Accusations swirl around failed USA Springs bailout
When Bill Gianopoulos put down $1.2 million -- the rest of his life savings -- to help USA Springs out of bankruptcy in the summer of 2011, he never dreamed he would be hiring a Swiss attorney in a long-shot attempt to get it back.
Gianopoulos has been caught up in an international financial mess that includes frozen Swiss bank accounts, dubious Brazilian bonds, an executive under indefinite detention in Switzerland, an FBI investigation, secretly taped meetings, missing escrow funds, an uncollectible multimillion-dollar judgment, accusations of fraud, and money winding up in the hands of various professionals in Las Vegas.
Gianopoulos, a Lawrence, Mass., contractor who said he had never made a major investment before, started out with a 1 percent stake in the fledgling company, which hoped to bottle groundwater from a site in the towns of Nottingham and Barrington and sell it overseas.
With the "water industry growing and growing," it would be a "good, clean business," he said.
He soon had invested roughly a million dollars into the venture, which struggled to get a permit to withdraw 300,000 gallons a day against the opposition of some local residents.
By July 2008 the company went bankrupt, trying to find financial banking to complete the half-finished bottling plant.
In the summer of 2011, a Swiss company, Malom Group AG, seemed to come to the rescue, promising $60 million in financing for the USA Springs project -- enough not only to pay Gianopoulos, but bring the company back to life.
Malom said it could raise the money by selling USA Springs bonds in Europe, but it needed at least $1.2 million to do so.
"There were time constraints," Gianopoulos explained. "A couple of people on the fence were hedging. The professionals were obviously impressed with Malom. I was fairly comfortable at the time, a lot more than I am now."
Earlier this year, the U.S. Bankruptcy Court in Manchester issued a $60 million judgment against Malom. One of Malom's principals, Martin Schläpfer, has been detained for nearly a year, the target of a securities fraud investigation in Switzerland.
And USA Springs is literally on the auction block.
"I think it is because of Malom that we are losing this company," said Rocci DeLucia, one of USA Springs' principals. "Had we pursued some other investment opportunities, we might still be in business."
Gianopoulos' $1.2 million never went to make an offering, but some of it did end up in a Swiss bank account - which may or may not be frozen by Swiss authorities - as well as in numerous other places, ranging from Florida to Las Vegas to Brazil.
Malom, which once claimed it had more than enough money in the bank to handle an initial $16.6 million bridge loan to USA Springs, now says it doesn't have enough money to fly in an executive to answer the court's questions about its finances.
"All this money was stolen in front of a judge," charged Jeff DeLucia, another USA principal. "We tried to change our lives with this American Dream, and it turned into a nightmare."
Still others are claiming to be victims of Malom's alleged fraud, to the tune of more than $10 million. And several of these victims claim to have been questioned by the FBI, among them Deborah Mitman of Las Vegas, Nev., who is suing her escrow agent after she said she was reassured by professionals in the USA Springs case that Malom was legitimate.
Yet several of those who worked with Malom vouch for it, especially for its other major principal, Hans-Jurg Lips, a longtime investment banker who himself was briefly detained in the Swiss investigation that has incarcerated his partner. Lips, they say, is still trying to come up with the money, but at this point, few believe that he will. (Lips declined to comment, citing pending litigation.)
USA Springs heard about Malom through James Erwin, a Las Vegas broker, according to USA Springs principals Francesco Rotondo, the DeLucias and the company's former attorney, Alan Braunstein.
Malom appeared to be a reputable company. It was led by two executives with a long history in the complex world of European finance.
When the deal was finalized by the bankruptcy court in August, there were congratulations all around, especially when it became known that USA Springs would get a $16.6 million bridge loan before the bonds were sold.
"Providing a bridge loan of this size is proof that they are confident," said U.S. Bankruptcy Judge J. Michael Deasy, who added that getting this project back on track was "fairly remarkable."
