Monday, November 22, 2010
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Eight indicted in Equipment Finance Scam
Sterling Financial, Lancaster, Pennsylvania notified NASDAQ of irregularities as reported in Leasing News. On April 19, 2007 Sterling learned of the "irregularities" at Equipment Finance LLC, which specializes in financing logging equipment. This unit had brought in 41 percent of Sterling's profits in 2006. This resulted in $53 million fraud.
How could did happen for so long?
Shawn Halladay, The Alta Group, Leasing News Advisory Board Member, wrote in Leasing News June 4, 2007, "Section 404 requires companies and their auditors to examine and report on the processes behind their financial reporting, with an emphasis on evaluating the internal controls associated with those processes.
"Based on what I have read of the case, there were established processes and internal controls in place at EFI. Furthermore, they were tested by the independent auditors, who, I assume, adequately met their responsibilities.
“For those of you not familiar with internal controls, the internal control system relies on techniques such as segregation of duties, verification rules, reconciliations, and various levels of authorizations to prevent, detect, and identify errors and malfeasance. Unfortunately, virtually any internal control can be circumvented if a fraud is perpetrated through extensive collusion. This is what happened at EFI. The internal control system apparently was suborned at all levels."
Shawn Halladay was absolutely correct, as per an indictment handed down by the US Attorney office late last week. It also appears the deception by many on all levels was in place before Sterling Financial purchased Equipment Finance, LLC, as evidenced in the US Attorney’s office news release below:
#### Press Release ########
Joseph M. Braas, Michael J. Schlager, Mary C. Stankiewicz, Misty L. Kroesen, Curtis A. Kroesen, John Wiley Spann, Harold W. Young, and John S. Tomberlin were indicted by the US Attorney's office, Eastern District of Pennsylvania with conspiracy to commit mail fraud and mail fraud, all arising out of a massive, sophisticated loan fraud scheme that caused losses of approximately $53 million at Equipment Finance, LLC ("EFI"), announced United States Attorney Zane David Memeger.
EFI was a logging industry lender that was based in Lititz, Pennsylvania. The company provided funding for the purchase of forestry and land clearing equipment. In March 2002, EFI was acquired by Sterling Financial Corporation ("Sterling"), a former financial services company that was headquartered in Lancaster, Pennsylvania. At that time, EFI became a wholly owned subsidiary of the Bank of Lancaster County, N.A., which in turn was a wholly owned subsidiary of Sterling.
It is alleged in the indictment that as far back as 2001, before EFI was acquired by Sterling, the defendants, which include five former EFI employees, were engaging in a systematic fraud at EFI. From 2001 through 2007, they are charged with colluding in a pervasive scheme to steal money by looting the accounts of EFI and falsifying EFI's books.
Joseph M. Braas, EFI's Chief Operating Officer, and Michael J. Schlager, a Senior Vice President, are alleged to have been the leaders of the conspiracy. They directed other employees of the company, including Mary C. Stankiewicz, Misty L. Kroesen, and Curtis A. Kroesen to make false entries in EFI's books, create false documents for EFI's files, and undermine the audit process conducted by Sterling's inside and outside auditors.
During the years of the conspiracy, the EFI employee defendants made EFI appear more profitable than it actually was, and made it appear that EFI was exposed to less risk than it was, and thereby succeeded in keeping their jobs, making increasingly higher salaries and bonuses, and continuing to obtain funding for EFI from BLC and its other creditors.
The non-employee defendants include John Wiley Spann, a logging equipment dealer based in Alabama, and two owners of an insurance company in Andalusia, Alabama, Harold W. Young and John S. Tomberlin. Spann is charged with participating in the EFI loan fraud scheme in a number of ways, including assisting the employees of EFI to create numerous bogus loans, forging EFI loan documents and auditor confirmation letters, and paying nominal borrowers to sign false EFI loan documents
For helping to manage the EFI loan fraud, Spann is alleged to have stolen from EFI "compensation" of between $80,000 to $100,000 per year. Tomberlin is charged with having signed a bogus EFI loan contract in exchange for a payment from Spann of $10,000.
