Examiner Says Pioneer Actions Resembled Ponzi : Bankruptcy: Court probe of mortgage firm finds evidence that officials used newly solicited funds to pay on previous investments.
During the year before its January bankruptcy filing, Pioneer Mortgage engaged in business practices that a court-appointed examiner said “could fairly be . . . characterized” as a Ponzi scheme.
The financially troubled investment firm evidently used newly solicited funds to pay returns on previous, troubled investments, according to the March 22 report by J. Cole Francis.
Francis’ preliminary review uncovered a decided lack of formal controls and accounting standards that led to “errors and omissions” that appeared to violate state securities regulations. Francis’ report confirmed complaints by investors that Pioneer failed to keep complete records on its investments.
Francis determined that a Ponzi scheme “appears to have been used” as Pioneer owner Gary Naiman struggled to find the funds needed to continue making payments to investors as the Southern California economy soured. But, because of a lack of hard evidence, Francis has “not yet concluded that (Pioneer) was engaged in a Ponzi scheme.”
Francis, who continues to review Pioneer’s tangled records, will file supplemental reports to U.S. Bankruptcy Court Judge James W. Meyers, who approved Francis’ appointment in February.
As many as 1,000 Pioneer investors are expected to attend a meeting today at Golden Hall in the San Diego Civic Center. Investors are expected to air complaints about Pioneer as well as discuss legal options aimed at recovering their investments.
Pioneer’s January bankruptcy filing prompted more than 100 lawsuits in U.S. District Court and state Superior Court in San Diego that allege fraudulent activity by Naiman, Pioneer’s former president. Naiman has stepped aside as president, but his family retains ownership of Pioneer.
The preliminary report was warmly received by attorney Tim Cohelan and two other attorneys who represent more than 100 Pioneer investors who have filed suit. Cohelan said the report supports his contention that U.S. District Judge John Rhoades should consolidate the bankruptcy and fraud cases.
Francis’ initial report was prepared for use in today’s 10 a.m. hearing in Bankruptcy Court, where Judge Meyers will hear arguments on the disposition of $250 million in real estate loans that Pioneer arranged for its clients.
Investors are at odds over how Bankruptcy Court should handle the investments, which involve loans secured by real estate. Some investors want the loans to be turned over to individual investors. Others argue that investments should be pooled, with any profits being divided on a pro-rated basis.
Francis’ report, which was based on a relatively quick review of Pioneer’s erratic filing and accounting systems, attacked Naiman for using “questionable” auditing procedures and property appraisals. Francis said that Pioneer also appeared to have violated several state Department of Real Estate regulations.
According to the report:
* A lack of formal controls and accounting standards led to “questionable accounting and record-keeping practices.” Investor funds appeared to have been withdrawn from trust accounts without investors’ authorization, “in violation of statutory rules.”
* A manual ledger system designed to track investments “made errors and omissions difficult to detect and creates a strong likelihood that large errors were made on a routine basis.” The company’s weak record keeping and accounting practices appeared “to have broken down in late 1990 and are only now being corrected.”
* Loan and investor files that Pioneer was supposed to maintain “vary significantly in their degree of completeness.”
According to Francis, Pioneer’s financial woes began in 1988 when the company expanded rapidly into new types of products. Before the mid-1980s, Pioneer concentrated on arranging short-term loans that were secured by first- or second-trust deeds on single-family residences. But Pioneer gradually shifted to junior deeds on larger residential and commercial loans, including hotels, resorts and undeveloped land in California and Arizona.
The report also found no ties between Naiman and Dennis Schmucker, who was recently named Pioneer’s chief executive. Many Pioneer investors have objected to Schmucker’s presence at Pioneer because he was appointed by Naiman just one day after Pioneer entered Bankruptcy Court.
William Wilson, a Los Angeles-based attorney who represents Schmucker and Pioneer in Bankruptcy Court proceedings, said the report was “welcome” because it found no basis for charges that Schmucker was beholden to Naiman.
