Piecing the FRM puzzle

Jon Hildreth, brother of New Hampshire Banking Commissioner Peter Hildreth, was once one of Financial Resource Mortgage’s preferred shareholders.Hildreth, the Laconia employee of a New York liquor importer, was a small investor in the Meredith-based company, to be sure – he held about $25,000 out of about a $1 million in preferred stock. But he was one of a class of shareholders who were paid off by FRM in 2005. That payoff accelerated an alleged massive Ponzi scheme that left other investors — who thought they were financing specific projects — holding the bag for millions of dollars.Under questioning by the bankruptcy trustee in February, FRM’s president, Scott Farah, said that he signed a revolving line of credit, dated June 1, 2005, to his partner Donald Dodge, for $10 million, in order to get $2 million or $3 million to pay off preferred investors. The money for that loan came from other investors, and the deficit of the company – which one Banking Department inspection called insolvent as far back as 2000 – mushroomed into more than $20 million of debt before it shut its doors.Those later investors – some of whom entrusted their life savings to Farah and FRM — are now in bankruptcy court, not knowing whether they will get any of their money back.“It was a sad thing,” said Jon Hildreth in describing his reaction to word of the company’s demise. “It certainly was a horrible thing. I guess I was lucky when I got out when I did.”FRM paid back Jon Hildreth in full on Oct. 31, 2005, according to documents examined by NHBR.Hildreth said he got out because he needed the money due to messy divorce and not because of possible conversation he had with his brother, Banking Commissioner Peter Hildreth.Jon Hildreth told NHBR that his brother called him to ask if he was involved in the company some time after his divorce but while still an investor. Hildreth then recalled that the commissioner said the department was “looking into” the company, but his brother was “too professional” to offer any more details. Hildreth said he had no idea that the company was on shaky grounds or was in trouble from that conversation, or he would have tried to cash in his shares immediately.When NHBR called back for more details about the timing conversation with his brother, Jon Hildreth said he was not sure that conversation happened until after everything “blew up” and FRM shut its doors last November.Two recusalsPeter Hildreth also said he remembered talking to his brother after FRM closed, but he did not remember any earlier conversation.“The intent was to find out if there was a conflict,” said the commissioner of the conversation. “He said that (his involvement) was long gone. I don’t remember saying that we are looking into it, but I think he could draw that conclusion. It was all in the papers.”Because of that conflict, Hildreth recused himself twice, even though he didn’t feel he had to because he could not derive any financial benefit from his decisions about FRM. The first time was in 2000, as director of the Bureau of Securities Regulation, when the agency investigated the company for the sale of unregistered securities. The second time occurred in December 2005, when he didn’t sign an order as banking commissioner threatening the company’s lending license, though at that time his brother actually was no longer a shareholder.“I just thought it didn’t make sense for me to have anything to do with it,” the commissioner said. When asked by NHBR if Commissioner Hildreth knew at the time that his brother owned a small share of a company that has become a massive Ponzi scheme, he said, “I knew he was an investor, but I didn’t know what kind.”As for Jon Hildreth, he said that NHBR’s inquiry was the first time anyone has asked him any questions about his role as a preferred shareholder, or any interaction with his brother, despite investigations by the FBI, the state Attorney General’s Office, the Securities Bureau, the Securities and Exchange Commission, the bankruptcy trustee, and numerous claimants in civil litigation.Concerns in ‘01 Jon Hildreth made his investment on March 7, 2000, about a month before Steve Latici, an attorney bringing a federal lawsuit against FRM who warned the Securities Bureau in a letter that the company was involved in what he called a “Ponzi scheme” involving the illegal sale of securities.That letter was forwarded to Peter Hildreth, who was then the director of the bureau. Peter Hildreth said that he recused himself shortly afterwards because of his brother’s involvement.Meanwhile, a report of an inspection conducted in May 2001 and released by the state Banking Department, shows that the company was on shaky ground even when Jon Hildreth was making that investment.“The company has no liquidity and is insolvent,” said the report, with no cash, and outstanding liabilities of $699,662. Although the company had $77,000 more in accounts receivable than in liabilities “it is doubtful the market value of assets would equal the booked value if the company were forced to dispose of the assets to satisfy the liabilities, thereby making the company insolvent.” The report concluded that the company “is not in compliance with various state and federal laws concerning loans secured by real property.”Hildreth became banking commissioner in September 2001, but there was no indication that he or his predecessor, the late Roland Roberge, took any action based on that report, or other subsequent examinations that focused more on truth-in-lending and technical violations and less on whether the company was solvent or not.But in November 2001, two months after Hildreth moved on, the Securities Bureau took action, issuing a show cause order demanding the company cease and desist from issuing securities without a license.One of those investors listed in the 2001 Securities Bureau allegations was Jon Hildreth, who was issued a $25,000 promissory note on March 7, 2001.At the time, FRM’s attorneys argued that the company should be regulated by the Banking Department and not the Securities Bureau. The bureau, however, insisted that the promissory notes were securities, not loans, and asked the attorney general to “secure assets for the benefits of investors.”The bureau said at the time it was concerned that FRM didn’t have the money to pay back the notes. FRM lawyers, meanwhile, argued in July 2003 that the company already paid back investors $500,000.However, Hildreth’s loan was still on the books.The Attorney General’s Office did not secure assets, and the Securities Bureau case dragged on for years, finally settling in July 2007, with the company paying a $20,000 fine and noting then that FRM had paid back all preferred investors (including Hildreth) to the tune of $1 million.A crucial year Meanwhile, back at the Banking Department, complaints about the company’s residential mortgage business continued to mount. While, the issue of solvency ? primarily relating to the commercial side of the business — was no longer directly raised, Banking Department examiners asked repeatedly for financial information.Mary Jurta, who first informed Peter Hildreth of his brother’s role in the company, followed Hildreth from the Securities Bureau to the Banking Department, and asked for a list of preferred stockholders, which she obtained on Feb. 18, 2003, along with a copy of the cease and desist order.NHBR did not get to see that list, but on April 22, 2003 (two months before the bureau was asking the attorney general to seize assets), FRM wrote a note to Jurta explaining the discrepancy of the number of preferred shares and naming Hildreth as one of three shareholders with preferred shares as additional collateral.All told, about 930 shares (worth $930,000) were held by preferred shareholders, the note said.This brings us to 2005, which was a crucial year in the alleged Ponzi scheme’s acceleration, when Farah told the bankruptcy court that he opened a $10 million line of credit with Dodge because “I needed some funds to pay off some preferred shareholders. And I don’t remember the exact amount. Two to three million, something in that range there,” Farah said in a deposition this past February.According to one document examined by NHBR, Jon Hildreth received his full payment – half to himself and half to his ex-wife – on Oct. 31, 2005, although Hildreth said one of those halves came at an earlier time.In any case, a letter from FRM – again to Jurta of the Banking Department, dated June 6, 2006 – lists a number of preferred shareholders who had redeemed their shares, including Hildreth’s 25 shares in October 2005.But Commissioner Hildreth said that information never reached him, and he added that he didn’t know that his brother was no longer an investor until he first called him about it in November 2009.Click here for a timeline of events in the Financial Resource Mortgage case
Bob Sanders can be reached at bsanders@nhbr.com.