Legislature(1997 - 1998)
10/10/1997 02:00 PM Senate JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 201 - PROHIBIT RECOVERY BY WRONGDOER
CHAIRMAN ROBIN TAYLOR called the Senate Judiciary Committee meeting
to order at 2:00 p.m. As sponsor of SB 201, he explained the bill
is essentially a statement of common law that has been applied by
courts for hundred of years, but has never been incorporated within
Alaska statute. He introduced the bill because of situations he
became aware of in which people were benefiting from inappropriate,
and possibly, criminal activity. The purpose of today's meeting is
to determine whether this bill will provide for additional remedy
or assistance in orchestrating state enforcement of examination of
these situations and to solicit recommendations. CHAIRMAN TAYLOR
announced that the other committee members would not be present
today.
MICHAEL A. MACDONALD, a Fairbanks attorney representing a number of
defendants in the Bonham recovery actions, testified in support of
SB 201, and provided the following background information on the
World Plus investment scheme. Raejean Bonham established a travel
agency in Fairbanks named World Plus in the late 1980's. She
bought mileage and sold tickets at a discount rate. Over time, the
travel agency became a viable business and offered an investment
opportunity to people with a return rate of 20 to 50 percent.
Around 1992, the investment opportunity became more high profile,
and securities questions about the nature of the investment
strategy arose. The Alaska Division of Banking, Securities, and
Corporations (DBSC) conducted an investigation of this enterprise
after being notified by the State of Idaho's securities division,
where Ms. Bonham had a similar business. Ms. Bonham submitted the
supplemental filings requested by the Alaska DBSC which reviewed
and approved her operations. People continued to invest in the
business based on that approval.
Number 103
CHAIRMAN TAYLOR stated he wants to be informed of the involvement
the various state agencies had at each step of the process and
asked if the Alaska DBSC rendered a report after it concluded its
investigation.
MR. MACDONALD answered that his review of the records indicate that
DBSC asked Ms. Bonham's law firm to prepare a supplemental filing
to verify, on a quarterly basis, the number and names of investors,
the amount being invested, and the presence of out-of-state
investors. The law firm did so, but it has been suggested that
those representations to DBSC were false.
CHAIRMAN TAYLOR asked if the filings were inaccurate. MR.
MACDONALD answered the record suggests that Ms. Bonham had more
than 25 investors and $500,000 at the time she made the
representations.
CHAIRMAN TAYLOR asked if DBSC conducted a review via correspondence
with Ms. Bonham's law firm after it was notified by State of Idaho
officials and then accepted the information submitted by Ms.
Bonham's law firm. MR. MACDONALD said the DBSC would have to speak
for itself, but that is the way it appeared in the record.
CHAIRMAN TAYLOR noted his intent to find out who was in charge of
the investigation.
MR. MACDONALD continued. The fact that the investigation was held,
and the offering was allowed to continue, bolstered the
representations of World Plus. The people who invested represent
a cross-section of Fairbanks residents, and some of those people
invested only after diligently speaking with Ms. Bonham, police
officers, district attorneys, civil attorneys, airline
representatives, and checking out ticket brokerages. Others had
money invested by their spouses or parents with no knowledge of
their participation. No one concluded that any wrongdoing
occurred, and the investors understood this was a small offering of
less than 25 people, and less than $500,000. Sometime in 1993,
1994, or 1995, Delta Airlines took offense to the number of tickets
sold, got an injunction against Ms. Bonham, and filed a claim of
$10 million against the bankruptcy estate; apparently Delta
Airlines had some basis for concluding that the level of ticket
activity could be valued at $10 million.
CHAIRMAN TAYLOR asked about the time period. MR. MACDONALD
clarified it occurred in 1993 or 1994 and explained that Delta
Airlines sought an injunction against Ms. Bonham for selling their
mileage and sought a civil penalty equaling the value of the
tickets she had sold in the past. After later making the claim to
the bankruptcy record, Delta Airlines compromised to a lesser
amount. MR. MACDONALD emphasized that his point is that World Plus
was a high profile travel agency that was clearly selling airline
tickets.
MR. MCDONALD commented on exhibits he distributed to the committee.
The first, the Cash Basis Income Statement, is based on the
debtor's own records and shows approximately $48 million in total
receipts and disbursements over the life of World Plus. The
relationship between some of the categories is implausible if one
looks at the ticket income and expense numbers. For example,
ticket income was $82,000 in 1989, while ticket expenses were
$1,000,0000 during the same year.
CHAIRMAN TAYLOR asked if there has been any discovery done of Ms.
Bonham's records. MR. MACDONALD replied that Ms. Bonham's records
were seized by the IRS. That seizure was successfully challenged
and the court found that because of Ms. Bonham's ticket agency
activity, her operation was not permeated by fraud and that the
entire body of record was not subject to the search warrant used.
