that the company was not foreclosing on properties that collateralized the loans to defendants.
