AG’s office caught in the middle of ‘Ponzi’ probe

The New Hampshire Attorney General’s Office – currently conducting a review into how state agencies responded to the Ponzi scheme allegedly hatched by Financial Resources Mortgage Inc. of Meredith – itself received communications in 2003 from the New Hampshire Bureau of Securities Regulation relating to a proposed enforcement action against the Meredith company, NHBR has learned.The review is being conducted to examine how such an alleged multimillion-dollar fraud could escape regulators’ notice, despite warnings that go back more than a decade. The review will include the Office of the Attorney General’s response to the warnings, but there is not enough of a conflict of interest to warrant a third-party investigation in the matter, said Deputy Attorney General Bud Fitch.“We have looked into that question, and we are comfortable we are providing an unbiased, neutral and accurate review,” he said.The review – to be headed by Senior Assistant Attorney General Richard Head – might involve engaging outside consultants (“just to get someone with expertise in banking and securities,” said Head), but there will not be an independent investigation into the matter, said Attorney General Michael Delaney.And although the Executive Council asked for the review, the council would not need to approve any of the consultants’ contracts, since the law gives the Attorney General’s Office the flexibility to hire experts when needed, the attorney general said.The communication on enforcement action was sent June 17, 2003, said Securities Director Mark Connolly in a response to a Freedom of Information request filed by NHBR with his office.Connolly said he won’t release the document until it has been reviewed by the Attorney General’s Office, and said it “discusses state enforcement matters regarding Financial Resources.”Although the Securities Bureau has turned to the Attorney General’s Office for legal advice, “it is our opinion that besides the name of the individual harmed… all state records regarding financial resources should be made public,” said Connolly

Investor restitutionThe interagency haggling over records is one of the reasons for the AG’s review in the first place.The Securities Bureau has issued a subpoena to the Banking Department for its records, arguing that it needs that information to determine whether Financial Resources Mortgage, or FRM, did sell unregistered securities, as Banking Commissioner Peter Hildreth has stated.Although the Banking Department licensed and regularly examined the firm – and found numerous irregularities along the way – it contends that it can only regulate residential mortgages, whereas the fraud was mostly against investors in commercial mortgages, which it does not regulate.Besides, Hildreth told NHBR, the only records that weren’t released were “work papers.”The Attorney General’s Office has been caught in the middle, trying to broker a release of records without having to enforce a subpoena as well as trying to determine which records should be released to the public.But the office has it own role in the matter.First, its Consumer Protection Division forwarded some complaints over the years to the Banking Department.Second, it apparently discussed some kind of enforcement action with the Securities Bureau. Third, it is currently providing advice on what records can be release to whom.Finally, the attorney general might need to protect the state against potential lawsuits against investors who are increasingly angry at regulators for failing to inform them of problems at FRM, even when they were asked specifically about the company before their investments were made (see related story, “FRM investors fume over lack of information”).So far, said Delaney, the state “has not identified anything that would suggest liability, but we are always mindful of that, since one of our responsibilities is to defend the state against such suits.”The Banking Department forced FRM and its loan servicing company CL&M Inc. into Chapter 7 bankruptcy on Nov. 20, 2009, after numerous investors – who had believed they were being sold a secondary mortgage backed by property and were now holding worthless paper – filed suit.In the end, according to the bankruptcy trustee, more than 500 investors had been defrauded. The companies had some $82 million in loans on the books and zero in the bankThe Ponzi scheme – involving high returns promised to investors that could only be paid by sucking in new investors with the same promises – allegedly dates back to 2005, according to the bankruptcy trustee. But records released by the Securities Bureau show Hildreth was warned about a possible Ponzi scheme in October 2000, when he was serving as director of the bureau.Hildreth has said he recused himself from the FRM matter after a staff member told him that one of his brothers was an investor.It was in November 2001, after Hildreth left Securities to become banking commissioner, that the state ordered the company to show cause why it should not cease and desist from selling unregistered securities, but that order languished as attorneys for FRM argued that they were exempt from securities law because they were regulated by the Banking Department.

‘Observations’ of FRMMeanwhile, the Banking Department was finding its own problems at FRM, in confidential examinations of the company. The examinations primarily involved “observations” involving numerous instances in which FRM didn’t follow consumer protection law.Shortly after the first examination in May 2003, the Banking Department sent an e-mail to Securities saying that it was not sure it could release records because FRM’s file could be confidential.A few weeks later, the Securities Bureau discussed some undisclosed enforcement action with the Attorney General’s Office, which won’t disclose what happened after that communication.At the time – June 2003 – the attorney general was Peter Heed. He was succeeded by Kelly Ayotte – now a candidate for the Republican nomination for the U.S. Senate – in July 2004.The Securities Bureau slowly proceeded with its own action against the company, resulting in $20,000 in fines and $1 million in restitution in 2007. Meanwhile, the number of “observations” noted by the Banking Department during the period continued to increase, and in 2005, the department issued its own order asking FRM to show cause why its license shouldn’t be revoked.Hildreth said that he had recused himself from the matter while he was banking commissioner because he thought his brother was still involved as an FRM investor. But because it didn’t rise to the level of an official conflict of interest, Hildreth said, he didn’t put the recusal in writing. The deputy banking commissioner at the time issued the order.Hildreth said he finally talked to his brother after FRM shut down. The brother told him that he had not been involved with FRM for years. “So I was in the clear, I figured” to go ahead and force the firm into bankruptcy, Hildreth said.Hildreth said it was “no secret” that his brother was involved, but Gov. John Lynch told a reporter last month that he had not been aware of the brother’s previous involvement even weeks after the company went into bankruptcy.Sources told NHBR failure to inform the governor about the involvement is one reason for the AG’s review.Banking Department records also show that the firm was the subject of a number of consumer lawsuits alleging that FRM misrepresented its loans.In November 2008, an observation by an examiner indicated that the line between residential and commercial loans was blurred, and that the company was using construction loan agreements for primary residential loans, raising the question of whether the Banking Department examined the commercial loans and what they may have found.To view a chronology of the FRM investigation, click here.Bob Sanders can be reached at bsanders@nhbr.com.