Putting together pieces of the FRM puzzle

“The pieces were not identified as pieces of the same puzzle and the agencies did not cooperate to create a complete picture of a Ponzi scheme.” – Attorney General’s report on Financial Resources MortgagesIn the last few weeks, a deluge of information has emerged about now-bankrupt Financial Resources Mortgage of Meredith, which is alleged to be at the heart of a massive Ponzi scheme that cost investors millions of dollars.That information has come from: • The U.S. attorney’s indictment of Scott Farah, who headed FRM, and Donald Dodge, who headed CL&M, a company also allegedly involved in the scheme • The U.S. Securities and Exchange Commission’s civil complaint • The New Hampshire Bureau of Securities Regulation’s report • Release of documents by the state Banking Department • Public hearings held by the Senate and House joint committee looking into the way the state handled the FRM matter • The attorney general’s report to the governor and Executive Council on FRMThe attorney general’s report highlighted a “pivotal moment” in the chronology of FRM. It occurred on April 27, 2006, when opportunities were missed – a joint inspection by Banking and Securities. But there were many other opportunities missed, including those by the Attorney General’s Office itself.For instance, buried on page 109 of the AG’s report is a discussion of two contacts made with its Criminal Justice Bureau about FRM.On Oct. 3, 2005 – four months after Farah took a massive loan out from CL&M, accelerating the alleged Ponzi scheme – Christopher Carter, an investor’s attorney, called Michael Bahan, an investigator in the bureau, saying that money was going back and forth between FRM and the Center Harbor Christian Church, which is headed by Farah’s father, Pastor Robert Farah.Bahan didn’t talk to Carter again until May 3, a week after that aforementioned “pivotal” moment, and then brought the matter up with Simon Brown, chief of the criminal bureau at the time. Bahan recalls Brown saying that the AG’s office (then under Attorney General Kelly Ayotte) didn’t have the ability to investigate and, if appropriate, prosecute the matter.

Brown didn’t recall the conversation, and unlike the many well-documented encounters with FRM at Banking and Securities, there was no record of any of this except for the initial contact. While meeting with an FBI agent on another case, Bahan informed him “they may want to investigate [the] case,” but he heard nothing further from the FBI and there was no follow-up.

The Attorney General’s Office said it would have been nice to have a central database so at least its civil and criminal bureaus would know what the other was doing, but it saved its most scathing criticism for the Securities Bureau, for its “failure to exercise regulatory curiosity.”

This shouldn’t be surprising, given that Securities Bureau Director Mark Connolly – who resigned May 15 in protest over what he alleges was a “cover-up” by the AG’s office for not facilitating the release of Banking Department documents.

Banking documents revealed that Banking Commissioner Peter Hildreth was more involved in the FRM matter than most people previously believed, despite his prior assurances that he had recused himself from the case for a decade because his brother Jon was a preferred investor. (Jon Hildreth – unbeknownst to his brother until FRM closed its doors – was paid in full in October 2005.)

While there was no record of any recusal on file, the records document that Hildreth was involved in or apprised of issues involving FRM at least seven times between 2005 and 2009, including apparently talking to someone about a complaint – which was later dismissed after a staffer talked with Farah.

He also received a memo updating him on FRM enforcement actions and a tentative settlement, along with memos indicating that Hildreth wanted staffers to conduct a joint exam with Securities, another asking staffers to fax information on the company to a reporter, another signing a subpoena against FRM for records, and being told by the same staffer who had originally alerted Hildreth of his brother’s involvement seeking for guidance on whether to contact the AG about a criminal fraud investigation.

The AG’s report noted that none of these actions benefited FRM. However, the interests of Jon Hildreth, who was trying to get his money back and FRM are not necessarily the same.

Bob Sanders can be reached at bsanders@nhbr.com.