Farah denies any 'criminal intent'
Scott David Farah, mastermind of the Financial Resources Mortgage Inc. Ponzi scheme, told lenders the day before his sentencing for wire and mail fraud, that he never intended to steal their money.He insisted he didn't have "criminal intent," although he added, "I knew what I did was wrong."Farah continued to insist that - aside from $20 million he personally secretly borrowed from CL&M, the loan servicing company run out of FRM's Meredith office - that both FRM and CLM was a "legitimate business" and it was himself, not the company that was guilty of fraud.Farah made his comments Tuesday during the second day of depositions in the same federal courthouse in Concord where he will receive his sentence. But his statements weren't made in front of a judge, but as part an adversary bankruptcy proceeding to find out what assets belong to the bankrupt company's estate, which once brokered millions of dollar of loans.FRM's victims said they lent money to fund legitimate mortgages on the properties that backed the loans. The estate's trustee insists that, since the funds for these loans were commingled in one account, they were fraudulent and are all property of the estate, which would mean the victims will have to wait in line like any other unsecured creditor.Last Friday, trustee attorney James W. Donchess grilled Farah, followed by lender Susan McIlvene - who finished up Tuesday by disputing whether the whole thing was a Ponzi scheme - at least as defined by the attorney general. (Farah said it wasn't, mostly.)Then came the attorney representing other lenders who are in a legal tangle with the trustee."No , there was never an intent to steal from the lenders," Farah said when questioned by Bertrand A. Zalinsky, who represents Phil and Melanie Migliaccio.Later, Farah insisted that "FRM was never involved in any fraud."CL&M - FRM's servicing company -- was engaged in fraud, he said, because it lent Scott Farah $20 million personally without telling lenders, "but to be clear, FRM didn't do anything wrong. Scott Farah borrowed money from CL&M. FRM was a legitimate business during its whole existence."And other than the fraudulent loan, "CL&M was a legitimate business."But that $20 million kept both companies afloat. Indeed, Farah said that CL&M was partially created in 2005 to lend FRM money."The intent wasn't to steal, but to pay it back," he said. And it was "to get the [state Bureau of Securities Regulation] off our back."The loan went to Farah personally rather than FRM because he "wanted the balance sheet to be cleared up."If the loan were on FRM's books, "it would have made FRM upside down" and attracted the attention of regulators like the Securities Bureau and state Banking Department. Instead, the money was marked down as "paid in capital" from Farah,Donchess zeroed in on both these issues when questioning Farah. That is when he denied criminal intent, while admitting what he was doing was wrong."It's an accounting thing," he said. Without it, the company would have been "insolvent."He added: "But Don (Dodge, president of C&LM, who also will be sentenced Wednesday) and I both discussed it. It was a common practice."Curiously, Farah said he was worried about the Securities Bureau finding out that it was insolvent. He said he wasn't too concerned about the Banking Department, which actually licensed and audited him - because the department didn't look into the solvency of the whole entity, and only focused on residential loans.Farah agreed with Donchess that he never had the assets to pay back $10 million, let alone $20 million. But he kept on hoping that the business would grow enough for him to do it.He said that even at the end he was hoping to close bigger deals to bail him out. If these deals went through, he said, "I would have had the money to pay it back before it was caught."After Donchess was through, McIlvene questioned him one more time. The intent, she asked, was not to steal but to keep the business going?"Yes," Farah replied.McIlvene said she believes him. Of course, the more legitimate the business is, the more legitimate her mortgage is.Whereas the trustee - who would benefit from proof that the whole scheme involved fraud and intent -- had a different point of view."I don't believe he didn't have intent," he said. "He was begging for money right up to the end." And the fact that he took the loans in his name rather than FRM was "just another way to hide."What U.S. District Court Judge Paul Barbadoro thinks will be made known Wednesday when he hands out sentences to Farah and Dodge. -- BOB SANDERS/NEW HAMPSHIRE BUSINESS REVIEW