Opportunities missed: Pieces of the FRM puzzle

The following are excerpts from various reports and documents on the FRM released the attorney general’s recently released report on how the investigation of Financial Resources Mortgage was handled by state agencies.April 4, 2000: “I think the fact that Financial Resources failed to segregate the funds of its investors would clearly indicate that, in fact, they were operating a Ponzi scheme.” – Attorney Steven Latici in a complaint to the Securities Bureau forwarded to Peter Hildreth, then Securities Bureau director and now banking commissioner. Hildreth said he has no memory of the complaint.May 1, 2001: “Company has no liquidity and is insolvent … is not in compliance with various state and federal laws.” – Kim Griffin, senior Banking Department examiner. In retrospect, Griffin said, it would have been appropriate to revoke FRM’s license. Sept. 5, 2002: “She was told the $ would be invested in mortgage. Investigation. The $ was placed in a general account. Could not rescind b/c he would not tender the $.” – Notes from a meeting with Jeffrey Spill, Securities Bureau deputy director of enforcement, and Suzanne Gorman, senior assistant attorney general, asking advice on how to proceed. Gorman could not recall meeting.June 16, 2003: “It is clear from the financial data submitted that the Respondent’s asset base is illiquid and uncertain, and not readily transferable to fully fund a rescission offer.” – Jeffrey Spill of the Securities Bureau to Financial Resources Mortgage, concerning repaying preferred investors, including Banking Commissioner Peter Hildreth’s brother.June 17, 2003: “I will wait to hear from you regarding the issue of securing assets for the benefit of the investors.” – Spill to the Attorney General’s Office. The assets were never frozen. In its report, the AG’s office defended itself, saying that it only had the power for a temporary restraining order. Both the AG and Securities Bureau had the power to freeze assets in August, but by then it was too late, Spill said. July 23, 2003: “Such a determination cannot be made without learning more about the financial condition of the Respondent and the whereabouts of all monies.” – Securities Bureau hearing officer Barry Glennon in an order denying FRM’s motion to dismiss the case against it the day before the hearing. No order was made after the hearing because Glennon was concerned that the company would be driven into bankruptcy and would not be able to pay back preferred investors.March 8, 2005: “Commissioner Hildreth: Thank you for speaking with me today regarding Financial Resources: Our conversation gave me a glimmer of hope.” – Redacted complaint letter to Hildreth. The complainant later replied to a letter apparently written by Hildreth, despite his recusal, and reported on by auditors from the Securities Bureau in their Appendix A to their report. Hildreth said there wasn’t such a letter in the department’s files, that it was a “fabrication” and pointed to another letter with similar language written by then-Banking Department attorney Andrea Shaw saying that FRM “has sufficiently addressed your complaint.” The complainant disagreed and added he couldn’t understand how a business could “outright lie.”Oct. 3, 2005: FRM money wasn’t used for ‘legitimate investments’ but instead put ‘in a single bank account that Scott Farah used for various personal and business purposes’ – Attorney Christopher Carter for an FRM investor, in a 2004 lawsuit passed on to the AG’s criminal bureau shortly after this date. In May 2006, Carter again spoke to the investigator, who passed it on to the head of the criminal division, but never went any further than a brief mention to an FBI agent.Dec. 20, 2005: “Mr. Farah has illustrated a willingness to forgo the laws and rules of the State of New Hampshire whenever they see fit.” – Banking Department Examination. The examination was referred for enforcement action, but never went to a hearing. April 25, 2006: “[W]e would like to fast track it [the consent order] and try to get it wrapped up as soon as possible in light of today’s newspaper article. We are planning an unannounced examination in the near future.” – Then-Banking Department attorney Andrea Shaw, following publication of a Concord Monitor article about FRM investor Ron Stone’s suit against the company. The next day, Hildreth instructed Shaw and the department’s Consumer Credit Division director, Mary Jurta, to reach out to the Securities Bureau to conduct a joint examination. The bureau declined and went in on its own. May 24, 2006: Farah was “stonewalling the whole exam … Scott [Farah] said that he thought that wasn’t going to be involved but I explained my notes said that 99 percent of his client fees were generated through commercial loans so we would be interested in doing that.” – The Banking Department’s Mary Jurta. Commercial loans were at the center of the alleged fraud. (Hildreth later signed a subpoena against FRM but doesn’t remember signing it.)Feb. 29, 2007: “Delay for unknown reasons. In the meantime nex[t] exam went down and they had essentially fixed all outstanding issues. Closing case without further action.” – Banking Department attorney James Shepard on an examination of FRM, which had been delayed after Shaw, his predecessor, left the department. Nov. 17, 2008: “The licensee was working with three unlicensed entities … This is a repeat violation.” – NH Banking Department examination of FRM. One of those entities was CL&M Inc., which held the bank accounts in which all FRM investors and lenders’ money was pooled together, and which the Banking Department never examined. The examination also cited a “commercial construction loan agreement” for primary residence loans, thus putting it in the purview of Banking Department regulation, even as narrowly defined. And it still did not provide quarterly and year-end financial statements, also cited in previous examinations. Feb. 11, 2009: “FRM was indeed licensed and in good standing with NHBD … there had only been one complaint ever filed against FRM.” – A Banking Department employee to FRM investor Frank Marino, according to a lawsuit filed by him on May 5, 2010, against Banking Commissioner Peter Hildreth. Hildreth later admitted that there were 15 complaints against FRM, but many were not in his agency’s jurisdiction, and some might have been missed because FRM had operated under different names. June 4, 2009: “Financial Resources Mortgage has engaged in, is engaging in, or is about to engage in, acts or practices which warrant the belief that it is not operating honestly, fairly, soundly and efficiently in the public interest.” – Massachusetts Banking Department show cause order.Sept. 16, 2009: “We have bits and pieces, but not a complete picture and likely no jurisdiction … Our routine examination processes have proved fruitless for the large part, so I would recommend that someone such as the new AG who knows what will be needed to prove criminal fraud should direct the investigation.” – Jurta to Hildreth, in response to an e-mail from the Attorney General’s office flagging an FRM Web site. The e-mail included the comment, “There’s something very not right about this.” (Later, testifying at the joint legislative hearing, Jurta said the question was “too little too late.”)