At that time, the bankruptcy proceeding began and the documents
were held, copied, returned to the debtor, and then the trustee
regained possession of the copied set. Essentially there are two
sets of documents and the debtor's own detailed records would be
available to cross examine the figures. There are ticket sales
receipts, ticket sales ledgers, investment contracts and business
records. He recalled that some testimony concluded that some of
the records may not be genuine and may have been manufactured by
the debtor so the credibility of the records is suspect.
CHAIRMAN TAYLOR asked if anyone has done an objective audit of the
records to verify that the numbers presented by the debtor to the
court are accurate.
Number 209
MR. MACDONALD stated the trustee did a deep analysis of the cash
flow, but he did not think an attempt has been made to verify the
business expenses. The process of the defendants' recovery action
is underway. The first phase is to acquire copies of all debtor's
documents. Those documents are being put on CDrom after which an
expert will review the accounting information and reconcile the
business information. MR. MACDONALD added that the matter
culminated in an involuntary bankruptcy petition against Raejean
Bonham, individually, in December of 1995. That action began a new
phase of the nightmare for the investors. The first aspect, the
involuntary petition, can only be an individual petition, and was
filed against Raejean Bonham. Many investors feel they did
business with two corporations, World Plus and Atlantic Pacific,
which has created an issue in this case. The trustee failed to
concolidate the corporations which has raised serious concerns for
the investors.
MR. MACDONALD warned that the legislation should be carefully
crafted to include provisions so that if someone, through an
elaborate corporate structure, tries to insulate themselves from
wrongdoing, the other entities could be brought in. There is also
recreation of an estate trustee for the debtor, and a subsequent
successor to the trustee should not be insulated from the
wrongdoing as well.
MR. MACDONALD stated what ultimately brings everyone to the hearing
is that the trustee's attorney has launched 500 actions against all
of the investors. That suggests there were more than 25 investors
involved. The information, from the trustee's web page, shows
those actions filed to December 1996, and he is aware that more
actions have been filed since that date. The trustee had multiple
theories of recovery. In a bankruptcy context there is a
preference theory so that in the last 90 days, all money comes
back. There is a partial inconveyance theory so that in the last
year, prior to the bankruptcy, all party conveyances come back.
There is a state fraudulence conveyance theory which is in statute,
that is being used to extend the statute of limitations for the
Fraudulence Conveyance Act beyond the bankruptcy code, which is one
year. It is also being used to encompass cash disbursements not
subject to the Fraudulence Conveyance Act. Finally, the usery
penalty is being used such that when a person received a payment,
if the trustee deemed that payment to have been interest, and
deemed that contract as less than $25,000, he is seeking two times
recovery for the payment.
Number 266
CHAIRMAN TAYLOR asked if the trustee is now using the state statute
on fraudulent conveyance as a threat to the defendants who are
being sued so that they cannot make conveyances for less than
market value of assets to avoid possibility of a claim. MR.
MACDONALD answered that essentially it is being used as a basis of
the cause of action. One could sell a boat, for example, at a yard
sale, to an innocent purchaser for its $10,000 value, even though
the creditor may have a lien on the boat. However, if the seller
sold the boat to his brother-in-law for $1.00 and continued to use
it every weekend, that would be considered a fraudulent conveyance.
In the present case, the trustee's allegation is that by paying
money to the top half of this pyramid scheme, Ms. Bonham
fraudulently induced and defrauded those at the lower tiers of the
scheme. The bankruptcy fraudulence conveyance statute has
successfully been used in such cases. The State fraudulent
conveyance statute has never been used that way but it has become
the basis of a cause of action; the reason for its inclusion being
that the statute of limitations can be extended. The bankruptcy
fraudulence conveyance statute has a statute of limitations of one
year; the trustee argues that the state fraudulent conveyance
statute has a statute of limitation of six years. Mr. MacDonald
did not believe there is any basis for that argument.
MR. MACDONALD discussed the tens of thousands of dollars being
sought in usery penalties and provided the following example: one
client invested $55,000 and received $12,500 in return. That client
is being sued for $25,000, twice the amount he received, based on
current state statute. The tragedy is that the stakes are so small
that one cannot defend a lawsuit for those amounts. In another
action, a client invested $17,500 and received $5,000 back, and is
now being sued for $10,000.
MR. MACDONALD felt SB 201 is important because it would at least
remove the usery penalty which is being used to punish people who
have already lost money. He suggested amending the usery statute to
say that fraudulent inducement shall deny anyone entitlement to a
civil penalty. It can be used defensively against collection, but
should not entitle anyone to use it as a sword for recovery.
MR. MACDONALD produced letters from investors showing that they
were acting in good faith. One was from a state trooper who was
responsible for investigating Ponzi schemes and had inquired of
district attorneys and other state troopers about the legitimacy of
the business before investing.
Number 364
CHAIRMAN TAYLOR added that Mr. MacDonald also submitted an
attachment of notable quotes from newspapers endorsing the
investment scheme. He thanked Mr. MacDonald for his testimony and
called Larry Compton.