In the United States, Malom was initially represented by Joseph Micelli, who showed up at bankruptcy court, swearing in his affidavit that "Malom is certain that the structured note (for $60 million) offering will be 100 percent fully subscribed, if not oversubscribed, on or before September 26, 2011," and that Malom has among its assets "unencumbered cash in its bank account(s) totaling far in excess of $16.6 million."
There were also two other letters from banks, one from Zurich-based EFG Bank.
Gianopoulos would get as much as a $600,000 success fee when the $60 million loan was closed, and $50,000 if it didn't. It seemed, he said, that his money was safe.
Only in hindsight do some of the red flags become more evident.
Most banks wouldn't be able to ascertain whether funds in its customer's account were unencumbered or were of a non-criminal origin. And it turned out Micelli was disbarred in 1997 for violating a two-year suspension of his law license when he stipulated that "he lied to his clients, telling them he had filed a complaint when he actually had done no work," the California Bar Journal reported at the time.
Then-USA Springs attorney Braunstein alluded to this in a motion nearly a year later, but by then the damage was done. (Micelli referred all questions to William Gannon, an attorney for Malom, who declined to comment.)
In the end, the bankruptcy court and USA Springs never saw a penny of that $60 million.
Malom initially blamed a bad bond market in Europe, but it was only toward the end of the year that USA Springs learned from Lips' affidavit that both he and Schläpfer were taken into "investigative custody" in Switzerland at the end of September 2011.
Lips, who was held briefly, was "accused of issuing guarantees from NAS Ltd. without sufficient financial cover." Schläpfer is still in custody for what Lips surmised is the same reason.
At the time, Lips said there were "no restrictions" imposed on Malom Group, but some of the assets held in some Swiss banks were "blocked." (In an email, the Swiss prosecutor confirmed that the two had been arrested on an allegation of fraud.)
By that time, Malom's quest to raise funds had switched to millions in Brazilian bonds, and Malom turned to James Warras to handle the matter.
Warras said in a deposition that Malom had paid about $800,000 for a bond that could be worth $1.2 billion. But the Brazilian government has publicly said that it would not honor such bonds - issued by a former regime - calling them fraudulent. Warras relied on the Brazilian law firm Compos and Compos' assertion that the bonds were genuine.
But Warras' credibility was also limited. At a December 2011 deposition, he admitted pleading no contest to securities fraud in Wisconsin a dozen years earlier. (Warras also did not respond to questions by deadline.)
Meanwhile, an audiotape has emerged and been widely circulated of a secretly taped phone conference January in which Erwin initiated a call to Switzerland, with Braunstein and Peter Sutton, a litigator in Braunstein's Boston firm. They discussed the legal options involved in getting back the $1.2 million in what was increasingly thought of as a case of fraud that was crossing paths with an apparent Swiss criminal investigation. (Erwin could not be reached for comment.)
Deborah Mitman, another investor who did business with Malom, said she listened in on the tape of the conversation and vouches for its accuracy. Mitman, who said she did not create the audiotape, said she turned it over to the assistant U.S. bankruptcy trustee in New Hampshire, Geraldine Karonis, who declined to comment.
In Mitman's email to Karonis, she said that the taped discussion alluded to some of the bank statements Malom provided as being "cut and pasted."
Principals at USA Springs claim that the tapes show that Braunstein -- who said he was taped without permission -- knew more than he saying in court. Braunstein, however, said that court transcripts will show that he was openly skeptical in court, and he was just doing the bidding of his client who had false hopes in Malom.
This is part of the "irreconcilable differences" that caused Braunstein to withdraw from the case, along with Bruce Harwood, the local counsel who is now slated to replace Deasy as the state's only bankruptcy judge next March.
Shortly after that withdrawal, Karonis filed a motion to convert the case from Chapter 11 reorganization to Chapter 7 liquidation, essentially giving up hope on Malom, and taking control of the bankruptcy process away from USA Springs' principals.
