Finance Firm Files Chapter 11 as Probe Expands

A Newport Beach finance company filed for bankruptcy Tuesday after state regulators who had accused it of fraud won the appointment of an investigator to look into its operations.

Performance Capital Management Inc. said its petition for reorganization under Chapter 11 of the federal Bankruptcy Code is part of a plan to convert its five limited partnerships into a new publicly traded corporation.

The company buys bad credit-card debt from banks for pennies on the dollar and then either collects on those debts or repackages and resells them.

State regulators said the bankruptcy filing will not prevent them from pursuing a lawsuit alleging that the company duped more than 1,500 investors who contributed an estimated $58 million to the firm.

“We can fight this out in the courts in the next year and spend an enormous amount of money in doing this and put all our plans on hold, or we can move into the bankruptcy court and deal with [state regulators] there,” said Vincent Galewick, chief executive and founder of Performance Capital.

Galewick said the company has planned to go public for several years, and had registered with the Securities and Exchange Commission a year ago.

By filing for bankruptcy, he said, he hoped to deal with both the consolidation of the limited partnerships and the state’s lawsuit at the same time.

“They think that if they declare bankruptcy that they’re better off because we won’t bother pursuing them anymore,” said Bill McDonald, chief of enforcement for the state Department of Corporations. “We want to make sure that the fraud investigation continues.”

Performance Capital began soliciting investors in 1991, according to a lawsuit filed by the state against Galewick and his companies that is being tried in Los Angeles Superior Court.

In 1996, the largest fund, which had raised $28.7 million, lent $2.3 million to three of the other funds, in violation of the company’s charter, the lawsuit alleges.

Galewick said the transfer was a result of an accounting technicality, was repaid when state officials pointed it out, and that “nobody was harmed by it, nothing happened that prejudiced anybody.”

State officials, who are trying to bar Galewick from the securities industry and revoke his company’s broker-dealer license, said the arrangement was fraudulent.

“When you give people their own money back in their investment and pretend that they are reinvestments where there are no investments made, that would be characterized as a Ponzi scheme,” McDonald said.

Galewick denied that his company is running such a scheme, saying that it is profitable, has $10 million in cash on hand and a portfolio of $2.3 billion in bad debts on which it is trying to collect.

The company, which has 200 employees, will have revenues of $40 million this year, Galewick said.

Also listed in the bankruptcy filing are four other companies, all controlled by Galewick, affiliated with Performance Capital: Vision Capital Services, Income Network Co., Performance Development Inc., and Atlas Equity Inc.

In total, the companies listed $10.1 million in assets and $12 million in debts.