LARRY D. COMPTON stated that his purpose for attending the hearing
is not to take a position on the issue, but to provide his
perspective and share information. He noted he has been very
involved in this case for two years and examined a majority of the
records himself.
(REMAINDER OF RECORDING ON SIDE A INAUDIBLE.)
TAPE 98-39, SIDE B
Number 025
SENATOR TAYLOR stated that he understands there are legal,
technical aspects of the problem, but his intent is not to limit
the scope of the discussion or review. His top concern is about
the roles the state agencies played in this matter, and whether
that role was appropriate.
MR. COMPTON described the World Plus investment scheme as follows.
The woman involved had a felony conviction, and self-employment may
have been her only available source of income. At best, the
brokerage of frequent flier miles can be considered underground,
especially after 1992 and 1993 when the airlines started winning
federal actions throughout the country against ticket brokers.
Over the course of the years, had she never taken an investment
contract, her income would have equaled about $4,000 per month. In
the last year before the business crashed, about $2 million was
going in and out of the business bank account. There are 1200
investors from 43 states, Puerto Rico, and one employee of the
United States Embassy in Nairobi. Some of the investors were
single parents who gave Ms. Bonham all of their children's
permanent fund dividends to invest. Somehow all of the investors
were convinced the investment was legitimate and they are all
victims. As a bankruptcy trustee, he has an obligation to recover
fraudulent transactions and to take whatever action the law
provides and allows to recover monies for the creditors. Of the
1200 investors, about 550 have been sued for recovery actions so
there are probably 600 people who never received a dime from their
investment and their only hope of receiving any return is from
recovery. The purpose of the bankruptcy code is to level the
playing field and try to treat the creditors fairly.
Regarding Mr. MacDonald's testimony, MR. COMPTON said he has been
trying to get the court to consolidate the corporations and
although the judge has stated his position, both sides are still
waiting for a written order. As a trustee, his opinion on the
usery fees is that people should be given the opportunity to settle
and not have to pay the usery penalties. Early on he received
approval from the court to settle on these actions, and the
settlement theory basically throws out the usery penalties.
Number 068
CHAIRMAN TAYLOR asked if, under the settlement theory, a person who
is being sued for $20,000, which includes the usery penalty, could
settle for $10,000. MR. COMPTON replied that would be correct if
usery was the only recovery theory applied to that case. If that
person received money within 90 days it would all have to be
returned. He noted each case would have to be ruled according to
each recovery theory applied to it.
CHAIRMAN TAYLOR asked if those who received a return are being sued
for the amount of the return so that that money can be collected
and redistributed among all investors who did or did not receive
anything. MR. COMPTON said that was correct, and that the process
could be described as "sharing in the hurt."
MR. COMPTON provided further background information on the case.
Early on he began to realize the scope of the case, and immediately
advised Larry Carroll of the DBSC of the situation, who assigned a
bank examiner to the case for three weeks to help sort the records.
Mr. Carroll informed Mr. Compton of the prior investigation and
Idaho actions. Mr. Carroll was concerned that he was provided
fraudulent reports and requested a prosecutor from the Attorney
General's office. No attorney has been provided during this two-year period.
disgusted with this issue, and there is no purpose in having a
division if it cannot prosecute the biggest and most flagrant
violator that the State has ever seen. MR. COMPTON said in his
personal opinion, he thought the Attorney General's office never
wanted to open up the "box" because of exposure of its own
employees as investors.
Number 132
CHAIRMAN TAYLOR asked when Mr. Carroll retired. MR. COMPTON
answered it was early in the summer, and that DBSC did an inquiry
and was assured by a sworn statement from the debtor, on her
attorney's letterhead, that every investor had been paid in full.
Had some follow-up occurred, the issue would have come to light two
years earlier and saved a lot of people a lot of anguish.
MR. COMPTON noted the State of Idaho did substantial research,
required her to pay back every Idaho investor and to swear that she
would never sell another investment within the State of Idaho. On
the day it crashed, Idaho investors had about $2 million involved.
The State of Idaho securities division was either provided with
documents it was satisfied with or never investigated any further.
CHAIRMAN TAYLOR asked at what point Mr. Compton became involved.
MR. COMPTON replied his involvement began when the involuntary
petition was filed. He noted he has written letters to Bruce
Botelho whose position is that the Attorney General's Office does
not want to be tripping over what the FCC and others are doing.
MR. COMPTON said specific state laws were violated, and no action
has ever been taken. CHAIRMAN TAYLOR said he has also written. He
asked if the state is running up against any statute of limitations
at this time because of the failure to act. MR. COMPTON was not
sure.
Number 166
CHAIRMAN TAYLOR asked Mr. Compton if he personally contacted the
Attorney General's office. MR. COMPTON said yes, he received a
letter, which he believed was published in a newspaper, stating
that the Attorney General's office does not want to duplicate the
FCC's efforts.
