Investment Fraud: Due Diligence in a Deceptive Environment Sean B. Hoar Assistant United States...

Investment Fraud: Investment Fraud: Due Diligence in a Deceptive EnvironmentDue Diligence in a Deceptive Environment

Sean B. HoarSean B. HoarAssistant United States AttorneyAssistant United States Attorney

Oregon Association of Certified Fraud ExaminersAnnual Seminar

May 14, 2010, Portland, Oregon

OverviewOverview

Case study of Case study of U.S v. Pac Equities, IncU.S v. Pac Equities, Inc..– Case backgroundCase background– Evidence seizure, organization & analysisEvidence seizure, organization & analysis– Asset seizure and preservationAsset seizure and preservation– Trial presentationTrial presentation

Opening statement/case in chief/closing argumentOpening statement/case in chief/closing argument

– Sentencing presentation/resultsSentencing presentation/results– Appellate process/resultsAppellate process/results– Lessons learnedLessons learned

Case study: Case study: U.S. v. Pac EquitiesU.S. v. Pac Equities

Complex case involving real estate Complex case involving real estate development and lending companydevelopment and lending company– Driven by investor moneyDriven by investor money– Investors solicited with promise of first trust Investors solicited with promise of first trust

deed security and 10% return on investmentdeed security and 10% return on investment– Plausible explanation of profitsPlausible explanation of profits– Representation of substantial development Representation of substantial development

and lending experienceand lending experience


Unfortunately, representations about Unfortunately, representations about CEO’s experience and security of CEO’s experience and security of investments were falseinvestments were false– Over 300 people invested over $19 million, Over 300 people invested over $19 million,

and lost over $16 millionand lost over $16 million– Company and CEO were charged in 27 count Company and CEO were charged in 27 count

indictment with securities fraud, wire fraud, indictment with securities fraud, wire fraud, mail fraud, bank fraud, tax fraud, money mail fraud, bank fraud, tax fraud, money laundering, and obstruction of justicelaundering, and obstruction of justice


BackgroundBackground– CEO represented he was in business of real CEO represented he was in business of real

estate development and mortgage lendingestate development and mortgage lendingPurported to manage profitable real estate Purported to manage profitable real estate development projects and make profitable loansdevelopment projects and make profitable loans

Represented over 30 years of successful Represented over 30 years of successful experience in real estate development and lending experience in real estate development and lending and no loss of investor principal and no loss of investor principal

– Promised 10% annual return, paid monthly, on Promised 10% annual return, paid monthly, on investments in real estate projects and loansinvestments in real estate projects and loans


BackgroundBackground– Represented that all investments were safe Represented that all investments were safe

because because Secured by real estateSecured by real estate

Which always had at least 30% of its value in Which always had at least 30% of its value in equityequity

On property used to secure loans, there was never On property used to secure loans, there was never more than a 70% loan to value ratio.more than a 70% loan to value ratio.


BackgroundBackground– Regarding how Pac Equities made money, Regarding how Pac Equities made money,

CEO represented thatCEO represented thatThey were hard money lenders to those who could They were hard money lenders to those who could not obtain conventional financing, and loaned not obtain conventional financing, and loaned money at a higher rate than the 10% paid to money at a higher rate than the 10% paid to investorsinvestors

The difference in what they were paid by those to The difference in what they were paid by those to whom they loaned money, and the money they whom they loaned money, and the money they paid investors, was what paid their costs and feespaid investors, was what paid their costs and fees

Seasoned executivesSeasoned executives

They looked like seasoned executives, and easily developed trust with retirees and those who had substantial wealth to invest . . . If you simply did like they said they did, and invested in first trust deeds, secured by real estate with substantial equity, you could consistently earn 10% monthly on your investment . . .

Trust Deeds to SecuritiesTrust Deeds to Securities

Pac Equities originally offered trust deeds Pac Equities originally offered trust deeds to secure investmentsto secure investments

Later persuaded investors to assign their Later persuaded investors to assign their interests to Pac Equities in exchange for interests to Pac Equities in exchange for securities in one of three funds securities in one of three funds – Pac Equities Funds 1, 2 or 3Pac Equities Funds 1, 2 or 3

Funds were purportedly operated to earn Funds were purportedly operated to earn income for the investors income for the investors

Conventional MarketingConventional Marketing

In soliciting investors, Pac Equities used In soliciting investors, Pac Equities used all conventional means all conventional means – The Internet via a web site located at The Internet via a web site located at

www.pacequities.com– Newspapers– Direct mail - newsletters

April 2004 Equity News

They developed professional marketing materials which fostered trust with potential investors . . .