Young and Tomberlin are also alleged to have assisted Spann in looting EFI' s insurance escrow account.
Although no EFI borrower had purchased insurance from their company, South Central Agency, Young and Tomberlin permitted Spann to create bogus SCA insurance invoices and send them to EFI. EFI then mailed checks to SCA, which were deposited into SCA's accounts. In total, over $1 million was sent from EFI to SCA for these nonexistent policies. For allowing Spann to use their invoices and accounts, Young and Tomberlin charged Spann 20% of the EFI money that flowed through their accounts. Young disbursed the rest of the stolen money at Spann's direction.
Spann, Young, and Tomberlin are also charged with conspiring to commit money laundering and money laundering. They are alleged to have agreed to engage in, and engaged in, numerous transactions in over $10,000 in money stolen from EFI.
If convicted, the defendants face a maximum statutory penalty on Count One (conspiracy), of five years imprisonment, three years supervised release, a $250,000 fine, and a $100 special assessment.
On each of Counts Two through Nine (mail fraud affecting a financial institution), the maximum statutory penalty is 30 years imprisonment, five years supervised release, a $1 million fine, and a $100 special assessment.
On each of the money laundering conspiracy and money laundering counts, the maximum statutory penalty is ten years imprisonment, a $10,000 fine or a fine of up to twice the amount of the criminally derived property involved in the transactions, three years supervised release, and a $100 special assessment.
The case was investigated by the Federal Bureau of Investigation and the United States Postal Inspection Service and is being prosecuted by Assistant United States Attorney Nancy E. Potts.
#### Press Release ########
((Please Click on Bulletin Board to learn more information))
It appears more smaller banks are in greater trouble as the real estate market is not turning around, meaning more foreclosures, less resales of property, drop in property values on the books in resales, as well as construction and land loans in default. Until the real estate picture changes, it looks like more and more smaller banks will fail, and in reality by looking at the net equity and previous year losses, many are in serious trouble right now. The profits have gone to the large banks as in the last quarter 1.3% of the industry accounted for $19.9 billion of the total earnings.
Is the real estate market overbuilt, meaning also too many shopping centers and other "convenience" locations as well as "mom and pop" shops as well as "franchise" locations? Are there too many banks and bank branches? Certainly competition will reward those who can survive or who become more aggressive for their share of business available.
The five branches of Gulf State Community Bank Carrabelle, Florida with Centennial Bank, Conway, Arkansas, to assume all of the deposits. It became the 28th bank to fail in Florida which still has high unemployment and real estate foreclosures. Founded January 6, 1971, they had branches in Apalachicola, Carrabelle, Crawfordville, Franklin County, Saint George Island with 59 full-time employees.
"The acquisition of Gulf State, which was founded in 1971 by Joe Butler and later managed under the direction of sons Cliff and David, means Centennial gets about $112.1 million in additional deposits, and now has far and away the top market share of deposits in both Franklin and Wakulla counties. Only one Superior Bank branch in Apalachicola remains as a direct competitor in Franklin County."
"Located in the panhandle of Florida, we are about an hour's drive southwest of Tallahassee. Carrabelle is laid-back and quiet...rural Florida, where the past meets the present. Our un-crowded, white-sand beaches are perfect for family vacations, romantic interludes or just much needed quiet for the soul. Here you will fully appreciate one of the last unspoiled areas in Florida where natural treasures await you and the stresses of life seem to fade away."
At year-end 2009 the bank had gone to $3.7 million net equity from $11.3 million the previous year. The bank in 2008 lost $2.4 million and 2009 $7.5 million following $5.6 million in charge offs ($5.3 million in real estate.) September 30, 2010 the bank had $4.3 million loss and the total net equity was a minus $324,000. Tier 1 Risk Capital was a minus .07%.
As of September 30, 2010, Gulf State Community Bank had approximately $112.1 million in total assets and $112.2 million in total deposits. The FDIC and Centennial Bank entered into a loss-share transaction on $84.4 million of Gulf State Community Bank's assets.
