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April 16, 2001
Headlines:
United Parcel Post to Buy First International Bank PinnFund/PinnLeasing--Latest News Fraud's Remembered Part II Ethics and Standards Latest Listserve News Dot-Bombs Bank Fraud--International Leasing News List---up-dated tomorrow ------------------------------------------------------------------------------------------------ United Parcel Service to Buy First International Bank I have just come across an article regarding the pending acquisition of First International Bank by United Parcel Service. I don't recall seeing this reported anywhere and anything UPS does is definitely on my radar screen. I consider the entry of UPS into the financial services market the biggest competitive threat I've ever seen. They are also acquiring Mail Boxes, ETC. Just think about that. MBE will give them 4200 "retail" outlets throughout the US and Canada. First International Bank will extend their reach in the global market. Don't forget that UPS already knows how to deal with Customs issues as they ship to virtually every country in the world. In my opinion they will be in a position to offer many value added services that others will not be in a position to provide. What if they start leveraging their brown trucks and delivery network to get documents signed. They probably deliver half the equipment that we lease already. How hard would it be for them to offer partnerships to those vendors for "free" shipping and other perks that conventional finance companies couldn't compete with. I think this is going to get really interesting. This could be the first real challenger to GE Capital that we've seen. Bob Rodi drlease@leasenow.com ------------------------------------------------------------------------------------------------ Uniform Documentation
Interesting indeed, but reaction has been very negative. I confess that much of the problem is lawyers wanting to earn fees from documenting deals and creating forms for their clients. We tried to do some good things at NAELB: We have a FREE standard documents package - it could probably use a bit of work - which several funders reviewed and OK'd for discounted leases. we are considering some form of recommended broker-funder language, although not anything funders would be obligated to accept. Still, with cooperation from other associations, much more is possible. The atmosphere may be warming to inter-association cooperation - I certainly hope so. Barry S. Marks bsmblik@aol.com* * * www.leaselawyer.com 205.250.8333 fax: 205.322.8007 ----------------------------------------------------------------------------------------------- Founder of Carlsbad's PinnFund missing, along with investors' millions By Mike Freeman SAN DIEGO UNION-TRIBUNE STAFF WRITER A week or so before federal regulators swooped in last month, Michael Fanghella escorted a couple of potential investors through his Carlsbad company, PinnFund USA. Fanghella gave these tours often, showing off what appeared to be a thriving mortgage business. Visitors saw bustling workers, photos of executives at charity events, plush executive offices with a private dining room, fresh flowers and an on-site chef. Sometimes, Fanghella would steer them toward one office in particular, employees said, the one with a sign that declared: "Quality Control." The message was almost subliminal, underscoring the story of quality and success that was at the heart of his tours. And it worked. During the past eight years, investors put more than $330 million into a PinnFund Trust Account. They believed the money would be used to fund mortgage loans. But today there is a different story to tell, and Fanghella isn't around to tell it. All of that investor money is missing. Fanghella is a fugitive. He, James L. Hillman of Oakland and the companies they controlled have been accused by the federal Securities and Exchange Commission of bilking investors out of millions. The civil litigation is believed to be among the largest securities-fraud cases ever in Southern California. Through investigative records and interviews with former employees and investors, details of what went on in Carlsbad are emerging. Most of the investors are sophisticated, wealthy professionals who were stunned by PinnFund's collapse. Several lost the bulk of their retirement savings. Fanghella remains an enigma: capable of writing a four-figure check to help an HIV-infected stranger pay for health care but also prone to filing lawsuits against enemies, including his ex-girlfriend. Hillman, a University of Michigan graduate who received his law degree from Northwestern University, maintains his innocence. He gave depositions to the SEC. Within a few days of the government's action, he rushed back from an overseas vacation to meet with investors face-to-face at a San Francisco law office. According to those who attended, he sometimes cried. But Hillman also disobeyed U.S. District Judge Marilyn Huff's March 23 order freezing his assets. On