May 2004 Equity News

They said all the right things . . .

May 2004 Equity News

They developed a tremendous corporate volunteer presence in their community . . .

They used the technology of the day to reach potential investors . . .

Portion of Michael Rich resume from Pac Equities’ promotional materials

They developed professional promotional materials which appealed to the most astute investors . . .

Well appointed offices in Bend, Oregon – compared by investors to the nicest offices one might find in Manhattan . . .

They created a physical environment which mirrored their representations of success . . .

and which anchored trust with investors . . .

And they established an office in a metropolitan corporate center to attract investment traffic from competitors . . .

New Investor PacketNew Investor Packet

Prospective investors received “new investor packets”

History and management of Pac Equities

Type and security of investments

Résumés of CEO & COORésumés of CEO & COO

List of references

CD with representations about CEO Michael Rich and Pac Equities

Private Placement MemoPrivate Placement Memo

Prospective investors for any of the three Prospective investors for any of the three Pac Equities funds were provided private Pac Equities funds were provided private placement memoranda which includedplacement memoranda which included– Representations about various properties Representations about various properties

secured by the fundssecured by the fundsvaluations, equity, and loans secured by the valuations, equity, and loans secured by the propertiesproperties

– Résumés of CEO & COORésumés of CEO & COO

But former employees alleged But former employees alleged it may be a facade . . .it may be a facade . . .

In November of 2003, former employees In November of 2003, former employees of Pac Equities brought potential problems of Pac Equities brought potential problems to the attention of state authorities to the attention of state authorities (Oregon Division of Finance & Corporate (Oregon Division of Finance & Corporate Securities – DFCS)Securities – DFCS)– personal expenses paid with investor fundspersonal expenses paid with investor funds– commingling of investment accountscommingling of investment accounts– apparent aliases used by CEOapparent aliases used by CEO– appeared to be real estate/securities fraudappeared to be real estate/securities fraud

Initial investigative resultsInitial investigative results

Preliminary investigation by DFCS revealed Preliminary investigation by DFCS revealed over a million dollars invested by persons in over a million dollars invested by persons in multiple states. Given potential complexity of multiple states. Given potential complexity of case, FBI was contacted in early 2004, and case, FBI was contacted in early 2004, and federal investigation initiated.federal investigation initiated.– grand jury subpoenas were issued for certain grand jury subpoenas were issued for certain

corporate bank accountscorporate bank accounts– early subpoena returns showed investor funds early subpoena returns showed investor funds

were used to pay off personal mortgage of CEO were used to pay off personal mortgage of CEO and COOand COO

Preliminary financial questionsPreliminary financial questions

Although a bank account appeared to Although a bank account appeared to show a personal expenditure with investor show a personal expenditure with investor money, a number of questions emerged:money, a number of questions emerged:– Was it an authorized “draw?” Was it an authorized “draw?” – Was it a loan from investors or an LLC?Was it a loan from investors or an LLC?– Was it otherwise done with the knowledge Was it otherwise done with the knowledge

and consent of investors?and consent of investors?– Was the home a corporate asset? Was the home a corporate asset? – Were there other plausible explanations?Were there other plausible explanations?

Preliminary property questionsPreliminary property questions

During this same period of time, title searches During this same period of time, title searches were underway to determine whether the were underway to determine whether the corporation owned real estatecorporation owned real estate– Where were the parcels located?Where were the parcels located?– Were ownership interests consistent with Were ownership interests consistent with

representations?representations?– Were actual values consistent with represented Were actual values consistent with represented

appraised values?appraised values?– Were loan to value representations accurate?Were loan to value representations accurate?– Were there loans/liens against the properties?Were there loans/liens against the properties?

