SEC Says First Pension Corp. Ran Pyramid Scam : Investigation: Irvine-based firm misled clients into investing in mortgages that did not exist, the agency alleges.
The owners of Irvine-based First Pension Corp. operated an elaborate pyramid scheme that misled clients into thinking they were investing in mortgages that in fact did not exist, federal authorities disclosed Friday in alleging that as much as $124 million may have been lost to fraud and outright theft.
The allegation in federal court by the Securities and Exchange Commission is the most complete version so far of how the scheme may have worked.
The agency said as much as $99 million of clients’ funds may not have been invested in real estate loans at all, despite the investment promoters’ promises. That means the possibility of recovery may be much lower for many customers than previously thought.
The allegations were made by the SEC against prominent Orange County businessman William E. Cooper and two of his long-term associates, Valerie Jensen and Robert E. Lindley. The three have been partners in a raft of brokerages and real estate deals over the years.
The SEC asked for and received from U.S. District Judge Manuel Real an order freezing the assets of Cooper, Lindley, Jensen and five firms they established or operated. These include First Pension Corp., its parent First Diversified Financial Services, Vestcorp Securities Inc. and Ernest-Edwards & Associates. The agency also moved to freeze 31 bank accounts held by the trio and their affiliated firms.
Over and above the $99 million at risk in the real estate partnerships, the SEC charged that an additional $25 million may have been lost through outright theft of clients’ checks, forgery of corporate checks and the establishment of fraudulent bank accounts.
In April alone, according to court papers filed by the SEC, Cooper forged 114 checks totaling $1.3 million on a custodial account held at Denver-based Summit Trust Services, a firm he and his partners had established to handle their clients’ money.
Cooper also arranged in late March or early April--a period when income tax deadlines meant that clients’ contributions to their First Pension accounts would have been at a yearly peak--to give himself personal access to First Pension’s incoming mail, court papers say.
In that period, an unknown number of clients’ incoming checks disappeared, many of which were eventually deposited in illicit bank accounts opened by Cooper and Lindley, the SEC alleged.
First Pension declared bankruptcy April 22, one day after Colorado state authorities seized Summit Trust on a complaint by its president that millions in client funds could not be accounted for.
First Pension had an estimated 8,000 clients whose accounts totaled about $350 million.
First Pension functioned as a pension fund administrator, serving people who wished to make individual choices about where to invest their individual retirement accounts, Keogh accounts or other retirement funds. In practice, many of its customers were persuaded to put their money into real estate limited partnerships marketed by First Diversified and Vestcorp.
As for Ernest-Edwards, the name of which comes from Cooper’s and Lindley’s middle names, the SEC charged that it was established as a subterfuge to allow the three principals to siphon First Pension clients’ cash out of custodial bank accounts held by Summit Trust.
Cooper’s criminal attorney, Robert Bonner, could not be reached Friday. Jensen’s lawyer, Donald Smaltz, said he would not comment on the allegations until he had seen the SEC’s court filing.
Lindley’s attorney, Russell Hayman, said: “The SEC is aware that Mr. Lindley is cooperating with the FBI and the U.S. attorney, and part of that involves cooperation with the SEC.”
He added that he was not surprised at the agency’s motion to freeze the principals’ assets, but he would not comment further.
Cooper’s and Jensen’s lawyers have both said previously that their clients were cooperating with federal authorities investigating the case.
Still, the SEC said Friday that Jensen and Lindley both pleaded the Fifth Amendment when asked about their personal finances; Cooper refused to appear before the agency at all.
At the core of the SEC’s case are 218 limited partnerships that Vestcorp established and sold to First Pension clients beginning in 1981, raising at least $99 million. The firm said the partnerships would invest in second or junior trust deeds, or mortgages, and that they would return dividends of as much as 28% annually from the borrowers’ repayments on the loans.
The SEC alleges that, for the most part, the money was not invested in real estate at all. According to testimony by Ana Maritza Golan, First Pension’s operations manager, on Jensen’s instruction she set up a secret account known as the “99 minifund” from which investors in the real estate partnerships received what purportedly was income distributions from mortgages.
But the agency says no such income came in and that the investors were actually getting money other clients had sent to First Pension for their own accounts. As much as $2.1 million passed through the 99 minifund between 1988 and October, 1993, the SEC said.
The partnership investors were largely unable to get any information on the nature of these mortgages, including details on the location of the underlying property or the credit-worthiness of the borrowers.
The dearth of information afflicted Vestcorp’s own officers. SEC documents say that in 1991, Rodger Rusch, then president of Vestcorp, had tried and failed to find official records that trust deeds had been transferred to the limited partnerships his firm had marketed.
Confronted by Rusch, Cooper told him he had decided to hold the trust deeds in his own name or those of firms he controlled, rather than paying the $10 fee and going through the trouble of recording the transfers to the partnerships, the SEC said.
“Of course, that didn’t make any sense,” said Lisa A. Gok, the SEC’s assistant regional director for enforcement.