March 26, he wired $6 million to his law firm in Los Angeles, SEC lawyers said. Last week, Huff ordered all but $250,000 returned to Hillman's frozen bank account in Oakland. And the SEC contends that Hillman, even if he wasn't aware initially, received plenty of warning signs through the years about fraud at PinnFund but disregarded them. Still missing Fanghella has not been seen in the area since March 21, the day the SEC filed its litigation. A warrant has been issued for his arrest. His credit card was last used outside the United States, said Nicolas Morgan, an SEC lawyer. Fanghella owns a home in Barbados and has bank accounts there. Morgan declined to disclose the country from which the credit-card purchase originated. According to the SEC, Fanghella spent at least $107 million of investor funds on his extravagant lifestyle, which included homes in Rancho Santa Fe, a yacht, a $31,000 dinner for nine people and a $5,000 tip at Laurel restaurant in San Diego, and a $5 million home in Laguna Niguel for his then-girlfriend, a one-time porn star named Kelly Cook. He also invested $2.9 million in Moomba, a chic restaurant with outlets in New York City and Los Angeles, according to court documents. Cook, 35, whose adult-movie credits include "Blonde Angel," went on a spending spree of her own last summer using a PinnFund credit card. From June through July, Cook charged $1.1 million on the American Express card, investigators said. Purchases included $65,000 at a carpet store, $34,000 at an audio-visual shop and $99,000 at an art gallery. Cook's lawyers did not return telephone calls for comment, and the SEC is seeking the return of the $10 million in gifts that she allegedly received from Fanghella. As for the rest of the $330 million, the SEC alleges that $95 million went to cover operating losses at PinnFund. At least $18 million flowed to Hillman in 1999 and 2000 alone for fund-raising commissions, the SEC contends. The rest, authorities said, was used to make interest payments to investors; that is typical of Ponzi schemes, which rely on new investor money to cover interest owed. Investor fallout The aftershock of the SEC litigation has been felt from San Diego to San Francisco to New York. In sheer number, the investor group is small. "It's in the hundreds rather than the thousands," said Charles La Bella, a former U.S. attorney named by the court to hunt down assets. Now in private practice, La Bella previously led the investigation into the 1996 Clinton-Gore fund-raising practices. Most investors are professionals -- lawyers, doctors and accountants. Many are at least 50 years old. Promised 17 percent returns at virtually no risk, investors jumped in, spreading the word to friends and relatives. For some, the amount lost is staggering. "We were Mike's personal piggy bank," said one Bay Area investor who wished to remain anonymous. "I'm resigned to having lost my $7 million." Thomas Frame, a retired real estate executive from the Bay Area and a former business partner of Hillman, said last week that he invested $8 million. A San Francisco lawyer representing several investors said, "There are half a dozen individuals whom I am personally familiar with who invested most, if not all, of their retirement plans." "A number of investors had leveraged their money by borrowing," he said. "Those funds will have to be repaid, and that will require an enormous re-adjustment in the lives of those investors and their families." The San Francisco lawyer asked to remain anonymous because his name is strongly linked to his clients and could reveal their identities. In San Diego County, PinnFund employees also are feeling the sting. About 200 people lost their jobs with PinnFund and its subsidiaries, PinnLease and Executive Catering. As with the investors, most had no idea what was happening until news reports about the SEC litigation. They are owed back pay and vacation. Most have no idea when they'll be paid. Fanghella's estranged wife, Patrice, who filed for divorce in January 2000 to end their 18-year marriage, said, "Our family is fairly well destroyed over this. I knew nothing of what he was doing, and I hope he turns himself in." She declined further comment on the advice of her lawyers. A paper trail Ironically, Fanghella helped the SEC develop its case through two key public documents: his declaration in his ongoing divorce and a lawsuit he filed against Cook. The divorce declaration last August claimed Fanghella made only $36,000 a year, that PinnFund had never made a profit, that his income was based on "borrowed" funds, and that he and his wife's inflated lifestyle was "smoke and mirrors," according to a copy of the declaration obtained by The San Diego Union-Tribune. "Since at least 1996, my wife and I have been living entirely off these borrowed funds," Fanghella said in his filing. " . . . I would need to sell PinnFund for $270 million to get out from under the Hillman loan. Meanwhile, if he senses a problem, Hillman can call the loan, leaving