Preliminary property questionsPreliminary property questions

The title searches also attempted to The title searches also attempted to determine whether the corporation determine whether the corporation properly recorded the trust deeds properly recorded the trust deeds – Were there unrecorded deeds?Were there unrecorded deeds?

How would investigators know?How would investigators know?

– Was percentage of investments in trust deeds Was percentage of investments in trust deeds consistent with value of properties?consistent with value of properties?

How would investigators know?How would investigators know?

But who was the CEO?But who was the CEO?

Approximately one year into the Approximately one year into the investigation, little more is knowninvestigation, little more is known– the financials were tremendously complicatedthe financials were tremendously complicated– the real estate transactions were a quagmirethe real estate transactions were a quagmire

Absent an understanding of the financials Absent an understanding of the financials or the real estate transactions, was there or the real estate transactions, was there another question to be asked to determine another question to be asked to determine whether a prosecutable fraud occurred?whether a prosecutable fraud occurred?– Was the CEO who he said he was?Was the CEO who he said he was?

Preliminary personal questionsPreliminary personal questions

The CEO represented that he “studied law The CEO represented that he “studied law and accounting” at the University of and accounting” at the University of WashingtonWashington– Was it a material representation?Was it a material representation?– How could we verify the claim?How could we verify the claim?

Obtain the transcripts . . . Obtain the transcripts . . .

The transcriptThe transcript

The transcriptThe transcript

Rather than “study law and Rather than “study law and accounting,” he completed only one accounting,” he completed only one semester at the University of semester at the University of Washington and then flunked outWashington and then flunked out

– obtained a “D” grade point average of only obtained a “D” grade point average of only 1.88 his first semester1.88 his first semester

– enrolled in fundamentals of accounting enrolled in fundamentals of accounting during the second semester but failed and during the second semester but failed and received no credit for the course received no credit for the course

– ultimately flunked out during his freshman ultimately flunked out during his freshman year and received no credit for any courses year and received no credit for any courses enrolled in during the second semester of enrolled in during the second semester of his freshman yearhis freshman year

Bottom line: he did not study law or Bottom line: he did not study law or accounting . . . Well, he may have accounting . . . Well, he may have “studied” accounting, but not what the “studied” accounting, but not what the investors expected . . . investors expected . . .

Fraudulent representation confirmed.Fraudulent representation confirmed.

Preliminary personal questionsPreliminary personal questions

The CEO represented that he helped to The CEO represented that he helped to develop Lake Limerick, a destination develop Lake Limerick, a destination resort in northwest Washingtonresort in northwest Washington– Was it a material representation?Was it a material representation?– How could we verify the claim?How could we verify the claim?

Obtain any promotional or legal records . . .Obtain any promotional or legal records . . .

The Lake Limerick recordsThe Lake Limerick records

The sales brochureThe sales brochure The plot mapThe plot map

The Lake Limerick recordsThe Lake Limerick records

The developers were Mark The developers were Mark Antoncich and Ken Engel . . . not Antoncich and Ken Engel . . . not Michael RichMichael Rich

He had nothing to do with the He had nothing to do with the development of the sitedevelopment of the site

He did not invest any money in the He did not invest any money in the developmentdevelopment

He was merely employed as one of He was merely employed as one of 12-15 lot salesmen12-15 lot salesmen

Bottom line: he did not assist with or Bottom line: he did not assist with or in any way help to develop the Lake in any way help to develop the Lake Limerick destination resortLimerick destination resort

Fraudulent representation confirmed. Fraudulent representation confirmed.

The news release

Formation of investigative teamFormation of investigative team

Case appeared to involve numerous bank Case appeared to involve numerous bank accounts (ultimately over 130 were accounts (ultimately over 130 were discovered) yet there existed no expertise discovered) yet there existed no expertise to analyze the financialsto analyze the financials– IRS was requested to participate and take IRS was requested to participate and take

responsibility for acquisition and analysis of all responsibility for acquisition and analysis of all financial recordsfinancial records

Formation of investigative teamFormation of investigative team

Case appeared to involve numerous Case appeared to involve numerous parcels of real estate and preliminary parcels of real estate and preliminary investigation indicated substantial title investigation indicated substantial title issues, yet there existed no expertise to issues, yet there existed no expertise to adequately assess the issues adequately assess the issues – DFCS was requested to provide real estate DFCS was requested to provide real estate

expert to assess the title issues and expert to assess the title issues and document all transactional informationdocument all transactional information

The lemon . . .The lemon . . .

