Trustee looks for help with Cyberco

By Ed White

The Grand Rapids Press

GRAND RAPIDS -- The trustee overseeing the bankruptcy of Cyberco Holdings wants help from former executives as he tries to tally numbers at the collapsed high-tech company.

U.S. Bankruptcy Judge Jeffrey Hughes soon will order James Horton to assist the trustee's legal team, but not the widow of deceased Cyberco chief Barton Watson -- at least not yet.

Krista Kotlarz-Watson has "limited knowledge of all the workings" at Cyberco, also known as the CyberNET Group, her attorney told the judge Thursday.

"She's not quite sure what her role was," Perry Pastula said. "She relied on her husband ... and did what he asked her to do."

The company imploded in November when authorities discovered Cyberco was acquiring millions of dollars in loans for equipment that didn't exist. The money instead was used to enrich Watson, his wife and others, the FBI alleges.

No charges have been filed. While federal authorities investigate, creditors are in Bankruptcy Court seeking any assets.

The trustee's attorney, Steve Rayman, needs help compiling lists of assets and liabilities. He also would like to learn more about the company's dealings with lenders, although cooperation might be limited.

Statements by Horton, Kotlarz-Watson or financial chief David Roepke could be used against them in the criminal probe.

"If they're going to take the Fifth, they're going to take the Fifth," Hughes said, referring to the Fifth Amendment right against self-incrimination.

Outside court, Rayman acknowledged that "criminal law trumps what we do."

He would like to talk to former company officials off the record, but that would require approval from the U.S. Attorney's Office.

Meanwhile, there is a March 15 hearing on the trustee's request to sell furniture, equipment and other assets at CyberNET offices at 25 S. Division Ave. The company's wine collection also will be sold.

The documents show the government has now officially seized millions in cash from the company's four bank accounts, which each have roughly three-quarters of a million dollars, a baby drop in the bucket for what is alleged.

At least 400 creditors (many are leasing companies) are looking for $60 million, maybe $65 million. Authorities believe they might be able to scrape up $5 million, maybe $10 million, in assets, leaving about $50 million still missing.

New names in the affidavit pop up as well, like Geraldine Watson, the mother of Barton Watson who killed himself in November after a raid of the business on Division Avenue.

It is alleged that Barton and wife Krista were masters at duping creditors. At one point, they secured a $17 million line of credit from Huntington Bank.

The St. Louis Business Journal reports:

Three regional banks -- Heartland Bank, Pioneer Bank and Trust in St. Louis, and Bank Midwest of Kansas City -- are owed more than $7.6 million, and possibly as much as $11 million, by a bankrupt Grand Rapids, Mich., technology company.

Pioneer Bank Chief Executive Gaines Dittrich said when the bank saw the loan could be a problem, it sold the note to its parent company, Forbes First Financial Corp. in St. Louis, to remove it from Pioneer's books. Tom Brouster, the primary owner of Forbes First Financial, could not be reached for comment.

"This will have no impact on the bank," Dittrich said, adding that Pioneer's earnings for 2004 were up 50 percent to $3.75 million from 2003's earnings of $2.5 million.

CyberCo.'s alleged fraud began to unravel in mid-November, a little more than a week after some of the banks had loaned millions of dollars to the company, according to court documents outlining CyberNET's dealings.

Charter One Vendor Finance of Illinois sued CyberCo in Michigan Nov. 19 claiming it loaned CyberNET $3 million to buy 66 computer servers. Charter One said it could find only 25 servers at the company's Grand Rapids headquarters, and CyberNET's executives could not provide an explanation for the missing equipment. Within days, other lenders also inspected CyberNET's offices and could find none of the equipment covered in their loan agreements.

On Nov. 25, after a standoff with local police, CyberCo's Watson was found dead in his home from an apparent self-inflicted gunshot wound.

Creditors forced CyberCo Holdings into bankruptcy in December. The company had assets of $4 million and liabilities of $65 million. "We haven't been able to see all the records, because they were seized by the FBI," said Steve Rayman, an attorney in Kalamazoo, Mich., representing CyberCo's bankruptcy trustee.

CyberCo made its connection with the St. Louis banks through a loan broker who had brought prospective loan clients to those banks before, said a banker familiar with CyberCo's loans in St. Louis. Riverbend Capital Group in St. Louis County is identified in the bankruptcy documents as a loan broker that had secured loans for CyberCo from Pioneer Bank. Pioneer's attorneys want a deposition, or formal testimony, from Riverbend's president, Tom Sears, about the CyberCo case, according to bankruptcy court documents. Sears said he has not given a deposition in the case and is not at liberty to discuss the matter.

Heartland Bank is represented in the CyberCo case by Greg Willard, who leads the bankruptcy practice at the Bryan Cave law firm. The other area banks hired law firms based in Michigan.

Loan brokers shop prospective deals to banks for customers that usually have been turned down in their home market, according to banking industry observers. Brokered loans can carry higher interest rates, but also present a greater risk. Executives at a bank making loans on computer equipment two states away should raise questions about why the loan could not get funded in the company's own backyard, those industry observers said.

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