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $42.7 million.
The five branches of Allegiance Bank of North America, Bala Cynwyd, Pennsylvania agreement with VIST Bank, Wyomissing, Pennsylvania, to assume all of the deposits. From December 2008 the bank had gone from 48 full-time employees to 28 full-time employees September 30, 2010. Founded July 6, 1999, they had branches in Bala Cynwyd, Berwyn, King of Prussia, Lansdale, and Philadelphia.
"Veteran banker Gregg Wagner was hired to replace longtime Allegiance CEO Andy Cook in 2008. Wagner inherited a troubled lending portfolio, specifically with the bank’s subsidiary Paramount Mortgage & Capital, which was shut down in the first quarter of that year after suffering major losses. Paramount’s customers were primarily small real estate contractors and the portfolio was sold in September 2009 for a $4 million loss."
Bank net equity was $15.3 million end of December, 2008 to $5.8 million end of December, 2009 with a loss of $5.9 million 2008 and loss of $9.3 million 2009. September 30, 2010 the loss was $4.6 million and bank net equity of $1.47 million after charge offs of $3.2 million mostly in construction of 1-4 family residential homes as well as 1st and junior liens. Year-end 2009 charge offs were $9.6 million ($1.4 million construction and land development, $4.5 million in 1-4 residential family properties, $3.1 million in nonfarm nonresidential property.
Tier 1 Risk Capital was 1.8% September 30, 2010.
The FDIC and VIST Bank entered into a loss-share transaction on $86.2 million of Allegiance Bank of North America's assets. VIST Bank will share in the losses on the asset pools covered under the loss-share agreement.
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $14.2 million.
The 17 branches of First Banking Center, Burlington, Wisconsin, were closed with First Michigan Bank, Troy, Michigan, to assume all of the deposits. First Banking Center is the 149th FDIC-insured institution to fail in the nation this year. They had 133 full-time employees with a branch in Albany, Darlington, Monroe, Shullsburg, Union Grove, Wind Lake, two branches in Burlington and Kenosha.
Founded June 20, 1920, the bank survived the depression and became FDIC insured when it took affect in January 1, 1934. The down real estate market was not getting better in this Wisconsin area, but continued to decline at a more rapid rate.
Bank equity was $68.4 million 2008 and $31.9 million end of year 2009. The bank had a profit of $5.27 million 2008, but a loss of $32.2 million end of year 2009 with non-current loans going from $25.8 million to $55.4 million following a charge off of $44.2 million ($26.7 million in construction and land development, $11.8 million in 1-4 family residential properties, $1.5 in multi-family properties, $1.4 million in commercial and industrial loans and $2 million in loans to individuals.
September 30, 2010 saw a $27.7 million loss after charge offs of $9 million with $1.3 million in loans to individuals, but most of the loss was still real estate in the same mixture as year-end 2009. Bank equity had fallen to $8.46 million. Tier 1 Risk Capital was 2.4%
As of September 30, 2010, First Banking Center had approximately $750.7 million in total assets and $664.8 million in total deposits. First Michigan Bank will pay the FDIC a premium of 0.50 percent to assume all of the deposits of First Banking Center. In addition to assuming all of the deposits of the failed bank, First Michigan Bank agreed to purchase essentially all of the failed bank's assets.
The FDIC and First Michigan Bank entered into a loss-share transaction on $515.6 million of First Banking Center's assets.
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $142.6 million.
Tracking Bank Failures Map:
List of Bank Failures:
Top Stories---November 15—November 19
Here are the top ten stories opened by readers:
(1) Bulletin Board Complaint
(2) First Premier loses "Reps and Warrants" Case: $5.62 Million
(3) Clarification: SL Financial Services Corporation
(4) Taycor Financial Joins “Broker/Lessor” looking for Broker list
(5) Sales Makes it Happen---by Christopher Menkin
(6) Bristol Palin's 'DWTS' run fuels conspiracy theories
(7) Bank Beat----
(9) November 12-13 NAELB Western Conference
(10) Fitch Affirms GreatAmerica Leasing Receivables
(extra) Not counted for technical reasons
"What is a Security Deposit?"