By May of 2005, investigation was By May of 2005, investigation was probably one third completeprobably one third complete– still trying to find and trace moneystill trying to find and trace money– still trying to find involved real estate and still trying to find involved real estate and

understand title issuesunderstand title issues– still trying to determine “who” CEO was . . still trying to determine “who” CEO was . .

A reporter called DFCS about the A reporter called DFCS about the investigation. The question then became investigation. The question then became how to turn a lemon into lemonade . . .how to turn a lemon into lemonade . . .

The plan . . .The plan . . .

Once the DFCS investigator spoke with Once the DFCS investigator spoke with reporter (and confirmed the existence of reporter (and confirmed the existence of an investigation . . .), he quickly informed an investigation . . .), he quickly informed me of the callme of the call

I suggested that reporter be referred to meI suggested that reporter be referred to me

I would issue a “no comment” which I would issue a “no comment” which implied existence of investigation, implied existence of investigation, prompting call from CEO’s attorneyprompting call from CEO’s attorney

And then the house of cards collapsed . . .

The lemonade . . .The lemonade . . .Day after article was published, received call Day after article was published, received call from CEO’s attorneyfrom CEO’s attorney

Scheduled debriefing days laterScheduled debriefing days later

During debriefing, “confirmed” CEO was During debriefing, “confirmed” CEO was engaged in fraud (he denied things we knew engaged in fraud (he denied things we knew were true)were true)

Obtained consent to search business and home Obtained consent to search business and home days later days later – seized over 70 boxes of evidence and imaged 24 seized over 70 boxes of evidence and imaged 24

computer hard drives computer hard drives

What was learned? What was learned? Pervasive deceptionPervasive deception

False representations aboutFalse representations aboutRésumé of CEORésumé of CEO

EducationEducation

ExperienceExperience

Property valueProperty valueEngaged in “strawman” purchases of Pac Equities’ own Engaged in “strawman” purchases of Pac Equities’ own property to inflate the value of the properties property to inflate the value of the properties

Used over two dozen LLCs and other entities to complicate Used over two dozen LLCs and other entities to complicate matters, some of which were used in the transactionsmatters, some of which were used in the transactions

Created fictitious appraisalsCreated fictitious appraisals

Created fictitious financialsCreated fictitious financials

Pervasive deceptionPervasive deception

False representations aboutFalse representations aboutExisting loansExisting loans

Most “income producing” loans did not existMost “income producing” loans did not exist

Loan to value ratioLoan to value ratioNon-existent loans + inflated values = complete fabricationsNon-existent loans + inflated values = complete fabrications

Existence of trust deedsExistence of trust deedsMany were not recorded, or the assigned interest was more Many were not recorded, or the assigned interest was more than the value of the propertythan the value of the property

Amount invested in certain holdingsAmount invested in certain holdingsCEO & COO invested none of their own $$CEO & COO invested none of their own $$


Facade of successful business created by using Facade of successful business created by using investor principal to make monthly interest investor principal to make monthly interest payments to investors payments to investors

new money paid old obligations – Ponzi-likenew money paid old obligations – Ponzi-like

Represented that payments constituted interest Represented that payments constituted interest earned from profitable investment and loan activity earned from profitable investment and loan activity

Facade used to recruit additional investors and Facade used to recruit additional investors and retain existing investors retain existing investors


Only sources of income for Pac Equities were Only sources of income for Pac Equities were from a few projects and loansfrom a few projects and loans

These amounts were insufficient to meet monthly These amounts were insufficient to meet monthly interest obligations which Pac Equities owed its interest obligations which Pac Equities owed its investors investors

The misrepresentations and material omissions The misrepresentations and material omissions caused over 300 people to part with over caused over 300 people to part with over $19,000,000$19,000,000

The “voluntary settlement” . . .The “voluntary settlement” . . .

