The Financial Resources Mortgage Inc. scandal may have been investigated to death, but the avalanche of documents and thick "final" reports can't seem it bury it.
It reaches out from its grave, grabbing just about anybody still standing, threatening to pull them down into the slime of suspicion.
The scandal seemed almost to reach out from the grave during the week of Jan. 17, with sentencing of the two men behind the massive Ponzi scheme sentenced in U.S. District Court in Concord, continued hearings into the mess at the state Bureau of Securities Regulation and a bankruptcy deposition by FRM mastermind Scott Farah.
Here are some of the highlights.
• Farah, president of FRM, and accomplice Donald Dodge, president of affiliated mortgage servicing firm CL&M, were sentenced to 15 and 6 1/2 years, respectively, despite the U.S. attorney's recommendation that they get about a decade each.• In a bankruptcy deposition during an adversary hearing, Farah asserted that FRM was a legitimate business, prompting the bankruptcy trustee to blow his cool, while his victims thanked Farah for supporting their claim that they were lenders to, not investors in, FRM.• At the Securities Bureau hearings, new details emerged on how the fraud was covered up.'Principal deceiver'
Taking center stage was the sentencing of Farah and Dodge on Jan. 19.
That date loomed large in the other proceedings, since after that the two principals presumably would be inaccessible.
However, Farah was the only one sent straight to jail. U.S. District Court Judge Paul Barbadoro, after adding five more years to the recommended sentence proposed by prosecutors, said he thought Farah might be a flight risk. Dodge was allowed to self-surrender on Feb. 11, after being sentenced to 3-1/2 fewer years than anticipated.
In meting out punishment, Barbadoro judged that Farah was the "principal deceiver" who "drew Dodge into the scheme."
Assistant U.S. Attorney Mark S. Zuckerman - while agreeing that Farah's role was more central - thought that Dodge was crucial also, adding that Farah was more willing and able to cooperate than Dodge with the government's subsequent investigation.
Lenders aimed their fire at Farah, outraged that prosecutors weren't asking for more time.
Zuckerman "sounds like a lawyer for Scott Farah. He is on his side. Who is on our side?" said Seka Sisic, who left war-torn Bosnia a dozen years ago to resettle in New Hampshire, only to lose everything she worked for through investing in FRM.
Farah was "a slimy criminal" whose business plan was "let me screw as many people as possible and stash the cash," she added.
It was Farah who started FRM, a mortgage brokerage firm that told lenders - sometimes individuals, and sometimes trusts with pooled investments - that their money would go to back specific commercial projects. But in fact, all of the money was put together in one commingled account.
Farah turned to Dodge in 2005 when the Securities Bureau demanded that he return about $3 million to FRM's preferred investors.
CL&M set up a line of credit for Scott Farah personally, and he would "pay in capital" to FRM, which would then use it to pay off creditors and cover future deficits, masking from various regulators the fact that the firm was deeply in the red.
When the firm closed in November 2009, Farah owed CL&M $20 million, with no way to pay it back.
FRM defrauded lenders out of $33 million, according to prosecutors. But despite calls for restitution to the victims, Barbadoro appeared to let that matter be settled in bankruptcy court.
The bankruptcy fight might be a side drama to most observers, but to the victims it is even more front and center now that their nemesis has been sent to prison. All this reached an emotional pitch in bankruptcy court the day before sentencing, when victims had a chance to look Farah in the face and ask him questions.
At issue was, and is, who owns the projects that ostensibly backed the victims' loans. The victims, pointing to mortgages located in county courthouses, say that the properties are theirs, and they should be free to foreclose on them. But they are being sued by the bankruptcy trustee's attorney, James Donchess, who said that because the lenders' funds were commingled in a Ponzi scheme, the loans were unsecured - and, unless they made a deal with the trustee, they would have to wait in line like everyone else.
Farah, of course, was a key witness in this adversary proceeding. But Farah wasn't going along with Donchess, telling him at one point he was "incorrect" when he referred to the victims as investors rather than lenders.
"That's your opinion," said Donchess.
"No, that's the truth," shot back Farah.
When Farah went on to explain himself, the normally steady Donchess blew up. "You're supposed to answer questions. If you want to give speeches, you can go in front of the courthouse."
The lenders couldn't have been more pleased, even going so far as to thank the man responsible for wiping out their life savings.
"I was thrilled to death," said Susan McIlvene, one of the leaders of the victims, who calmly questioned Farah from across the table.
Farah helped out the lenders in another way: maintaining that but for a $20 million line of credit, FRM was a "legitimate business." And since the secret loan by CL&M was to Farah, and not to FRM, it was never on the company's books. Thus, concluded Farah in a remarkable statement: "FRM was never involved in any fraud ... FRM was a legitimate business during its whole existence," he said.
Dodge made a similar point when he was questioned during the Securities Bureau hearings.
"I should go to jail for not telling them about the line of credit. If it wasn't for me being stupid enough to do that, he [Farah] couldn't do anywhere near the damage," said Dodge.
The line of credit started with CL&M, in Farah's words, to get the Securities Bureau "off our back" by raising $3 million to pay off the preferred investors. But if the credit was on the books, it would show that the firm was "upside-down" to both the bureau and the state Banking Department, Farah told the bankruptcy trustee.
Farah then put that "personal" loan back into FRM, at first as income from the "sale" of two worthless companies, fooling not only regulators but the company's own accountant.
"They were telling me the story I needed to hear," said Bill Connor, who audited FRM's books. "It would still be revenue if it wasn't a debt owed."
As far as the Banking Department was concerned, FRM needed not worry, as testimony from bank examiner Kurt Gillies revealed.
In order to clean up the agency's examination backlog, the department stopped looking at whether a company was solvent, concentrating instead on protecting borrowers, both from privacy violations and in making sure they received the proper disclosure.
So FRM at that time only was subject to "what I call a 'drive-by exam,'" said Gillies.
In hindsight, Dodge said, "I boarded the Titanic after it hit the iceberg," but he claims he didn't know it.
Although the line of credit grew, and the banking account "dips were getting lower and longer," Dodge always had enough to meet obligations.
And, he said, he believed Farah would be able to continue to raise enough money to keep things going.
Even toward the end, Dodge still had hopes in Farah's assurance that $100 million in financing would come through from Dubai.
"I believe that we had the most stable thing going," he said. "It was all a fantasy, just a fairy tale."
When it was clear that the company was going to collapse, Dodge said, he called one of the lenders, Harry Bean, a lender whose family lost $3.5 million and was a longtime friend of Dodge. (The Beans later asked judge Barbadoro to lower the sentence for Dodge to two to four years, calling him another victim.)
"I offered to kill myself in front of him. I was driving there with my gun. If he didn't do it, I would do it," Dodge said.
Bob Sanders can be reached at email@example.com.
This article appears in the January 28 2011 issue of New Hampshire Business Review