‘Final’ FRM report lambastes AG, Banking Dept.
“I am disappointed in my state government,” said Charles Chandler, after presenting his “Findings of Fact” Monday relating to the Financial Resources Mortgage Inc. Ponzi scheme. “I really am.”Chandler didn’t name names, except in footnotes, in the report he delivered as a result of his six-month investigation for the state Bureau of Securities Regulation into the largest Ponzi scheme in the history of New Hampshire. But he added, “You can figure out who they are.”And while some of those officials not named have resigned partly because they failed to prevent the fraud, one is being promoted, or at least is awaiting potential promotion: Associate Attorney General Richard Head, nominated by Governor John Lynch to be deputy attorney general, the No. 2 law enforcement official in the state.That nomination may or may not be confirmed, or even discussed, at the Executive Council meeting on Wednesday. Head’s nomination was quietly pulled from the previous council meeting — an action that usually means he didn’t have the votes to win approval. One reason councilors hesitated is that they hadn’t yet seen the long awaited Chandler report.Head co-authored the report in the first FRM investigation at the request of the Executive Council — a controversial decision in itself, because Head at the time directed the AG’s Consumer Protection Bureau, which during his tenure received six complaints about FRM.Head’s report also found fault with the three agencies in state government that failed to halt the Ponzi scheme — the Securities Bureau, the Banking Department and the AG’s office itself.But unlike that report, Chandler’s sided squarely with the viewpoints of the more outspoken FRM victims, and criticized the agencies’ conduct both before and after FRM’s collapse, including that AG, also known as the Department of Justice, or DOJ.”I unfortunately find the DOJ Report to be less than significant in my deliberations,” Chandler said in his report.When asked about the criticism lodged by Chandler, Attorney General Michael Delaney noted that less information was available during the time of that first report, because the Federal Bureau of Investigation was still conducting its investigation. That probe eventually led to the guilty pleas and sentencing of the two major principals in the scheme: FRM President Scott Farah, who got 15 years in prison, and Donald Dodge, president of CL&M, which serviced the loans, who got six years.Besides, Delaney said, it is time to put the past behind us and focus on a new effort aimed at encouraging state agencies to share information about potential fraud by strengthening the state’s Consumer Protection Act and establishing a financial crimes investigator at the Banking Department (financed though Banking Department fees, so it would be untouched by proposed budget cuts which could eliminate the rest of the Consumer Protection Bureau), he said.But when asked about how the Chandler report might affect the upcoming appointment of Head, Delaney demurred, saying he hadn’t had a chance to study the details in Chandler’s report.’Independent investigation’For his part, Chandler said his was the first “truly independent investigation” into the FRM matter. While the investigation was conducted under the auspices of the Secretary of State and used Securities Bureau staff (including some who were involved in investigating FRM for years), Chandler – a Tilton attorney — said his was the final word on the investigation and the report itself.Secretary of State Bill Gardner said he didn’t even see the report until it was released to the public. Neither did the Department of Justice, the only agency that asked for an advance copy, said Chandler.Chandler, unlike the joint legislative committee that investigated the matter, had subpoena power, and was not “hamstrung” by an election deadline. It was certainly the most extensive probe: 76 witnesses, 62 hours of sworn testimony, 14 subpoenas and 62 exhibits.The probe didn’t lead to any startling new revelations. Indeed, when Chandler was asked what was his major discovery, he said it was “the heartless viciousness” of the Ponzi scheme.Some of that viciousness is familiar ground: pressured by the Securities Bureau into paying off initial investors, Farah took out a massive line of credit from CL&M. This enabled FRM – on a larger and larger scale – to commingle lenders’ money that was supposed to go to specific commercial projects (usually residential developments) into one operating account.But the investigation revealed other details.In order to deceive regulators – and even their own accountant – Farah and Dodge covered up those loans by matching them with payments on notes in worthless companies that FRM supposedly sold to CL&M.”Donald Dodge and Scott Farah were maintaining two sets of books … that would show FRM is a sound financial position when FRM was anything but sound,” said Chandler.FRM also deceived lenders, some 43 of whom testified under oath during the investigation, but most either pooled their money through trusts – headed by Donald Dodge – or were sold fractional shares of a project. But all of them thought that their loan was backed by real property, and if the project failed they would be able to foreclosure on it.That’s why Chandler concluded – in contradiction of both the Banking Department and the Attorney General’s Office – that these were loans, not securities. Indeed, Chandler said, Farah structured them that way after a 2007 settlement with the Securities Bureau, to avoid scrutiny by the agency, which been after him for seven years.At the time, the Securities Bureau’s investigation into FRM was delayed by a hearing officer’s reluctance to demand that FRM immediately pay off the company’s initial investors, fearing the company would collapse and the investors get nothing.Chandler called that delay “inexcusable,” but most of Chandler’s criticism was aimed at the Banking Department for not sharing information, and the Attorney General’s Office for not helping the Securities Bureau more.’Self-serving’ commissionerChandler also faulted the Banking Department’s lack of follow-through on 18 complaints, even though it was aware of seven lawsuits against FRM and its lack of response to 70 violations detailed in seven exams. He echoed one former banking examiner’s complaint that these were “drive-by exams” aimed at meeting an 18-month examination cycle rather than to see if company was solvent.Chandler also said the failure to examine the unlicensed CL&M was a “major failure.” And he criticized former Banking Commissioner Peter Hildreth (though not by name) for being “irresponsible” in attempting to shift jurisdiction of the FRM matter to the Securities Bureau after the collapse.”This convenient and self-serving position advanced by the former NHBD Commissioner appears to have been made to divert attention from the multiple failures of the NHBD,” the report says.Chandler saved his discussion of the role of the Department of Justice – the longest such section in the report – for last. The AG “failed in its client counseling obligations” when the Securities Bureau came to it for help, and it was a “serious failure” when the office did not follow up on a criminal tip from a former prosecutor from its own office.The Consumer Protection Bureau forwarded five complaints to Banking and closed another without any significant action.But Chandler also targeted the DOJ report itself, saying that “investors” (actually five lenders and one borrower) were interviewed by interns, that the report did not memorialize interviews with its own staff, and the accuracies of others were contested by some witnesses under oath.And it noted the criticism of the report of having the “associate attorney general author the DOJ Report (Head) when he was actively involved in the pre-collapse matters””It is clear that the DOJ never should have self-analyzed its role in the FRM matter by using its own staff,” Chandler wrote.But Chandler’s most scathing words on “the level of failure of state government” came in the second paragraph.”The state had the necessary tools and resources at its disposal to perform their statutory duty and adequately protect the consumer, but failed to do so. When they needed to reach out and take responsible action, agencies of the state with direct oversight responsibility became timid, hid behind technicalities and failed to exercise their full statutory authority.” – BOB SANDERS/NEW HAMPSHIRE BUSINESS REVIEW