Between June and December of 2005, Between June and December of 2005, negotiations ensued for what was believed to negotiations ensued for what was believed to be voluntary settlementbe voluntary settlement– Acceptance of criminal responsibilityAcceptance of criminal responsibility– Agreed to not take new investmentsAgreed to not take new investments– Agreed to preserve assetsAgreed to preserve assets

Primary purpose of agreement was to return all assets Primary purpose of agreement was to return all assets to investorsto investors

During this time, CEO assured investors During this time, CEO assured investors assets were safe . . .assets were safe . . .

The “voluntary settlement” . . .The “voluntary settlement” . . .

Unfortunately, between August and Unfortunately, between August and November, assets were dissipatedNovember, assets were dissipated

On December 9, 2005, CEO fired his On December 9, 2005, CEO fired his attorneys and wrote letter to all investors attorneys and wrote letter to all investors – declared innocencedeclared innocence– claimed prosecutor attempting to increase claimed prosecutor attempting to increase

conviction rate conviction rate – claimed prosecutor attempting to drive claimed prosecutor attempting to drive

company into bankruptcy . . . company into bankruptcy . . .

Initial indictmentInitial indictment

Once December 9, 2005 letter received, Once December 9, 2005 letter received, case was immediately prepared for grand case was immediately prepared for grand juryjury– Indictment alleged securities fraud and the Indictment alleged securities fraud and the

forfeiture of 36 parcels of real estate, 16 forfeiture of 36 parcels of real estate, 16 known bank accounts, and other assets that known bank accounts, and other assets that were proceeds of fraudwere proceeds of fraud

Search warrantsSearch warrants

On December 21, 2005, search warrants On December 21, 2005, search warrants were served on two condos in Maui, Hawaii, were served on two condos in Maui, Hawaii, and an office in Bend, Oregonand an office in Bend, Oregon– $40,000 in cashier’s checks seized $40,000 in cashier’s checks seized

After seizure of cashier’s checks, CEO requested After seizure of cashier’s checks, CEO requested issuing bank to reissue two of the checks (two issuing bank to reissue two of the checks (two $10,000 cashier’s checks), claiming that they had $10,000 cashier’s checks), claiming that they had been put through the laundry and destroyed. The been put through the laundry and destroyed. The bank refused to do so without further proof. bank refused to do so without further proof.

– One of the bank fraud counts . . .One of the bank fraud counts . . .

– Another 20 banker’s boxes seizedAnother 20 banker’s boxes seized

Seizure warrantsSeizure warrants

Between December 21Between December 21stst and 27 and 27thth, seizure , seizure warrants were issued for over 30 parcels warrants were issued for over 30 parcels of real estate, 16 bank accounts, and of real estate, 16 bank accounts, and $1,382,925 in seized currency and $1,382,925 in seized currency and cashier’s checkscashier’s checks

Initial arraignmentInitial arraignment

On December 27, 2005, CEO and COO On December 27, 2005, CEO and COO arraigned on initial indictmentsarraigned on initial indictments– Released pending trial on condition that not Released pending trial on condition that not

engage in any financial transaction over engage in any financial transaction over $1,000 without the prior approval of the Court $1,000 without the prior approval of the Court

Appointment of ReceiverAppointment of Receiver

Seized real estate needed management, Seized real estate needed management, foreclosures needed response, and foreclosures needed response, and substantial title and other issues needed substantial title and other issues needed focused attentionfocused attention

Primary purpose to preserve assets so Primary purpose to preserve assets so they could be returned to investors they could be returned to investors

Stipulated motion and order appointing Stipulated motion and order appointing Receiver filed on March 16, 2006Receiver filed on March 16, 2006

Pretrial release violationPretrial release violation

Between December 27Between December 27thth and April 28 and April 28thth, , CEO engaged in over $6,000,000 in CEO engaged in over $6,000,000 in financial transactions, most in violation of financial transactions, most in violation of his pretrial release conditionhis pretrial release condition– deposit and withdrawal of hundreds of deposit and withdrawal of hundreds of

thousands of dollars at casinos in Las Vegasthousands of dollars at casinos in Las Vegas– While this was occurring, various loans While this was occurring, various loans

incurred by him for Pac Equities were in incurred by him for Pac Equities were in default and bills were left unpaid default and bills were left unpaid