PinnFund unable to function." Investors were told that their money was dedicated to funding mortgage loans. In addition, some investors saw audited financial statements that claimed PinnFund was profitable -- statements that turned out to be false, the SEC contends. Also last summer, Fanghella sued Cook in Orange County. He claimed the two met in December 1999 while both were going through divorces and, thinking the two would marry, he gave her $10 million in gifts, including a $5 million house. She broke off the relationship in June. Fanghella and Cook tried to settle their lawsuit. But by that time, Patrice Fanghella's lawyers uncovered it and protested to an Orange County Superior Court judge, saying Fanghella had given Cook community assets. The judge froze Cook's assets, and the case is pending. Working in PinnFund's offices following the SEC action, La Bella found a bill for a $50,000 BMW that Fanghella purchased for a woman about 10 days prior to PinnFund's collapse. The luxury car turned out to be one of 11 Mercedes, Jaguars and other luxury cars purchased by Fanghella with investor money, said La Bella's investigators. Most of these vehicles were bought in 2000. 'Something is wrong' Raised in the New York City borough of Queens, Fanghella appears younger than his 49 years. He attended prep school at Admiral Farragut Academy in Pine Beach, N.J., and remained close with his high school football coach, Stan Slaby. Slaby said he is like a second father to Fanghella and to many other Farragut alumni. According to the SEC, Fanghella bought Slaby a 2000 Cadillac Deville. "I haven't heard from him since Christmas," said Slaby, who lives in Pine Beach. "Given the fact that I haven't heard from him, I know something is wrong. Knowing how he is, he would be ashamed to face me. He would say he let me down." Fanghella apparently moved to California in the mid-1980s following a divorce from his first wife in Texas. He met James L. Hillman, now 62, at TransGroup, a real estate syndicate based in Oakland. In many ways, Hillman and Fanghella are opposites, according to friends and investors. Fanghella enjoyed the appearance of wealth, sources said. Hillman reportedly put in long hours at a plain office in Oakland, investors said. Stocky with thick, gray hair, Hillman lives in a relatively modest house and gave generously to charities, investors said. His main extravagances are boats. He owns at least one yacht. After working together in the mid-1980s, Hillman and Fanghella started a relationship again in 1993 when Fanghella founded PinnFund. The company specialized in mortgage loans to borrowers with poor credit histories. Hillman agreed to raise money to underwrite the loans. He created Peregrine Funding and three investor partnerships, Six Sigma, Grafton Partners and Allied Capital. In June 1999, Hillman hired PricewaterhouseCoopers to audit his partnerships. The auditors suspected fraud at PinnFund and warned Hillman, the SEC said. Hillman fired the company that same day. He now says he fired the auditors because they were taking too long to complete their work. Thomas Brown, Hillman's lawyer, contends the SEC is exaggerating what PricewaterhouseCoopers told Hillman. "I feel comfortable that when I get the chance to cross-examine (PricewaterhouseCoopers), as well as when the records we have are laid out, it will show a little different story," he said. Two San Diego accounting firms hired by PinnFund, Levitz Zacks & Ciceric in 1999 and A.V. Arias & Co. in 2000, also discovered that bogus audits were circulating among investors and some of PinnFund's outside lenders, according to court documents. The statements showed the company was profitable, but in fact PinnFund lost $32 million in 1999 and $36 million last year. Both of the San Diego firms quit and took other steps, including notifying the U.S. Department of Housing and Urban Development about the existence of two sets of financial statements, court documents show. Based on an investor tip, the SEC began investigating Fanghella and Hillman in November. In court documents, Hillman said his family members, including his wife, mother, and daughter and brother-in-law, were investors. In all, Hillman and his family members have about $2.65 million invested, Brown said. "He is devastated," Brown said of his client. "The man cries daily. Truly weeps. Many of these people are very close to him and he is very close to them. His life has been turned upside down." Chief Operating Officer and shareholder Keith Grubba quit PinnFund about a month before the SEC swooped in. The day of the action, Chief Financial Officer John Garitta quit. Asked to make statements to the SEC, Grubba, PinnFund lawyer Sam Kelsall V and Cook have exercised their Fifth Amendment rights against self-incrimination, SEC officials said. Kevin Kelly of the U.S. Attorney's Office in San Diego would not confirm or deny whether a criminal investigation is under way, but many court filings mention the possibility of criminal prosecution.