A security deposit is defined as “a cash bond taken as security against proper performance by the lessee during the lease term”. If the lessee fails to live up to any of the provisions in the lease agreement, funds from the security deposit can be used under the “right to perform for the lessee” section to pay for it. The funds can be used to pay past due payments, unpaid property tax, insurance premiums, late charges, assessed taxes and the like. These usually are called defaults which are cured by using the security funds. Then the lessee is required to replenish the used funds. When the lease terminates the security deposit is returned to the lessee if no default is left outstanding.
Many leasing companies today refer to it as the “last month payment.” In their state or for their accounting records it avoids the “commingling agreement."
Originally the use of a security deposit was to lower the lessee’s payment if a “commingling agreement” is in the lease agreement. A commingling agreement allows the lessor to use the security deposit funds during the lease without any compensation. If it is used to help the lessor pay for the equipment then the lessor has a lower investment thus a lower payment. However the lease payments plus the residual (if any) must always return the total investment so the security deposit can be returned. The effect is to reduce the payment because the lessor’s return is calculated only the funds employed by the lessor. The danger here is that if the funds are required to pay for a default then the lessor does not have full use of the deposit and the yield will suffer.
Lower payments help meet the 90% test for operating lease classification for the lessee and are therefore very popular when a conservative residual alone prevents passing the test.
On occasion the lessee may feel that they should receive an interest rate on the deposited funds but in effect they are receiving a lower payment which means their funds are reducing the cost on the funds equal the lessor’s yield. If a lessor does not reduce the payment when taking a security deposit and has a commingling agreement then the lessor yield will increase sharply.
Mr. Terry Winders, CLP, has been a teacher, consultant, expert witness for the leasing industry for thirty-five years and can be reached at email@example.com or 502-649-0448
He invites your questions and queries.
Previous #102 Columns:
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#### Press Release #############################
Lease Scammer Convicted of $4.2 Million Scheme
NEWARK, NJ—David Moro, former chief executive officer of Inchon LLC, was convicted by a federal jury in New Jersey for orchestrating a $4.2 million broadcasting equipment lease and financing scheme that caused losses of more than $3 million to major lenders, United States Attorney Paul J. Fishman announced.
The jury returned a guilty verdict against David A. Moro, 51, of Pomona, N.Y., following a seven-week trial before United States District Judge William H. Walls. Moro was convicted of 33 counts of a 34-count Indictment: One count of conspiracy to commit mail and wire fraud; six counts of mail fraud; five counts of wire fraud; three counts of bank fraud; 17 counts of money laundering; and one count of making false statements in a matter within the jurisdiction of the FBI and Internal Revenue Service. Moro was not convicted on a second count of making false statements.
According to documents filed in this case and the evidence at trial:
Inchon LLC was a business based in Englewood Cliffs, N.J., that ran the Russian Radio Network—a broadcasting company marketed to Russian speakers. From 2003 through 2005, Moro approached victim lenders, directly and through brokers, and induced the lenders to purchase a total of more than $4.2 million in purported high-end broadcasting equipment as part of lease-financing agreements with Inchon.
Moro advised lenders that Inchon needed the broadcasting equipment in order to upgrade and expand its ethnic radio programming. As proof of his need for financing, Moro presented the lenders and brokers with fraudulent equipment invoices reflecting that Smart Function LLC, based in Parsippany, N.J., as well as other purported vendors, had provided Inchon with new high-end Digital Audio Servers, when in fact, Smart Function was acting as a front for Inchon, and was sending the vast majority of the money back to Inchon and Moro after receiving it from the lenders.
Although Moro convinced the lenders the servers contained state-of-the-art software valued at more than $10,000 for each server, in reality the servers contained nothing other than software available for download free-of-charge from the Internet.
On at least one occasion, Moro caused fraudulent equipment invoices to be sent to lenders and brokers which represented that the Digital Audio Servers had been provided, when in fact, this equipment did not exist. When a lender arranged for an inspection before funding the lease, Moro instructed a co-conspirator to place new serial numbers on old Digital Audio Servers so the inspector would think it was newly-purchased broadcasting equipment.
