Securities Industry Commentator by Bill Singer Esq

Fraudster Sentenced for $400,000 Motorized Surfboard Scam (DOJ Release)

The 2021 Edition of the Prime Bank Note Scam (BrokeAndBroker.com Blog)

Grand Jury Returns Superseding Indictment Charging First NBC Bank Executives And A Borrower With Bank Fraud And False Statements (DOJ Release)

SEC Wins Judgment Against Microcap Company Executive for Fraudulent Press Releases (SEC Release)

operated a scheme to defraud small investors in Virginia, Maryland, and the District of Columbia. As part of the scheme, Clark falsely promised that the investments made with Clark's company, KRM Services, would go toward manufacturing "Jetboards" for resale to third parties at substantial profits. Instead, Clark spent the money on maintaining his lavish lifestyle.

To execute the scheme, Clark falsified sales contracts with cruise lines and water sports companies; forged signatures and notary stamps; fabricated emails from supposed buyers of the Jetboards; and falsified a patent report so that it would appear he could obtain a patent on the Jetboard. He provided all of this false information to investors to convince them to invest in KRM Services. In reality, Clark had purchased a Chinese-made motorized surfboard that had serious mechanical and design problems and never properly functioned. Clark never sold a single surfboard to any buyer.

Clark primarily defrauded small investors, including people he met socially in local restaurants and bars. He maxed out one victim's personal credit card on Christmas Eve so that she could not buy her daughter a present or travel to see family. According to court documents, Clark stole more than $400,000 from 14 victims between 2016 and 2019, causing substantial financial hardship to a number of them.

[F]rom 2006 through April 2017, RYAN, BURNELL, CALLOWAY, BEEBE, and ADOLPH conspired to defraud First NBC Bank (the "Bank") through a variety of schemes. RYAN was the President and CEO of the Bank for most of its existence. BURNELL was the Chief Credit Officer. CALLOWAY was an Executive Vice President.  BEEBE was a Senior Vice President. ADOLPH was a borrower at the Bank who was charged with conspiring with the four Bank executives to obtain loans based on false statements and forged documents.

The Superseding Indictment alleges that RYAN, BURNELL, CALLOWAY, BEEBE, ADOLPH, and others conspired to defraud First NBC Bank by disguising the true financial status of certain borrowers and their troubled loans, concealing the true financial condition of the Bank from the Board, auditors, and examiners. The borrowers included real estate developer Gary Gibbs, real estate developer Kenneth Charity, Bank general counsel Gregory St. Angelo, factoring business owner FRANK ADOLPH, hotel owner Arvind "Mike" Vira, contractor Warren Treme, and contractor Jeffrey Dunlap. CALLOWAY was Gibbs's loan officer while BEEBE worked as Treme's loan officer. RYAN served as the loan officer or oversaw the loan officers for all of those borrowers. BURNELL approved the risk rating for all of these borrowers' loans and was the gatekeeper tasked with protecting the safety and soundness of the Bank's loan portfolio. Dunlap, Charity, St. Angelo, Vira, Gibbs, and Treme have all previously been charged in individual Bills of Information with conspiring to defraud First NBC Bank. All six of these borrowers are listed in the Superseding Indictment as members of the bank fraud conspiracy with RYAN, BURNELL, CALLOWAY, BEEBE, and ADOLPH.

During the course of the conspiracy, RYAN, BURNELL, CALLOWAY, and BEEBE repeatedly extended loans to borrowers who were unable to pay their loans without relying on loan payments to keep them current. To hide this practice, RYAN, BURNELL, CALLOWAY, and BEEBE made false statements in loan documents and elsewhere about the purposes of loans, the borrowers' abilities to repay those loans, and the sources of funds used to pay those loans. When the borrowers were unable to pay those loans, RYAN, BURNELL, CALLOWAY, and BEEBE made new loans to these same borrowers and then used the proceeds from those new loans to pay the existing loans. This created the false impression that the borrowers were able to pay their loans, when in fact they would not have been able to pay their loans without going further into debt through new borrowing from the Bank. The new loans prevented these borrowers from appearing on lists that RYAN and BURNELL gave the Bank's Board each month, which would have highlighted that the borrowers were unable to make loan payments or had cash flow problems. RYAN, BURNELL, CALLOWAY, and BEEBE also made false statements about the purpose of those loans, misrepresenting in Bank documents that the borrowers were able to pay loans with cash generated from the borrowers' businesses, when in fact the borrowers were only able to pay those loans with proceeds from new Bank loans. The borrowers often spent the proceeds of these business loans on unrelated personal expenses, including by overdrawing their checking accounts at the Bank, and RYAN, BURNELL, CALLOWAY, and BEEBE paid these overdrafts by issuing new loans to the borrowers. This practice kept the borrowers off of month-end overdraft reports to the Board and hid the borrowers' inability to pay their own expenses without new loan proceeds.