MR. COMPTON added that several Ponzi schemes are being prosecuted
nationwide right now and cautioned that legislation after the fact
could accidentally affect other actions. He read the following
statement from Jim DeWitt, his private counsel, for the record:
May I preface my remarks by advising the committee that these
comments are my own and do not represent the views of my law
firm, my clients, or anyone but myself. Senator Taylor, with
all respect, this bill is a terrible idea. A few quick
points. The issue apparently addressed in this bill have just
been the subject of a long, and sometimes acrimonious, debate
in the so-called "Tort Reform" legislation enacted this year.
Do we really need to revisit those issues? The bill has the
practical effect of reversing the Alaska Supreme Court's
decision in Kaatz v. State of Alaska, adopting the rule of
comparative negligence in Alaska. This bill will take us back
to the rule of contributory negligence where a slight degree
of fault on the part of the victim bars him or her from any
recovery. The bill read literally would mean that if I were
involved in an auto accident that was in part my fault, I
could not recover monies in a lawsuit even from my own
insurance company. The bill read literally abolishes a
fundamental premise of the workers' compensation system.
Workers' compensation is a civil remedy premised on the
irrelevance of the employee's fault. If an employee were even
slightly at fault, he or she would be barred from recovery
under this bill. If, as the newspaper reports, the bill is
really aimed at the Bonham bankruptcy, the practical effect is
to allow the wrongdoer - Bonham - to determine who wins and
who loses in the collapsed Ponzi scheme. The bill would allow
the thief to determine who gets to keep the stolen goods. To
the extent the bill attempts to change bankruptcy law, it is
largely preempted by federal law. In the context of federal
bankruptcy law, the bill is only going to have a chance of
limiting the scope of one of the trustee's avoiding powers,
specifically the rule that allows the trustee under state
fraud law. That effort will succeed only if the federal
courts agree that a bankruptcy trustee was a "person achieving
a benefit from the person's own wrongdoing." In conclusion,
this bill appears to be a species of special interest
legislation, and little or no thought seems to have been given
to the collateral consequences of its enactment. The bill
should be allowed to die a quiet death.
Number 262
CHAIRMAN TAYLOR stated he appreciated Mr. DeWitt's comments and
noted he is aware SB 201 may be over broad and may need to be
amended. He expressed concern about a situation in which an
involuntary bankruptcy is filed, and the file contains an "asset-less" estate,
that could be made against the investor/victims, there is not much
value in the estate. MR. COMPTON said that is correct.
CHAIRMAN TAYLOR asked Mr. Compton how much is being claimed against
the investors at this point. MR. COMPTON replied the litigation
total is $35 million which includes all usery and other penalties.
CHAIRMAN TAYLOR asked how the attorneys are compensated out of this
bankrupt estate. MR. COMPTON answered Mr. DeWitt is paid on an
hourly basis for the general bankruptcy work, and Mr. Christianson
is compensated on a contingency fee for the recovery actions.
CHAIRMAN TAYLOR asked if Mr. Christianson has filed the litigation.
MR. COMPTON said he has. CHAIRMAN TAYLOR asked if all of the
litigation is being handled by the contingency attorney, not the
hourly attorney. MR. COMPTON answered yes and explained it is a
defacto contingency case; the main purpose of the contingency fee
was to limit the exposure on the attorney fees. His agreement is
not only to recovery actions, but to resolve all of the claims, so
that the maximum exposure would be 30 percent.
CHAIRMAN TAYLOR asked if the amount is 30 percent of all claims,
whether litigated or not. MR. COMPTON answered no, 30 percent of
his recovery. CHAIRMAN TAYLOR asked if Mr. Christianson gets 30
percent whether an action is settled or goes to trial. MR. COMPTON
said it is for both. CHAIRMAN TAYLOR asked if the gross claim is
$35 million. MR. COMPTON said yes.
Number 385
MR. COMPTON said the philosophy being applied is that no one should
walk away as a net winner; everyone should lose something. That
philosophy has been applied to Ponzi schemes nationwide. CHAIRMAN
TAYLOR asked if some people actually profited off of this scheme.
MR. COMPTON said yes, and that Mr. MacDonald's examples were very
one-sided. One person put in $110,000 and within 13 months took
out $230,000. The full spectrum of the victims include those who
lost everything who are not being sued, the silent majority, who
will not get anything back unless he is successful in recovery.
CHAIRMAN TAYLOR asked what percentage Mr. Compton thought would be
returned to those victims. MR. COMPTON said this case is very
"front-loaded" with administrative expenses; $850,000 have been
made in settlements; all of the "front-loaded" expenses have been
paid; from this day forward in the area of 50 to 55 percent will be
money available to creditors. CHAIRMAN TAYLOR asked if that amount
is of the money recovered. MR. COMPTON clarified through
settlements or litigation from this day forward, 50 to 55 percent
may be distributed to those who filed claims.
CHAIRMAN TAYLOR asked if he had invested and lost $100,000, whether
he could expect to recover $5,000. MR. COMPTON replied he could
not say until all of the claims have been liquidated, but he
thought 30 percent would be a fair estimate.
