Feds charge former Novato businessman in massive ‘Ponzi scheme’

Feds charge former Novato businessman in massive ‘Ponzi scheme’

Federal criminal investigators this week charged a former Novato businessman of operating a massive Ponzi scheme, defrauding more than a thousand investors and embezzling tens of millions of dollars to personally enrich himself.

The U.S. Securities and Exchange Commission and U.S.Attorney’s Office alleged this week that the late Kenneth Casey and his business associate, Lewis Wallach, were coconspirators who intentionally defrauded 1,300 individuals who invested in their two Novato real estate investments companies, Professional Financial Investors Inc., or PFI, and its associated fund, Professional Investors Security Fund Inc., or PISF.

Casey, who died after a heart attack in May, founded the companies.

Wallach, 64, has served as PFI’s president and CEO since1998. He is charged with embezzling $26 million from a PFI account to personally enrich himself and using the money to buy personal items such as aMalibu vacation home and luxury cars.

“We allege that PFI became a classic Ponzi scheme,” U.S.Attorney David Anderson said in announcing the charges Tuesday. “Money taken from new investors was allegedly used to pay existing investors while losses mounted behind the scenes. This alleged Ponzi scheme came crashing down just four months ago after the death of PFI’s founder in May 2020. We allege that for years Wallach conspired with PFI’s founder to fool investors.”

This fraud escalated in the final months before Casey’s death and the beginning of the coronavirus pandemic “as more money was needed to maintain the false appearance of a successful investment company,” Anderson said.

Casey, who founded PISF in 1983 and PFI in 1990, was previously convicted of several counts of fraud and tax evasion in the late1990s and lost his certified public accountant license.

The federal investigations into the companies began at the request of a law firm hired by Casey’s ex-wife, Charlene Albanese, who is also the beneficiary of Casey’s estate, to handle the companies’ transition. The law firm found several financial irregularities that raised red flags, prompting them to voluntarily approach the SEC. The U.S. Attorney’sOffice and Federal Bureau of Investigation led a separate criminal investigation.

Reached Wednesday at his Southern California home in Encino, Wallach declined to comment. His attorney, Ed Swanson of the SanFrancisco-based Swanson & McNamara LLP provided a statement:

“For the past few months, Mr. Wallach has fully cooperated with the Department of Justice and the SEC in their investigations. He will plead guilty to the criminal charges that have been filed by the Department of Justice. He has voluntarily turned over property and money to PFI and PISF. He will continue to work with government to remedy the harm he has caused investors.”

Wallach faces both civil and criminal charges for allegedly violating several U.S. securities laws. He has already pleaded guilty to civil charges filed by the SEC, according to court documents. A case management hearing is scheduled for Dec. 28. A proposed judgment submitted to the court in the SEC case would bar him from serving as an officer or director for a public company in the future. The court would determine how much of Wallach’s ill-gotten gains would be repaid along with any other penalties, according to the SEC.

If convicted in criminal court, Wallach could face up to20-year maximum prison sentences for each charge, a fine of $250,000 and to pay other restitution, according to the U.S. Attorney’s Office.

Court documents allege Wallach misappropriated $26 million from 1,300 investors between at least 2015 and 2020. The SEC has a five-year statute of limitations to file the charges, according to an SEC spokesperson.

Wallach allegedly used the money to buy a vacation home, luxury cars, coin collections and pay for private school tuition. The Los Angeles Times and others reported Wallach and his wife had purchased a Malibu beach house formerly owned by actress Judy Garland for more than $3.5 million in 2018.

The U.S. Attorney’s Office alleges Wallach used investor funds to advance his personal development projects in California and Texas such as oil and gas exploration projects as well as to pay down his credit cards.

Federal officials say Wallach and Casey misled investors by telling them their investments would be used to purchase multiunit residential and commercial real estate to be managed by PFI. The companies own about 70 commercial properties including office spaces and apartment complexes in Marin and Sonoma counties. A large portion of the investments was actually being used to cover the interest payments and equity disbursements of previous investors, according to the SEC.

When investors raised concerns about their investments at the beginning of the coronavirus pandemic, Wallach assured them that the company was financially secure because it had large cash reserves, lines of credit and the “ability to sell properties owned ‘free and clear,'” according to the SEC filing.

“In fact, Wallach knew that PFI did not have large or even sufficient reserves to meet its obligations, had no lines of credit, and all properties had outstanding debt,” the SEC complaint states.

The companies collected $330 million of investments from 2015 to 2020, many of them from elderly or retired individuals who invested life savings and relied on the interest payments for daily expenses, the court documents state.

“As alleged in our complaint, Wallach engaged in an egregious fraud that deprived many older investors of their hard-earned savings and retirement funds,” the SEC’s San Francisco regional office directorErin Schneider said in a statement. “We will continue to combat fraud targeting our most vulnerable investors, and we encourage all investors to use the resources available on the commission’s website to help identify risks and red flags.”

Roseville resident Phil Lastreto first met Wallach in 2012 after investing in the companies. Wallach was always very reassuring, Lastreto said, and all of the interest payments were paid on time.

“We always thought Lewis was a really good guy,” Lastreto said. Lastreto said he and other investors he’s spoken to are glad that Wallach has been charged, but said the allegations still came as a shock.

“I think most people are surprised at the extent of what Lewis did and we’re just waiting to see what happens,” Lastreto said.

Wallach joined the company as a bookkeeper in 1990 and was promoted to the companies’ president in 1998. He and two other executives resigned in May at the request of the companies’ newly hired restructuring officer, Michael Hogan, who was brought in to manage the companies and their properties as the SEC investigation took place.

Both companies filed for Chapter 11 bankruptcy in August with nervous investors hoping to secure at least part of their investments, which range up to the millions of dollars for some. A court declaration filed by Hogan stated Wallach appeared to have benefitted from how the companies were managed.

In July, Wallach had agreed with the companies’ attorneys to wire $1 million from his limited liability company to PFI and PISF as well as to surrender two properties believed to be worth several million dollars, according to Hogan.

New York-based attorney Bijan Amini represents some of the investors in the bankruptcy case and said it still remains to be seen whether their money will be returned. Amini said he would hope Wallach would provide as much information as possible with the goal being to “maximize the return to the investors who were fleeced.”

“What everybody’s looking for is the best structure and circumstances under which to do that,” Amini said Wednesday.

It is unclear whether more individuals associated with the company will be charged. The SEC investigation is ongoing, according to an SEC spokesperson.

A copy of the SEC complaint can be found at here.

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