CEO arrested on May 3, 2006, for violation CEO arrested on May 3, 2006, for violation of pretrial release conditionsof pretrial release conditions– search warrant served on his home in Palm search warrant served on his home in Palm

Desert, CaliforniaDesert, California– over $51,000 in currency and traveler’s over $51,000 in currency and traveler’s

checks were seized checks were seized


CEO detained as a flight risk and an CEO detained as a flight risk and an economic danger to the communityeconomic danger to the community– Magistrate Judge stated that the violation of Magistrate Judge stated that the violation of

pretrial release was the most egregious he pretrial release was the most egregious he had ever seen in a white collar case had ever seen in a white collar case

The final searchThe final search

After spending two weeks in jail, COO Phyllis After spending two weeks in jail, COO Phyllis Rich informed us that agents may have missed Rich informed us that agents may have missed some money in couch cushions of the Palm some money in couch cushions of the Palm Desert homeDesert home

Based upon this information, on June 9, 2006, Based upon this information, on June 9, 2006, another search warrant was served on the home another search warrant was served on the home and $184,000 in cashier’s checks were found in and $184,000 in cashier’s checks were found in zippered couch cushionszippered couch cushions

The victimsThe victimsApproximately 300 hundred victimsApproximately 300 hundred victims

Most retired; some elderlyMost retired; some elderly

Relatively astute; several former CEOs and/or Relatively astute; several former CEOs and/or business ownersbusiness owners

Communication with victimsCommunication with victims– Held initial meetings with investor “representatives”Held initial meetings with investor “representatives”– Coordinated with Victim/Witness StaffCoordinated with Victim/Witness Staff– Receiver held regular investor committee meetingsReceiver held regular investor committee meetings

The evidence:The evidence:digital and hard copydigital and hard copy

24 computer hard drives24 computer hard drives– Forensic duplicationForensic duplication– ALS personnel created searchable databaseALS personnel created searchable database

Created image files per document with bates Created image files per document with bates numbers per pagenumbers per page

Key terms identified; time and personnel allocated Key terms identified; time and personnel allocated to search databaseto search database

I reviewed results for relevanceI reviewed results for relevance

120 banker’s boxes120 banker’s boxes– Reviewed page by pageReviewed page by page

The trialThe trial

Began on November 27, 2007Began on November 27, 2007

Completed on December 10, 2007Completed on December 10, 2007

Over 70 witnessesOver 70 witnesses– Some via video-teleconferencingSome via video-teleconferencing

Hundreds of exhibitsHundreds of exhibits– All pre-admitted All pre-admitted – Referenced tens of thousands of pages of Referenced tens of thousands of pages of

documentsdocuments

The verdictsThe verdicts

Jury went out by 6:30 p.m.Jury went out by 6:30 p.m.– Had dinner Had dinner – Judge hosted counsel for pizza & portJudge hosted counsel for pizza & port

Jury returned guilty verdicts at 9:30 p.m.Jury returned guilty verdicts at 9:30 p.m.– CEO Rich guilty on 25 of 27 countsCEO Rich guilty on 25 of 27 counts– Pac Equities guilty on all four countsPac Equities guilty on all four counts– All proceeds obtained by CEO Rich and Pac All proceeds obtained by CEO Rich and Pac

Equities were obtained by fraud and were Equities were obtained by fraud and were therefore forfeitable, i.e. all seized assets could be therefore forfeitable, i.e. all seized assets could be returned to victimsreturned to victims

The sentencingThe sentencing

April 15, 2008April 15, 2008– Reviewed important issuesReviewed important issues– Reviewed all sentencing enhancements and Reviewed all sentencing enhancements and

explained why they appliedexplained why they applied– Provided compelling reasons for Provided compelling reasons for

recommended sentencerecommended sentence

Result = a 236 month sentence, an almost Result = a 236 month sentence, an almost 20 year sentence 20 year sentence

EpilogueEpilogue

Less than two months after being Less than two months after being sentenced to serve 20 years in federal sentenced to serve 20 years in federal prison, CEO Michael Rich diedprison, CEO Michael Rich died