---------------------------------------------------------------------------------------------- Fraud's Remembered Part II Unfortunately I worked closely on the Lila/Rhino Copy deal about 12 years ago when I was with Sanwa Leasing. I remember it well. I even spent an entire day with someone that I believed was named John Edwards. He seemed to have his quirks (like having those electric eyes installed on the water faucets in his office bathroom which in retrospect looks like he didn't want to leave finger prints) the carrot juice, etc but he was very bright. He also went and hired a whole bunch of people off the streets and presumably paid them to appear as if they were working. The sole requirement of these people was that they were to have no command of the English language. He was operating out of an old converted chocolate factory in Bridgeport, PA as well as a small office in King of Prussia. We had some concerns about the request but couldn't really put our finger on anything. And of course those were the days of volume-volume-volume. If I remember correctly, the person that I knew as John Edwards had done some time in prison for some type of white collar crime in the past. I'll never understand why he didn't just leave the country after he had amassed some money but I guess I don't understand the criminal mind. Frank Latourell Director Rave Financial Services, Inc. fml@ravefinancial.com ---------------------------------------------------------------------------------------------- "Ethics and Standards---EXCITING" I find this discussion about funding source ethics and standards stimulating - but more than that: EXCITING! What is exciting is that we have the ability - through the magic of the internet and the communication it affords to us through listserves and newsletters like yours, to effect a groundswell movement and actually make appropriate changes happen in our industry. By these tools, we have the ability - as mere serfs in the kingdom of the funding sources - to communicate in open discussions about our mutual interests. What we learn is that we are not alone in our frustrations with those things that turn out to be our common enemies, whether they be unethical funding sources or conniving competitors. In our (mostly) unregulated industry, the balance of power is about to shift. Collectively we are larger than any problem we may encounter. Collectively, we can do more than any single association, funding source or government regulator ever could to rout bad guys and promote the good guys. Ethics. Of the people, by the people and for the people. Keep up the good work. -- Gary Greene, CLP gary@lease-smart.com Lease $mart - Equipment Leasing & Financing for Business & Industry http://www.lease-smart.com http://www.WeFinanceWebSites.com Happiness is . . . A Positive Cash Flow (TM) 520/628-9929 + + + Rodi Likes Response The responses to the questions I raised concerning "ethical" behavior in our industry are exactly the type I had hoped to solicit. Hal Horowitz, an, esteemed WAEL past president, suggested that those who behave ethically do so because they wish to act in the right way. It would be a major coup for those in our business if their actions in the marketplace were the "first" criteria by which they were judged. I also agree with Barry Marks on the point that those that "steal" from the vendor or lessee will eventually steal from you. In fact, to amplify Barry's point, the theft begins the first day that a transaction, obtained in some unethical manner, is put on the books at one of the funding sources upon which we mutually depend. While this is not "theft" of a direct nature, it is theft nonetheless because of the eventual "cost" of cleaning up such a portfolio;a portfolio which contains all of the business brought by ethical members of our industry. Now, if a funding source were able to separate its business and price each broker or vendor according to the risk they represent, then the problems with a particular portfolio would be more easily determined and therefore much harder to "allocate" across an entire portfolio. Simply stated it would be much easier to pinpoint the damage done by business that was booked using less than acceptable standards. As long as he bad operators are in a minority and the good ones are in the majority, then the good can subsidize the bad and the "cost" is barely noticeable because it can be spread across such a wide range of transactions. Concerning the "post disclosure" issue, I personally considered this a part of my responsibility even though it has not always been abundantly clear in all of the master assignments agreements I have executed during my career. I think this is because there are two ways to interpret an agrement. You can interpret an agreement in the very literal sense, sort of like former Presient Clinton trying to get to the exact definition of the word "is". Or you can interpret the agreement in the "Spirit" in which it was written. If you choose the "spirit" interpretation that will not necessarily protect you, if the other party to the agreement, decides to be very literal. I think that this may be the problem that we have with the various "standards" that exist in our industry. They were constructed in a certain "spirit", which assumes that everyone who accepts them will roughly interpret them the same way. If this were the case they wouldn't need teeth. When it comes time to use standards interpreted in this manner, to actually conduct an investigative or enforcement proceeding, then the literal |