CHAIRMAN TAYLOR said he understands the logic behind recapturing
the entire group that participated to collect all of the money paid
out and then to divide it up, but in the process, the attorneys and
trustee will make a great deal more than any of the investors ever
would have made doing it themselves. MR. COMPTON said no one could
do it by his/herself. CHAIRMAN TAYLOR stated if $35 million is
recovered, Cabot didn't have a bad day: he picked up $12 million.
MR. COMPTON said if he wins the litigation, he has to do the
collection before he gets his 30 percent, and that he has invested
over one year and 75 percent of his office staff to this project.
MR. COMPTON stated, as trustee, his job is to apply the laws
correctly. He noted he has many cases where debtors file
bankruptcy with a personal injury action and can only hire an
attorney to pursue the personal injury suit if that attorney will
take it on a contingency basis.
CHAIRMAN TAYLOR expressed concern that in the process of trying to
recover distributions for redistribution among the group, the usery
penalty could bankrupt a person. MR. COMPTON replied this is the
type of thing that has and will be decided by judges and juries,
and that there are more people who care that they get 10 percent
back rather than nothing, than those who are being sued.
CHAIRMAN TAYLOR thanked Mr. Compton for coming to testify. MR.
COMPTON offered to provide more information on the facts if need
be.
Number 392
BILL FISTER, an investor with World Plus Incorporated and Atlantic
Pacific Funding Corporation, and a current member of the creditors'
committee, testified. He stated one thing Mr. Compton failed to
point out is that in this scheme the people at the top of the
pyramid got out, and the people left paying the bills are those who
got in last. The law encourages the victimization of those at the
bottom twice because those people also got the least out. MR.
FISTER said the point of Mr. MacDonald's handout entitled "Notable
Quotes" is that this was not an obvious scam. Those who invested
relied on people they trusted. A newspaper article reported a U.S.
District Attorney who was well acquainted and trained to recognize
Ponzi schemes believed Ms. Bonham was operating a bona fide
business. MR. FISTER discussed the way this matter was handled by
Mr. Compton, and noted those who filed claims ended up getting
sued, when they would have preferred to settle for 10 percent of
their losses.
LARY SCHAFER, an investor in World Plus, stated his support for SB
201 if the legislation will give the State more power to oversee
and investigate these activities, and oblige it to take action.
TAPE 97-40, SIDE A
Number 001
MR. SCHAFER continued with the following comments. Some of the
people who invested initially made hundreds of thousands of dollars
of profit. At the time of bankruptcy, they still had contracts due
and submitted those contracts as a claim for the amount due.
CHAIRMAN TAYLOR asked why those investors aren't also facing a suit
for the amounts they received plus the usery penalty.
MR. COMPTON said the misunderstanding may come from the fact that
many claims still need to be reviewed, and just because one filed
a claim does not ensure any payment will be made.
CHAIRMAN TAYLOR asked if the audit has disclosed who received
payments. MR. COMPTON replied there were no books to speak of,
they got canceled checks which were keyed into a database to
reconstruct the books. Many transactions have fictitious names,
those are slowly coming to light. Because the record was
reconstructed through bank transactions, everyone is being treated
equally.
CHAIRMAN TAYLOR asked Mr. SCHAFER if he believes the investor who
made a profit is being treated equally now. MR. SCHAFER said he is
being treated equally in that he has filed a claim. CHAIRMAN
TAYLOR asked if this investor is being sued. MR. SCHAFER said if
he is, it is for a small amount from a later contract, but that he
is not being sued for the large profit he made in the beginning.
That investor also told Mr. SCHAFER that he had received two
payments in cashier's checks so they could not be tracked. MR.
SCHAFER said his interest is in whether the winners, those who made
large profits, will be eliminated from the distribution process.
MR. COMPTON answered that in each settlement, the claim that will
be allowed in the bankruptcy will be one's total amount invested
minus the amount returned, plus the amount the lawsuit was settled
for.
MR. SCHAFER said he invested $300,000, cashed in $120,000, and is
being sued for $180,000. He asked Mr. Compton how that will be
viewed. MR. COMPTON said if MR. SCHAFER invested $300,000, settled
his claim for $125,000, and had received $125,000, then the claim
would be based on the $300,000. MR. COMPTON repeated the claim
would be based on the total in and total out. MR. SCHAFER said he
has called numerous state attorney generals himself to get
information, including the attorney who heads the fraud division,
but has not been successful in getting any information.
CHAIRMAN TAYLOR asked if anyone from the state troopers, attorney
general's office or district attorney's office has contacted him.
MR. SCHAFER said no one has. CHAIRMAN TAYLOR asked if he had any
evidence of crimes he believes have been committed. MR. SCHAFER
said he does; he was told specific lies and stories to induce him
to invest just before the collapse, i.e. the same mileage contracts
were sold to several people. CHAIRMAN TAYLOR asked Mr. SCHAFER if
he reported this to anyone. MR. SCHAFER said he was referred to
the fraud division in Anchorage. CHAIRMAN TAYLOR asked if Mr.
