Police Arrest Ex-Investment Firm Official : Say W. Covina Man Ran a Ponzi Scheme

An investment counselor who allegedly lured thousands of investors into parting with at least $30 million was arrested Friday at his West Covina home on 37 counts of grand theft and securities law violations.

Richard Earl Donovan, 46, former operator of Financial Dynamics of Covina and other investment firms, recruited clients at public seminars for projects ranging from wind machine farms near Palm Springs to apartment houses in Fresno, the district attorney’s office said.

In July, 1986, state Department of Corporations officials seized Financial Dynamics, saying Donovan had made false promises to his investors, routinely offering them annual returns of between 22% and 27%.

Some May Lose Homes

At the request of Wells Fargo Bank, a major creditor, Donovan was placed in involuntary bankruptcy in December, 1986.

The six grand theft counts against him are based on allegations that he ran a classic Ponzi scheme, in which money raised from new investors was used to pay off earlier investors, the district attorney’s office said. The charges involve $6 million collected over five years from more than 1,500 investors, mostly in real estate ventures, according to prosecutors.

But Department of Corporations attorney David Chang estimated total investor losses at $30 million, which he described as “a conservative figure,” and said some individuals lost as much as $60,000.

Authorities said the 31 securities law violations with which Donovan is charged stem from his failure to receive approval from the Department of Corporations or follow legal procedures.

Donovan is also accused of setting up a program whereby investors could take out second mortgages on their homes and use the money for investments, the district attorney’s office said, adding that some victims are having difficulty repaying those loans and could lose their homes.

Denies Wrongdoing

In some cases, authorities said, the Internal Revenue Service attached investors’ wages after determining that they owed taxes because Donovan’s programs did not qualify as legal tax shelters.

Donovan’s attorney, Steven J. Stanwyck, said the charges are “without any substance” and that his client “emphatically and angrily denies wrongdoing.”

He said Donovan, who was seized while having breakfast and taken to county jail, was expected to be released on bail late Friday.

“The classic Ponzi has nothing to do with what happened to Mr. Donovan’s business,” Stanwyck said. He declined to elaborate.

Chang said the Department of Corporations’ investigation is continuing.