FRM ties were overlooked in school shutdown



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She doesn't have a name. It was blanked out in the attorney general's files. But the would-be nurse told a story that still tugs at Lynn West's heart."She called me a number of times crying," said West, the career school licensing administrator at the New Hampshire Postsecondary Education Commission. "She lost everything. It was the worst story I ever heard. My heart just broke for these students."These students, West believes now, were early victims of Scott Farah and Financial Resources Mortgage Inc., financial backer of Skill Med Services Inc., a Laconia nursing school headed by Bonnie McPhail. Skill Med eventually went under, causing more than 40 poor students to lose much of what they had -- just as dozens of investors did some five years ago when FRM suddenly closed its doors after its multimillion-dollar Ponzi scheme fell apart.Unlike the investors, who lost millions, these students lost thousands, but to this student - let's call her Jenny - the loss was just as great. Jenny, the single mother of three children, had just fled an abusive relationship and she faced a choice. She could use the money she saved to buy a car or put a deposit on Skill Med's course.She chose the latter and "eagerly went to go and take the test to enter the program," according to the complaint. Then she waited and waited for the program. And when it became clear that the course wasn't going to happen, she waited for her refund. She only got a small fraction of it back."There were so many things I could have done with that money," Jenny said in the complaint. "Like buying badly needed furniture as I left my bad marriage with only my kids and clothes. Now my children have lost the hope of a better life. ... I don't even have the money to take them to small claims court."Jenny's complaint was filed with the New Hampshire Consumer Protection Bureau at the Attorney General's Office. She got a reply signed by the then-director of the bureau -- current Associate Attorney General Richard Head - explaining that, "given the nature of your complaint," it was being forwarded to the commission, where it was handled by West.Head sent out 10 similar responses to similar complaints. Three specifically mentioned the name of McPhail's business partner who allegedly "embezzled" or had "stolen" more than $100,000 or more from Skill Med. Though the three complaints didn't mention the business partner, they also referred to the business partner as the "Pastor's son," and charged that those in the state agencies involved with Skill Med were aware of him.West didn't believe what McPhail told her about Scott Farah at first. Now she does."This was his sandbox, his playground, before he went on to bigger things," West said.Farah, the president of FRM, was sentenced in January to 15 years in federal prison after pleading guilty to defrauding hundreds of investors out of tens of millions of dollars.The Skill Med matter came to a head in the summer of FRM, right about the time Farah set up a multimillion-dollar line of credit with CL&M, FRM's affiliate mortgage servicing firm. The line of credit enabled him to pull off the massive Ponzi scheme that - despite numerous red flags to various agencies, including the AG's office -- went largely undetected until FRM came to a crashing halt when it was forced into bankruptcy in November 2010.Head's nominationHead left the AG's Consumer Protection Bureau in 2007 and took on an increasingly important role at the AG's office. Despite charges of a conflict of interest because of his bureau's handling of FRM complaints, Head authored the AG's report on FRM regulatory failures - a report that minimized the AG's failings, while emphasizing those of the other agencies involved, particularly the Bureau of Securities Regulation.On March 16, Gov. John Lynch nominated Head to be promoted to deputy attorney general, which would make him the No. 2 prosecutor in the state. The Executive Council will consider whether to act on his nomination on March 28, just days before the Securities Bureau is scheduled to release its own report on how the FRM affair was handled.Some of the FRM victims want the council to hold hearings on the nomination, or at least delay it until after the Securities Bureau report is released. At least one councilor - Ray Burton - said that he was going to vote for a delay. But two others asked by NHBR weren't sure, so what the council eventually does remains an open question.And so is this: Who in the AG's office knew what about FRM when? Whom did they tell, and what was done about it?West, for one, said she did pass on at least some of her concerns about Farah to the AG. But when asked for more details, she just gave a look of anguish and exasperation. She said she couldn't talk about what she discussed without violating attorney-client privilege, since the AG's office represents her agency. When a reporter pointed out that the privilege was meant to protect the client, not the attorney, she said, "Yeah, well it seems a little turned around in this particular case."Attorney-client privilege is one of the reasons that some of the 1,400 pages of documents related to Skill Med will not be released, Head confirmed to NHBR. Others are being redacted to protect privacy.In an email to NHBR, Head said that he had "no memory of reviewing any of the Skill Med complaints in 2005" before they were sent over to the Postsecondary Education Commission. He noted that the office receives some 3,500 complaints on an annual basis, that they are reviewed by paralegals, which in turn are reviewed by attorneys, all on a rotating basis. Form letters about the referrals were electronically signed by the bureau chief, which was Head at the time.He said the McPhail matter was not included in the AG's report about FRM, since the complaints were not specifically directed at FRM, he said.Head also said that he was "pleased that I have been nominated for deputy attorney general, and I look forward to discussing my nomination with the Executive Council"The documents that have been released so far show that the Skill Med mess - and the alleged embezzlement by Farah - were a focus of investigation of two agencies represented by the AG's office, the Postsecondary Education Commission and the Board of Nursing.According to those documents, the local bankruptcy trustee's office in Manchester - the very office that now controls the remaining FRM assets - wanted the FBI to get involved, though it seems that the trustee was focused more on McPhail than Farah. That office referred questions to Washington bankruptcy trustee's office, which would not confirm or deny