SCHAFER received any negotiable instruments from Ms. Bonham that
were not, in fact, negotiable. MR. SCHAFER said he has $60,000 in
bad checks. CHAIRMAN TAYLOR asked what it takes to get a bad check
charge in Alaska.
MR. COMPTON said he has provided Mr. Botelho with a lot of this
information. CHAIRMAN TAYLOR asked when. MR. COMPTON said he did
so several times during the year.
Number 100
JIM DUNLAP, a World Plus investor, agreed with Mr. MacDonald's
chronology of events. He invested at the early stage and made a
profit, and said he would be happy to return the profit, minus his
expenses, however what is happening is a transfer of wealth. There
are 550 investors being sued; he estimated $3 million are being
spent just to defend the lawsuit. Approximately $1 million has
been collected so far but those dollars are being spent as quickly
as they come in. He stated Travel Plus started out as a legitimate
business, but about the time Mark Air offered their four for one
ticket deal, according to the charts and graphs, the "50 percent
thing" got ahead of Ms. Bonham and then she collected from one
person to pay another. He agreed with Mr. Compton's statement that
the business was legitimate in 1992. MR. DUNLAP felt the trustee
has a personal vendetta against Ms. Bonham. He believed the claim
numbers are inflated and that the correct amount is around $7 or $8
million. He noted Ms. Bonham had a life insurance policy with
World Plus listed as a beneficiary. He informed Chairman Taylor
that Mr. DeWitt's average fee for this lawsuit amounts to $700 per
day since December of 1995. He concluded by saying a lot of money
is changing hands and is now going to the investors as individuals.
He agreed with Mr. Schafer that the investors should have had the
opportunity to get together so that those who made a profit could
have returned it to the "pot" for redistribution. He predicted
that if Mr. Compton's methods prevail, approximately 50 to 100
families will have to file bankruptcy to pay. He explained that by
reinvesting, one doubled his/her usery claim. He believed the
solution to be to prosecute the wrongdoers, not the investors.
PAUL CARTER, representing himself, gave the following testimony.
When the original bankruptcy was filed, he and a group of other
investors got the bankruptcy filing changed from a Chapter 7 to a
Chapter 11 filing. At that point an official creditors' committee
was brought on board. He was one of the first creditors to look at
Ms. Bonham's financial records, outside of the trustee, and as a
commercial banker, he has a good understanding of those records.
He surmised that a majority of the 1200 investors will be sued, not
a minority. He believes this lawsuit is not about justice but
about money, and none of the money that is being collected will be
distributed among the investors but will be used to pay fees. He
believes Mr. Compton and his attorneys will make the most money off
of this case because there is no incentive to settle. The FCC
considers the money to be investments, to which usery fees do not
apply, while the trustee considers the money to be loans to which
usery fees do apply. Mr. Compton has been trying to paint the
victims as the "bad guys" in this case to the bankruptcy court and
the media. He estimated the total amount lost to be around $5
million, not $55 million, as the claims, with interest, suggest.
MR. CARTER also criticized Mr. Christianson's contingency fee
because there is no incentive for him to close the case, and Mr.
Compton's unwillingness to force consolidation of the corporations
for bankruptcy purposes. He did not believe the investors would
regain 30 percent of the money collected because aside from
attorney and administrative fees, Delta Airlines and the IRS will
get their share. MR. CARTER stated his support for SB 201 and
asked Chairman Taylor to consider making it retroactive.
CHAIRMAN TAYLOR asked Mr. Compton what Delta Airlines settled their
claim for. MR. COMPTON explained that Delta took the number of
tickets and multiplied it times the full fare for each and claimed
$10 million in damages. The purpose of the settlement was to limit
the exposure which is limited by the total amount of disbursements.
It will receive 20 percent of the first million, 15 percent of the
second million, until it has received a maximum of $10 million.
Had the case not settled, Delta would have received possibly 70
percent of the distributions.
CHAIRMAN TAYLOR asked Mr. Carter if he has been trying to get
records he needs to defend himself against the litigation. MR.
CARTER said he has a defense team working on it and that team is
just getting through the first batch of records now. For two years
Mr. Compton had a lock on the records, and he could use them any
way he wanted to. MR. CARTER believed there is a conflict of
interest in the case because the trustee is the only one who can
produce the records. The FCC is relying solely on the records
being produced by Larry Compton. He thought the documents should
become public record so that they could be scrutinized by everyone.