Moro also submitted phony financial documents to the lenders to convince them that Inchon was a highly profitable company, when in reality it was relying largely on the proceeds of the fraud to continue its operations. Moro had false tax returns prepared for Inchon and for an individual he portrayed as the 100 percent owner of Inchon. In reality, these tax returns were never filed with the IRS, and reflected income and profits for the business and the purported owner that neither ever received.
In Ponzi-scheme fashion, Moro used funds received from the financial institutions through the fraud to make payments on earlier leases. After all of the lease financing agreements were executed and funded by the lenders, Inchon was due to pay more than $100,000 per month. Moro ceased making the required lease payments on behalf of Inchon, resulting in a loss to the lenders in excess of $3 million.
The lenders included: CFC Investment, based in Cincinnati; Hewlett Packard Financial Services, based in Murray Hill, N.J.; Santa Barbara Bank and Trust, based in Santa Barbara, Calif.; Wells Fargo Equipment Finance, Inc., in Minneapolis, Minn.; Citi Capital, based in Moberly, Mo.; the CIT Group, based in Livingston, N.J.; American Express Business Finance Corporation, based in Houston; ACC Capital Corporation, based in Salt Lake City, Utah; Diamond Lease (USA), Inc., based in New York; Cathay Bank, based in Flushing, N.Y.; and Bank of the West, based in San Francisco.
The money laundering charges stem from the movement of funds from Smart Function and other entities to Inchon. Moro used the laundered funds to pay unrelated business expenses and personal expenses, including travel and gifts to family members.
The charges of conspiracy, mail fraud, wire fraud, and bank fraud of which Moro was convicted each carry a statutory maximum sentence of 30 years in prison and a $1 million fine, as well as restitution to the victims of his offense. The money laundering charges each carry a maximum penalty of 10 years in prison and a fine of $250,000, or twice the gross gain or loss from the offense. The false statements charge carries a maximum penalty of five years in prison and a fine of $250,000.
Moro is scheduled to be sentenced by Judge Walls on March 15, 2011.
U.S. Attorney Fishman credited special agents of the FBI, under the direction of Special Agent in Charge Michael B. Ward, and Special Agents of IRS - Criminal Investigation, under the direction of Special Agent in Charge Victor W. Lessoff, for the investigation leading to today’s verdict.
The government is represented by Assistant U.S. Attorneys Leslie Faye Schwartz and Jacob T. Elberg of the U.S. Attorney’s Office Criminal Division in Newark.
#### Press Release #############################
“Brandy is a charming gal with a great personality! This six year old lab is obedient, affectionate, and loves to play fetch. Unfortunately, she also has a tendency toward being nervous. Oh, she won't let it show-just look at her smile-but on the inside, Brandy is worrying about the state of the economy (what if Beggin Strips goes out of business?!), where she left her tennis ball, and why she can't shed those pesky pounds. Brandy's anxiety causes her to obsessively lick her front leg, forming a "lick granuloma." Brandy will need to have laser treatment on her leg. We are keeping our fingers crossed that someone will fall in love with her (we all have!) and be willing to adopt her and provide her with the treatment that she needs.
“In the meantime, if you come to visit her, Brandy will probably be wearing an e-collar to keep her from licking. Brandy gets along well with most other dogs but can't resist giving chase if there is a cat around. She is housebroken, already spayed, and vaccinated. She loves kids, enjoys car rides, and likes to snack on rawhides. According to her previously family, Brandy's best quality is that she is friendly and loves attention. Due to her special circumstances, her adoption fee will be waived. If you are interested in adopting Brandy, come meet her at the HLLC or email firstname.lastname@example.org for more information. “
Location: Humane League of Lancaster
Shelter Hours: Monday, Tuesday & Thursday 3:00pm - 8:00pm; Wednesday Closed; Friday, Saturday & Sunday 12:00pm - 5:00pm
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