SEC Alleges Bus-Shelter Ponzi Scam : * Investigation: Tustin-based company allegedly duped 4,500 investors, regulators say. Scheme reportedly diverted money to improve president’s home.
A federal judge Tuesday ordered a Tustin-based bus shelter company to stop selling investments in what the Securities and Exchange Commission alleges was a $48-million pyramid scheme that duped more than 4,500 investors.
U.S. District Judge William Keller granted the temporary request by the SEC, which late Monday filed a lawsuit against Metro Display Advertising Inc. alleging fraud and misappropriation of the company’s money by its president, Jean Claude LeRoyer and his wife, Karen. SEC Assistant Regional Administrator Silvia Scott said the LeRoyers allegedly diverted more than $800,000 to make improvements on their Newport Beach house.
In addition, the SEC alleged that investors were never told that 25% of their $9,500 investments in Southern California’s largest bus shelter company were being used to pay sales commissions, and that the company had sustained net losses in excess of $7 million in the first six months of 1991 alone. Metro Display is one of three major companies that install and sell advertising space on shelters.
The company was also involved in a massive overselling of the bus shelters--taking investments for building almost double the number that were actually installed, the SEC alleges.
“It’s just a complete sham,” Scott said. “You think you are getting a bus shelter and you’re not.”
A lawyer representing Metro Display denied the allegations, saying that evidence will show that the company never intended to defraud investors and that the LeRoyers did not steal any company funds.
“The company will deny that it was a Ponzi scheme,” said lawyer Thomas Nolan of Los Angeles. “I think the evidence will show . . . that Bustop (Shelters) and the LeRoyers ran into difficult problems largely due to the economic turnaround.”
Metro Display, which was doing business as Bustop Shelters of California, filed for Chapter 11 bankruptcy reorganization Jan. 22, just weeks after it stopped making regular monthly lease payments to investors.
Altogether, Metro Display has 2,553 shelters in more than 60 cities and counties in the Southland and in southern Nevada, but it has collected investments to build more than 4,200.
In Orange County, Metro Display has large numbers of shelters in the cities of Cypress, Stanton, Westminster, Huntington Beach, Fountain Valley, Irvine, Santa Ana and Lake Forest. It also has a few in Anaheim and Newport Beach.
Unlike its two major competitors, Metro Display has financed its growth by selling shelters to investors, some of them elderly people on fixed incomes, in a lease-back arrangement. For a $9,500 investment, the company made $170 monthly lease payments and vowed to buy back the glass-and-metal shelters at their full price at the end of five years. Then, Metro Display pledged to give investors a 20% share of that shelter’s advertising revenue for the following five years.
On Monday, the SEC asked a bankruptcy judge in Santa Ana to appoint an independent trustee to prevent what it called the further looting of Metro Display’s funds. The judge set a hearing for 2 p.m. today to consider the request.
On Saturday, more than 200 Metro Display investors appeared supportive of a reorganization plan advanced by other investors. The plan called for transforming shelter owners into stockholders, and forgoing the monthly payments.
Allan Ross, an investor and stockholder who said he has invested about $1 million in Metro Display, asserted at the meeting that examination of the company’s records show “no malfeasance on the part of the LeRoyers.”
He and Scott Kraft urged fellow investors to write letters to the SEC urging them not to try to liquidate the company. They said their figures show that shelter owners would only receive 2% of their original investment if the company liquidates, and no more than 15% if the company sold its assets to competitors.
Without having to pay shelter owners their lease payments every month, Metro Display has the potential of being an immensely profitable company, they said. By reorganizing and concentrating on the sale of advertising space, the company could become strong enough in 18 months to start delivering a monthly return of $50 to $80 per shelter, investors were told.
They said the company had been able to sell advertising for only about a third of its shelters, instead of the industry standard of two-thirds.
The SEC’s Scott said that evidence gathered so far indicates that the company was being sustained on the basis of investor funds alone.
Gary Delgado, who came to the company as a chief financial officer and served briefly as president in December, told the SEC that LeRoyer insisted on bringing in more investors. Delgado said his warnings about the company’s heavy debt load went unheeded, Scott said. Delgado also told the SEC about the alleged siphoning of money for the house on Kings Road in Newport Beach.
Nolan, the lawyer for the LeRoyers, said the couple “took loans from the company during the first several years in lieu of a salary. In addition to that, monies were borrowed from the company to make improvements in a piece of property”--the LeRoyers’ residence.
He said the $850,000 referred to by Scott was apparently all of the money LeRoyer received from Metro Display in compensation over eight years, which “would not be out of line for the services Karen and Jean Claude rendered to this company.”
In granting the SEC’s request Tuesday, Judge Keller temporarily froze the more than $20,000 in the LeRoyers’ bank accounts, pending a Feb. 7 hearing.
Scott said Delgado told investigators that Metro Display was a fraud. “It wasn’t just some disgruntled investors. It was the president of their company saying it was a Ponzi scheme,” she said.
Scott said that many investors could not locate the shelters they were supposed to have bought, and that in some cases several investors apparently were sold the same shelter.