Those principals charged that Braunstein didn't properly vet Malom, and when the fraud became more apparent, did not do enough to expose them. Braunstein said that "it was the debtor who hired a broker against my wishes," and it was they who found the broker that "vouched for Malom's viability and integrity, not us."
Before Braunstein bowed out in June, however, he filed in May several motions accusing Malom of "using false pretenses or fraudulent activities to induce the $1.2 million deposit."
And it was around that time that he filed for a $60 million judgment against Malom, which was granted by Deasy on June 5.
Gannon, Malom's attorney in Manchester, declined to comment on the judgment, but did contest it in court, arguing that Malom was no longer obligated to fund the loan because USA Springs did not show that it still had a valid contract to sell the water overseas, which was a condition of the loan.
USA Springs' principals were also upset at Braunstein's use of Eric Danner of CRG Partners, now a unit of the consulting firm Deloitte, to handle the vetting of Malom -- particularly after discovering that Danner (who is now a consultant to the bankrupt estate's sale of the company) suggested that the principals bid on their own company. Danner did not respond to questions.
No matter who is at fault, Gianopoulos' $1.2 million was already long gone.
On June 23 Braunstein's firm wired the money to Allen Ross Smith, a Malom attorney in Winter Haven, Fla. Smith, according to a document filed with the court, wired nearly all of the money before the week's end.
A handwritten accounting, provided by Smith in June 2012, and obtained by NHBR, shows some of the recipients.
While the bulk of the $1.2 million -- $720,000 -- went to Malom, the rest was scattered among various consultants and professionals, according to the accounting. Some $175,000 went to Compos and Compos in Brazil. Some $115,000 went to M.Y. Consultants, or Anthony Brandel, in Las Vegas, for processing the loan. Brandel said that he dispersed that money among some other Las Vegas professionals -- Micelli and Erwin -- for their services on the case and $25,000 went back to Braunstein, who turned it over to the bankrupt estate.
Smith's accounting also showed $30,000 each going to Lips and Schläpfer, and others funds going to individuals and organizations.
All of this is on the up and up, said Brandel.
"Malom did exactly what they are supposed to do," he said. "I have a hard time swallowing anything of this as a fraud."
In fact, Brandel said that Lips was still hard at work trying to cash in those bonds, so everybody will get paid what they are owed.
Faith in Lips was a sentiment echoed by Cheryl Robinson, another Malom broker, who said that she too has several clients that are victims of Malom.
Most of Robinson's clients contributed money into a Malom bank account in order to leverage more money in "joint venture" transactions, which she now characterizes as "pie in the sky."
Robinson, Irwin and a third broker have now lost about a total of $10.2 million to $10.8 million in these ventures, said Robinson.
Mitman counts herself as one of her victims, but so far her legal action filed February 2 has been against Antoinette Hardstone and Commercial Escrow Services, the California firm that held the escrow account.
Mitman said she deposited $400,000 into the account in order to fund $10 million financing of a mortgage, but the funds were dispersed to Malom before Mitman received required documents and gave it the OK, according to her complaint.
In March, the California Department of Corporations barred Hardstone from any position of employment, management or control with any escrow agent.
Robinson thinks that Lips was not part of any fraud.
"All these people will be paid back," she said. "I'm 90 percent sure. Hans is a very smart banker. Why would he jeopardize his livelihood for something like this?"
Meanwhile, the bankruptcy court has to figure out what to do about the $60 million. Right now, said Thomas Raftery, the USA Springs estate's trustee's attorney, had three options. It could hang onto the judgment and try to collect, but there is no money at present in the estate to do so. It could try to sell the judgment. (Raftery said some bankruptcy judgments have actually been put on eBay). Or it could abandon it.
USA Springs principal Francesco Rotondo, however, would like the trustee to take a strong stance.
"GO AFTER MALOM!!!" he said in an email to Raftery. "A lot of people's lives rest on the tip of your pens, make those pens do the right thing. THINK ABOUT COMMON SENSE FOLKS AND NOT YOUR WALLETS."