CHAIRMAN TAYLOR asked if anyone at the federal level is
investigating this matter. MR. CARTER answered, "I know there have
been two federal grand juries, or state grand juries, and both of
them have come out negative. There's an affidavit that the FCC
used and I can't remember the ticket broker's name that testified
in front of the grand juries, but the FCC does have, and I will as
well soon have, a copy of that affidavit, and it explains exactly
how the ticket brokering business works. And we started
understanding a little bit more on how the business works, and
began to see how she operated and how things really worked. I
think Larry's hit it on the head in one of his [indiscernible] that
it is a bit of an underground business and there aren't a lot of
records out there. But there are a lot of people that flew, it was
not a criminal activity, selling those tickets, and certainly
wasn't even a civil problem until Delta Airlines got involved
[indiscernible]. But I think it was his testimony, and if you read
his affidavit you'll have a much clearer and better understanding
of how she ran it, and what kind of business she really had. And
she was one of the biggest ticket broker people in the country.
They actually had -- they had an organization, I believed it was
called the National Association of Ticket Brokers Salesmen, and she
was an officer in that organization, and my understanding is that
Delta Airlines knew about it, a lot of the airlines knew about it,
they knew -- I mean you just ride down the street in any major city
in the United States and there's lots of ticket broker, ticket
offices, brokerages. I mean it happens all of the time. What I
have been told, and the reason the grand jury hasn't come out is
because -- partly due to the testimony from this particular
individual [indiscernible] and I wish I could remember his name, I
just heard it once, ...."
CHAIRMAN TAYLOR asked Mr. Carter to try to get that name for the
committee. MR. CARTER agreed. CHAIRMAN TAYLOR asked whether the
probes were by federal or state grand juries. MR. COMPTON verified
they were federal.
MR. CARTER said state officials have said they are not involved
because they were told to "back off" by the FCC while it does the
groundwork, but he thought it was interesting that no one has been
indicted by two grand juries.
MR. COMPTON added the IRS could have "put this down" in 1993 but it
was so greedy it wanted to tax all of the people who were reported.
It had its own investigation going on and it duplicated much of Mr.
Compton's work. He thought the IRS believes there is more in it
for them by going after the investors.
MR. CARTER noted it has been his contention from the start that the
first bit of advice to come up at every creditors' meeting at the
Eagles Hall was that everyone should get their taxes in order.
CHAIRMAN TAYLOR said it is pretty wild that the IRS knows there was
a fraudulent activity but allowed it to go on so that it could gain
more in taxes from the investors. MR. DUNLAP stated that the IRS
took all of Ms. Bonham's records to their offices and kept them for
about one year. It then had to return the records because they
were taken with an illegal seizure. He questioned whether it could
use information from those records.
MR. CARTER noted that Ms. Bonham has not hired an attorney. MR.
COMPTON said she was offered an attorney, but fired him. MR.
CARTER said he supports SB 201 because he does not believe that re-injuring pe
TAPE 97-41, SIDE A
Number 001
PAT FOX, a Fairbanks resident, directed her testimony toward SB 201
in general, not in relation to the World Plus case. She stated
that the words "wrongdoing" and "at fault" need to be defined. She
expressed concern about selective law enforcement occurring in
Alaska and that laws are enforced in an arbitrary manner because
the state attorney's office arbitrarily decides which crimes will
be prosecuted. She stated that there are many problems with the
judicial system, and that often perpetrators of crimes do not have
to take responsibility for their criminal behavior. She said her
home was burglarized and the contents either stolen or destroyed in
1989. The burglar also wrote and cashed checks from her stolen
bankbook. When apprehended, it came to light that he was on
probation for a similar crime. His plea agreement was to admit he
was guilty in exchange for no charge but he was to pay restitution.
He never has and she cannot afford to prosecute him. She described
other scenarios in which criminal sentences are not enforced and
the wrongdoers are out to re-offend.
BILL SATTERBERG, JR., an attorney representing several of the
defendants involved in the bankruptcy recovery action, said that
one of the significant frustrations is the amount of freight it
takes to defend these cases, by private counsel, is
counterproductive. One must advise clients that for certain
amounts, the clients are better off writing a check and rolling
over and playing dead, than to go to Court. He believed this case
is guaranteed to be appealed because of certain rulings, and will
be locked in litigation for several years. Additionally, the
trustee and counsel have indicated that they will soon be filing a
motion for summary judgment, essentially seeking to declare that
any investor involved in this particular operation who received
money back was operating in bad faith, and therefore is entitled to
no recovery. He questioned the application of the usery statute,
as it is being used as a sword rather than a shield in this matter.
He suggested that the State should request a legislative audit to
determine what took place in DBSC and why the Attorney General's
Office and the Alaska State Troopers have taken no action. He
noted one client is considering suing the State of Alaska for
negligence in the way this matter has been handled. He also asked
Chairman Taylor to inquire of the IRS why it took no action in
1993.
CHAIRMAN TAYLOR acknowledged that SB 201 was hastily drawn and that
it was not his intent to rewrite workers' compensation or
comparative negligence statutes in the State of Alaska. He noted
he was not sure of the best way to target the legislation so that
the usery statute can be used only as a sword, or only as a shield.
MR. SATTERBERG reiterated his concern about the trustee's
forthcoming motion that essentially says that anyone who invested
is a bad faith investor and will be prevented from any right of
recovery. He questioned whether the foreign creditors' act can be
used under these circumstances.
