Investment Company Accused of Running a Ponzi-Type Scam

Commercial Acceptance Corp. agreed Tuesday to be placed under control of a bankruptcy trustee, and separately a state official said the company is under criminal investigation for its handling of about $60 million of investments by area pension funds.

Melinda L. Brun, senior trial counsel for the California Department of Corporations, said that the U.S. Attorney’s office agreed to take the case for possible criminal prosecution. Meanwhile, Brun submitted evidence to a state court alleging that Commercial Acceptance used a Ponzi-type scheme to defraud investors.

The Corporations Department lawyer told the Los Angeles County Superior Court that the investment company’s records showed that it had used funds from new investors to pay interest as high as 12.75% on supposedly insured securities in the form of collateral trust notes and commercial paper notes.

Use of new investor funds to pay interest to prior investors is a common pattern of the so-called Ponzi scheme used in securities frauds.

Based on the evidence, Superior Court Judge Jerry K. Fields recently granted a preliminary injunction against the Los Angeles firm, its two top officers and a number of affiliates. He also confirmed appointment of David L. Ray as receiver for Commercial Acceptance.

Even though the company filed a Chapter 11 proceeding under the federal bankruptcy code, Bankruptcy Judge Lisa Hill Fenning had allowed the state to proceed with the injunction action it had begun in mid-November.

During a brief hearing in bankruptcy court Tuesday, company representatives agreed to appointment of a trustee rather than to fight for a right to remain in control of the business during the Chapter 11 reorganization.

Fenning ordered the U.S. Trustee’s office to appoint a trustee. She added that Ray, the appointed receiver, would be eligible for appointment as trustee.

In documents submitted recently to Superior Court, the state regulators said they had corroborated key information given them last month by Dennis Wagner of Glendale, Ariz., who said he borrowed $10 million to $14 million from Commercial Acceptance and kicked back large sums to its principals.

A review of Wagner’s and other loan documents disclosed that interest payments due investors were being made from investors’ money rather than from repayments to Commercial Acceptance on loans it made with its capital, the state agency told the court. The funds used for paying interest were kept in a so-callled interest reserve account, according to the filing.

Fields issued a preliminary injunction against two groups. One comprises Commercial Acceptance; its president, Barry Francis Gray; its chief financial officer, David A. Facciani; CAC Financial Group; HLS Enterprises and Seventh Street Investments. The other group includes John C. Ellsworth, Desert Marvel Ltd., Intervideo Ltd., Apple Valley Air Service, Oasis Entertainment Ltd., Slauson Tube & Steel Ltd. and Dennis Wagner Enterprises.

The injunction restrained them from “further violation” of state securities laws through offering or selling unqualified securities and by means of untrue statements or omissions of material facts.

The order put Ray in charge of all the assets of each of the individual and corporate defendants.