Top officers and a salesman for an investment company based in Nashville, Tenn., have pleaded guilty for their roles in an $18 million Ponzi scheme.
Acting Assistant Attorney General Mythili Raman of the Justice Department’s Criminal Division, U.S. Attorney David Rivera of the Middle District of Tennessee, Special Agent in Charge Todd McCall of the FBI’s Memphis Division and Special Agent in Charge Christopher Henry of the IRS-Criminal Investigation in Nashville made the announcement today after the pleas were accepted by U.S. District Judge Todd J. Campbell in the Middle District of Tennessee.
Terry Kretz, 61, of Gallatin, Tenn., the chief executive officer for Hanover Corporation, and Daryl Bornstein, 54, of College Grove, Tenn., a Hanover salesman, pleaded guilty today to securities fraud, money laundering, and conspiracy to commit securities fraud, wire fraud and mail fraud.
On Jan. 29, 2014, Hanover’s chief financial officer, Robert Haley, 54, pleaded guilty to the same charges.
Kretz and Haley also pleaded guilty to mail fraud.
“The three men who pleaded guilty today schemed, lied, and stole at the expense of innocent investors,” said Acting Assistant Attorney General Raman. “They ran a classic Ponzi scheme until the bottom fell out, and their clients – people looking to provide stability for their families or save for their retirements – suffered serious financial harm. We will stay vigilant to ensure that fraudsters like Kretz, Bornstein and Haley are held accountable.”
“Ponzi schemes typically leave unsuspecting investors in financial ruin and many have lost their life’s savings,” said U.S. Attorney Rivera.
“The U.S. Attorney’s Office and our law enforcement partners will continue to place a great emphasis on educating the public about investment fraud and will vigorously pursue those who prey upon unsuspecting investors.”
“It is a priority of the FBI to target fraudsters who use criminal investment and Ponzi schemes to scam innocent working families and retirees out of their hard earned money,” said FBI SAC McCall. “These pleas demonstrate the effectiveness of state and federal law enforcement working together to protect the public from financial fraudsters and bring those responsible to justice.”
“Promoters of Ponzi schemes prey upon trusting investors and then steal their hard earned money,” said IRS-CI SAC Henry. “Investors should be wary of programs promising unbelievable returns and investments should be looked at carefully.
Remember the old cliché, ‘If it seems too good to be true, it probably is’.
The three men were indicted by a federal grand jury on July 27, 2011.
Sentencing is scheduled for April 2, 2014.
According to court documents, the defendants carried out the fraudulent scheme from October 2004 through August 2006.
During that period, Kretz and Bornstein offered clients the opportunity to invest in Hanover through promissory notes bearing high interest rates.
Through representations in the promissory notes, as well as their own discussions with investors, Kretz and Bornstein told clients that their money would be used for specific purposes, such as investing in stock options and startup companies.
In fact, as all three defendants knew, more than half the money invested in Hanover went to repay earlier investors, to pay Hanover’s salaries and overhead, or to benefit the defendants personally.
Such personal benefits included the purchase of a $600,000 residential building lot in the name of Kretz personally, contributing more than $176,000 to a church, and paying for golf memberships.
Kretz and Bornstein also issued Hanover promissory notes to reimburse individuals who had previously lost money investing in ventures recommended by Bornstein before he joined Hanover.
In some cases, these old investors contributed new money to Hanover, while in other cases, they invested nothing.
In both cases, money from new investors in Hanover was used to make payments on promissory notes issued to cover non-Hanover losses without the Hanover investors’ knowledge.
Haley, in his role as chief financial officer, furthered the fraud by sending note holders checks that purported to be for “interest” — but were in fact simply transfers of money recently taken in from new investors.
Haley also prepared a false balance sheet that overstated Hanover’s financial health and that he knew would be shown to note holders.
The case was investigated by the FBI, IRS-CI, the Tennessee Bureau of Investigation, and the Tennessee Department of Commerce and Insurance.
The case is being prosecuted by Assistant United States Attorney Scarlett S. Nokes of the Middle District of Tennessee and Trial Attorney Justin Goodyear of the Criminal Division’s Fraud Section.
Today’s convictions are part of efforts underway by President Obama’s Financial Fraud Enforcement Task Force (FFETF), which was created in November 2009 to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. Attorney’s Offices, and state and local partners, it’s the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions and other organizations. Over the past three fiscal years, the Justice Department has filed more than 10,000 financial fraud cases against nearly 15,000 defendants, including more than 2,700 mortgage fraud defendants. For more information on the task force, visit www.stopfraud.gov