CHAIRMAN TAYLOR thanked Mr. Satterberg for his comments and noted
his intent to request a legislative audit of DBSC, the Attorney
General's Office and Alaska State Troopers. He expressed concern
that this matter has been deferred to the federal government.
NANCY LARSON, a creditor who is being sued, gave the following
testimony. She has been a member and chairperson of the World Plus
Creditors' Committee. The most troubling matter to her is the lack
of accountability by the trustee and his attorneys for their
actions. She has witnessed, in creditors' meetings, "gestapo"
tactics being used against the creditors. The victims worked very
hard for their money and thought this was a rare investment
opportunity that was endorsed by many in the legal community. She
criticized the way the claims are being calculated and gave her own
case as an example. She noted that repayment of the principal on
her loan, rather than the interest payment, is being calculated in
the usery claim and therefore doubled as the amount she owes in the
claim. She agreed with other speakers that Mr. Christianson has no
incentive to settle. She expressed her disillusionment with the
justice system and believes it has not paid to cooperate and be
responsible. Ms. Larson said the bankruptcy laws have changed, and
that in cases during the last ten years, the trustees have not gone
back to day one and collected all of the money paid out to later be
redistributed.
GISELLA DYKEMA stated she agreed with the previous speaker's
testimony and made the following comments. She believes Mr.
Christianson's law firm is acting unethically. Shortly after the
bankruptcy, that law firm received the names of the creditors and
contacted them requesting copies of their contracts and
correspondence with Ms. Bonham. She complied, only to be sued
three weeks later based on the documents she submitted to them.
Regarding the usery law, if it is applied as Mr. Compton is doing,
the State of Alaska becomes an accessory in fleecing the people.
She believes the usery law is discriminatory because it is not
being applied to those who invested over $25,000.
SCOTT CALDER gave the following testimony. He sees a direct
parallel between the State's actions in the World Plus matter and
the State's social service agency's actions regarding his child.
He recommended that the State of Alaska not be excluded from the
effect of SB 201.
DAVID PARRY, an attorney with Birch, Horton, Bittner and Cherot who
represents a number of investors in the World Plus litigation,
testified. He has found, in case law on usery statutes from other
states, that the courts have had difficulty applying the usery
penalties in cases where it appears the person trying to recover
those penalties was involved in wrongdoing, particularly if that
person initiated the transaction, set up the loan terms, or
committed fraud in connection with the transaction. It is
currently the common law in Alaska that someone who initiates a
transaction or commits fraud in the inducement cannot come into
court and use the usery statute to profit from their wrongdoing.
The trustee's attorneys disagree with him, and have filed a motion
in opposition to his on which the bankruptcy court has yet to rule.
He asked if he could supplement the record with those cases which
he would submit at a later date, as well as his usery argument and
portions of the trustee's usery argument.
CHAIRMAN TAYLOR said the committee would appreciate a summary of
those arguments. He asked why the equitable doctrine of clean
hands does not apply to both the trustee in bankruptcy and the
trustee's attorneys because if Ms. Bonham were standing in the
courtroom instead of the trustee and his agents, no court would
allow use of the usery statute for any penal purpose. He also
questioned whether the federal bankruptcy court utilizes the state
standard for determining the question.
MR. PARRY answered that is what his argument boiled down to. The
crux of that argument was that under the bankruptcy rules, when the
trustee asserts the Alaska usery statute, the trustee does so
through a bankruptcy mechanism where they stand in the shoes of the
debtor. By standing in the debtor's shoes, and alleging that Ms.
Bonham committed securities fraud, the trustee pled himself out of
using the usery statute. No court in the land would allow Ms.
Bonham to use the law to make a profit from her own wrongdoing.
CHAIRMAN TAYLOR surmised that the opposing side would argue that
the trustee is representing the victim creditors, and Ms. Bonham's
bankruptcy filing was involuntary, therefore the trustee is not
tainted by Ms. Bonham's bad acts. MR. PARRY said the court is yet
to rule on that argument.
TAPE 41, SIDE B
CHAIRMAN TAYLOR said he would like to review whether a state
legislature can affect the interpretation that will be given to a
state statute by the bankruptcy court, and whether or not that
court has to follow that interpretation.
MR. PARRY said he believes the bankruptcy court does have to.
Regarding SB 201 and its affect on other statutes, MR. PARRY
suggested amending the usery statute itself to clarify that an
individual who initiates an action, or commits fraud with respect
to the transaction, cannot employ the usery penalty, to clarify the
matter.
CHAIRMAN TAYLOR thanked the participants for attending, and
concluded by offering the committee's assistance when the session
convenes, and repeated his intention to request a legislative audit
of the Division of Banking, Securities and Corporations, the
District Attorney's Office, the Attorney General's Office and the
Alaska State Troopers regarding actions taken when these crimes
were reported. He adjourned the meeting at 5:15 p.m.
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