His attorneys filed a motion to vacate his His attorneys filed a motion to vacate his conviction conviction ab initio ab initio under the judicially-under the judicially-created abatement doctrine because he created abatement doctrine because he died pending appeal and was therefore died pending appeal and was therefore unable to avail himself of his appellate unable to avail himself of his appellate rights, i.e. the Ken Lay motionrights, i.e. the Ken Lay motion

EpilogueEpilogue

On May 3, 2010, the Ninth Circuit Court of On May 3, 2010, the Ninth Circuit Court of Appeals held that the conviction, including Appeals held that the conviction, including the restitution order, should be vacated the restitution order, should be vacated ab ab initio initio under the abatement doctrineunder the abatement doctrine

EpilogueEpilogueFortunately, there will be no adverse effect Fortunately, there will be no adverse effect upon the victimsupon the victims– Pac Equities was also convicted and has the same Pac Equities was also convicted and has the same

restitution order imposed upon it, which is still valid restitution order imposed upon it, which is still valid and enforceableand enforceable

– COO Phyllis Rich pled guilty and has the same COO Phyllis Rich pled guilty and has the same restitution order imposed upon herrestitution order imposed upon her

– The Receivership continues to operate under the The Receivership continues to operate under the jurisdiction of the district court and all assets seized jurisdiction of the district court and all assets seized and distributed to victims (over $10 million) remain and distributed to victims (over $10 million) remain undisturbedundisturbed

Lessons learned about Lessons learned about due diligencedue diligence

CredentialsCredentials: If the credentials of the : If the credentials of the person or entity soliciting the investment person or entity soliciting the investment are material to the investment, confirm that are material to the investment, confirm that the credentials of the person or entity are the credentials of the person or entity are consistent with that which has been consistent with that which has been represented. represented.


ExperienceExperience: If the experience of the : If the experience of the person or entity soliciting the investment is person or entity soliciting the investment is material to the investment, confirm that the material to the investment, confirm that the experience of the person or company is experience of the person or company is consistent with that which has been consistent with that which has been represented. represented.


Ownership interest: Ownership interest: If the investment If the investment pertains to something that is purportedly pertains to something that is purportedly owned by a third party, confirm that the owned by a third party, confirm that the ownership interest of the third party is ownership interest of the third party is consistent with that which has been consistent with that which has been represented. represented.


ValueValue: If the investment pertains to an : If the investment pertains to an asset, such as real estate, that has a asset, such as real estate, that has a determinable market value and the determinable market value and the estimated market value is material to the estimated market value is material to the investment, confirm that an independent investment, confirm that an independent appraisal has been conducted and that the appraisal has been conducted and that the actual estimated market value is actual estimated market value is consistent with that which has been consistent with that which has been represented. represented.


ValueValue: If the investment pertains to a : If the investment pertains to a project, and the estimated value of the project, and the estimated value of the project is material to the investment, project is material to the investment, confirm that an independent market confirm that an independent market analysis has been conducted and that the analysis has been conducted and that the market analysis is consistent with that market analysis is consistent with that which has been represented. which has been represented.


Recording: Recording: If recording of documents If recording of documents associated with the investment is associated with the investment is necessary to secure any aspect of the necessary to secure any aspect of the investment, confirm that the proper investment, confirm that the proper documents have been properly recorded. documents have been properly recorded. This includes not simply confirming that an This includes not simply confirming that an instrument has been recorded, but that the instrument has been recorded, but that the instrument pertains to the asset which is instrument pertains to the asset which is the subject of the investment.the subject of the investment.


Financial statementsFinancial statements: If the financial : If the financial health of the person or entity soliciting the health of the person or entity soliciting the investment is material to the investment, investment is material to the investment, require an audited financial statement of require an audited financial statement of the person or entity.the person or entity.

Questions??Questions??

Investment Fraud: Investment Fraud: Due Diligence in a Deceptive EnvironmentDue Diligence in a Deceptive Environment

Sean B. HoarSean B. HoarAssistant United States AttorneyAssistant United States Attorney

Oregon Association of Certified Fraud ExaminersAnnual Seminar

May 14, 2010, Portland, Oregon

Investment Fraud: Due Diligence in a Deceptive Environment Sean B. Hoar Assistant United States...

Documents

Transcript of Investment Fraud: Due Diligence in a Deceptive Environment Sean B. Hoar Assistant United States...