any criminal referrals.NHBR could not reach McPhail except through an intermediary, who said she does not want to discuss the matter.In the end, the bankruptcy court discharged McPhail's debts without any finding of fraud. The Board of Nursing, however, ruled that McPhail was diverting the company's money for personal expenses, and issued a$65,000 fine against her -- a decision that the state Supreme Court let stand.McPhail founded Skill Med in 2002 with Scott Farah, who was deacon in the Center Harbor Christian Church that was run by his father, Bob Farah. It was Farah, McPhail told various agencies, who handled the money, which was raised through various investors for that specific enterprise. Farah paid out various expenses, but McPhail said at one point the money stopped coming.FRM, it was later learned, routinely commingled various investors' funds so that money from one investor went for other projects. The financial shuffling accelerated about this time because the Securities Bureau found that FRM had violated securities law by selling unregistered securities to preferred investors and demanded that they be paid off.At some point, McPhail broke with Farah and had her husband do the bookkeeping. A summary of the case put together by the Board of Nursing says it happened in the fall of 2003. McPhail told West it was about the summer of 2004.McPhail retained Christopher Carter, an attorney who threatened to sue Farah (a suit that was not actually filed until 2006, according to the Board of Nursing). However, Carter, a former white-collar prosecutor in the AG's office, was already representing another FRM victim, Ronnie Stone, at the time. McPhail said, and Carter confirmed, that McPhail's case was put on hold until the Stone matter was settled, which is why, according to McPhail, she was silent on the matter during the initial interactions with the Postsecondary Commission and the Board of Nursing -- the former was increasingly concerned about the financial viability of the school while the latter was worried about the quality of the program it offered.It's unclear when the Board of Nursing first learned about Farah, but the commission found out about him in a meeting with the board on March 17, 2005, according to West.West got a more detailed account from McPhail on May 25, 2005, when she heard such a "bizarre set of circumstances" that she had to record it in a memo to the file she was keeping at the commission. The memo details how the McPhails were "victims of a business scam orchestrated by her longtime friend and fellow church member, Scott Farah. ... The scam, evidently was played out with many other victims, the general concept being that Scott would involve himself with a business and become the business manager with all control of the money. He would then siphon off company money while still paying some of the bills....eventually financially destroys the company. After the company closes, he uses that company's letterhead to sell bogus shares to investors."FRM coincidencesThe Farah story is tangential to the agencies' story in one sense. The important thing wasn't who to blame, but that the nursing students either get the education they paid for, or at least get their money back. A bond posted by McPhail wasn't large enough to do the latter. But it became a "focus," as West put it, because McPhail kept the agencies' hopes up with a lawsuit against Farah and a possible settlement that would generate enough money to keep the school going. Indeed, the chronologies and summaries put together by the commission and board repeatedly allude to McPhail talking about a potential settlement with Farah, a settlement that never happened.It's unclear who finally killed off Skill Med. The board ordered that it stop accepting students. In July 2005, the commission ordered the school closed. The Board of Nursing order came through the New Hampshire Department of Justice, another name for the Attorney General's Office.In September 2005, McPhail filed personal bankruptcy, but the filing was soon challenged by some of the creditors. It was then that Brian Tierney, an attorney working out of the bankruptcy trustee's office, began to get involved, according to West.West said that Tierney was interested in going after Farah at least at one point, but according to her notes, "they were bringing charges against the McPhails (not Scott Faher [sic] the supposed embezzler)," West wrote in November 2005.The Board of Nursing also went after McPhail, in a case prosecuted by Norm Patenaude, the board's attorney, who had previously represented the agency for the AG's office. The complaint resulted in an order issued in October 2005. (Calls to the Board of Nursing were not returned, nor has the agency responded to a NHBR right-to-know request.)By this time, Carter had contact with another division of the AG's office -- the criminal division, regarding the Stone case. In October 2005 and May 2006, Carter warned the AG that FRM was commingling funds and it amounted to criminal fraud.The AG's office referred that warning to the FBI and never followed it up.While all this was going on, FRM also was dodging a number of other regulatory bullets.In December 2005, five weeks after McPhail was spelling Farah's name at a bankruptcy hearing in Manchester, the Banking Department issued a show cause order why FRM's license should not be revoked because of failure to safeguard consumer information. But the Banking Department closed that case in February 2007 without taking any action.In April 2006, after the Concord Monitor published an article on FRM and Farah's father's church, the Banking Department invited the Securities Bureau to go with them on an inspection of FRM -- the "pivotal moment," according to the AG report on FRM that Head authored. That moment came less than a week before Carter was warning the AG about FRM's commingled funds.And in September 2006, when the Securities Bureau asked the AG's office for advice about what to do about an ongoing cease-and-desist order against FRM, it was only a month after the Board of Nursing had held a hearing and issued an order against McPhail, Farah's former partner and alleged victim.Much of this story has been detailed in past reports, and it's expected to be detailed to an even greater extent in the Securities Bureau report -- which is scheduled to be released in early April.But don't look for much in the report about Skill Med. Retired attorney Charles Chandler, who conducted the bureau's investigation, rejected evidence relating to Skill Med that had been offered by the Securities Bureau staff.Bob Sanders can be reached at bsanders@nhbr.com.

 

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