For certain loans, RYAN, BURNELL, CALLOWAY, and BEEBE included borrower documents in loan files despite knowing that the documents were false. For example, even after RYAN and BURNELL learned that ADOLPH was submitting falsified documents to the Bank to inflate his collateral, RYAN and BURNELL continued to submit loans for ADOLPH that included the false documents. Even though RYAN, BURNELL, and CALLOWAY knew that Gibbs could not pay his loans with cash generated from his businesses, they continued to submit loan documents that included false documents showing that Gibbs's business earned enough cash to pay his loans at the Bank. Likewise, RYAN, BURNELL, and BEEBE submitted loan documents to authorize Bank funds to be loaned to Treme that included falsehoods relating to Treme's creditworthiness and the purpose of the loans.

When members of the Board or the Bank's outside auditors or examiners asked about loans to these borrowers, RYAN, BURNELL, CALLOWAY, and BEEBE made false statements about the borrowers and their loans, and left out the truth about the borrowers' inability to pay their debts without getting new loans. As a result, the balance on these borrowers' loans continued to grow. By the time regulators closed First NBC Bank in April of 2017, Gibbs owed the Bank $123 million; Charity owed $18 million; St. Angelo owed $46 million; ADOLPH owed $6 million; Vira owed $39 million; Treme owed $6 million; and Dunlap owed $22 million. The Bank's failure cost the Federal Deposit Insurance Corporation deposit insurance fund just under $1 billion.

RYAN, BURNELL, CALLOWAY, and BEEBE each received substantial compensation from the Bank during the course of the conspiracy. RYAN also received personal benefits from three of the borrower relationships. Vira lent millions of dollars to RYAN at the same time Vira was a borrower at the Bank, and RYAN and Vira conspired to hide their business dealings from the Board, auditors, and examiners. Treme was RYAN's partner in several businesses and real estate development projects, and RYAN used Treme's borrowing from the Bank as a way to spend Bank loan proceeds on RYAN's own projects. Even when parts of RYAN's business dealings with Vira and Treme were revealed to regulators, RYAN continued to conceal from regulators that he exercised authority over loans to Vira and Treme. Dunlap was a contractor for a business that RYAN and Treme ran, and RYAN used loan proceeds from Dunlap's business to benefit his own development project, Wadsworth Estates. RYAN never disclosed his business relationship with Dunlap to the Board, auditors, or examiners. BURNELL was aware of this business relationship and also never disclosed it to the Board, auditors, or examiners. 

[A]li, while a Senior Vice President at Revolutionary Concepts, Inc. (REVO), arranged for REVO to enter into several sham transactions in which REVO would purportedly acquire valuable assets from companies that he portrayed in the press releases as independent. Ali then touted the sham transactions in press releases as being highly lucrative for REVO, while claiming that REVO acquired valuable assets from the deals. These claims were false. In reality, Ali had close ties to the other companies, the assets REVO acquired were essentially worthless, and Ali's claims that REVO could earn millions of dollars from the deals were baseless.

On April 10, 2020, the court awarded the SEC summary judgment on its fraud claims based on material misrepresentations and omissions Ali made in REVO's press releases. Specifically, the court concluded that Ali was, at a minimum, reckless when he made the false statements about the deals, and when he failed to inform investors that the deals were not arms-length transactions. The court also awarded the SEC summary judgment on its claim that Ali violated the beneficial ownership reporting requirements when he failed to report his ownership of more than 18 million shares of REVO stock.

• Securities Industry Commentator
• Bill Singer