Legislature(1997 - 1998)

03/06/1998 01:35 PM Senate JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
            SB 201 - PROHIBIT RECOVERY BY WRONGDOER                            
                                                                               
CHAIRMAN TAYLOR noted that representatives from Legislative Budget             
and Audit were in attendance to present their report on the World              
Plus scheme.                                                                   
                                                                               
MS. PAT DAVIDSON, Acting Auditor, presented to the committee a                 
verbal overview of the memorandum detailing the critical events in             
the World Plus scheme. She said the request she received was for a             
time line detailing the financial arrangements of World Plus and               
she provided the committee with this time line as well as letters              
sent to the Division of Banking, Securities and Corporations (BSC).            
CHAIRMAN TAYLOR asked if the letters, received by BSC, were in                 
response to inquiries made by BSC. MS. DAVIDSON did not believe                
that these letters were solicited by BSC but that the owner of the             
company or her attorney may have directed these individuals to                 
submit them. CHAIRMAN TAYLOR asked if, to the best of her                      
knowledge, these letters were unsolicited by BSC and they were                 
motivated by someone else. MS. DAVIDSON said yes.                              
                                                                               
PAT DAVIDSON mentioned that, due to the ongoing civil and criminal             
litigation surrounding this case, only public information was used             
in the compilation of this report. She said they used information              
from the Department of Commerce and Economic Development, court                
documents and newspaper accounts for this report. MS. DAVIDSON                 
identified Ms. Raejean Bonham as the owner/operator of World Plus              
Inc. (WPI) and Mr. Hompesch as her attorney as well as attorney to             
WPI.                                                                           
                                                                               
MS. DAVIDSON stated that the memorandum had one recommendation,                
that being that the Attorney General (AG) should consider asking a             
special prosecutor to determine if any additional state, civil or              
criminal charges should be pursued. She said the AG has left the               
prosecution of these matters to the federal U.S. Attorney due to               
the involvement of some of his own staff, and to avoid any conflict            
of interest. She said the auditor's office believes that someone at            
the state level should also look at the case and determine if the              
charges that have been filed in this matter are sufficient.                    
                                                                               
MS. DAVIDSON explained that a ponzi scheme is a type of structure              
that uses money from subsequent investors to pay off the initial               
investors. She said these schemes can be kept up for a while but               
generally fall apart under their own weight.                                   
                                                                               
MS. DAVIDSON explored the time line, beginning in April 1991 when              
a certificate of incorporation for WPI was issued to Ms. Bonham,               
and gave the following testimony:                                              
                                                                               
 In September 1992, Ms. Bonham contacted BSC, saying she did not               
know that her program notes were considered securities. She stated             
at this time that she had 15-20 investors who seldom changed.                  
However, according to court documents at that time, she continued              
to sign investment contracts. In November 1992, Mr. Hompesch                   
submitted a letter to BSC requesting a notice of exemption, he                 
enclosed a list of contracts and identified 35 active investors                
with a total investment amount of $560,000. According to court                 
records, at that  time, WPI had approximately 500 contracts with an            
outstanding aggregate balance of $8.6  million. Mr. Hompesch also              
submitted 24 letters to BSC expressing satisfaction with WPI. These            
letters comprise attachment B of the report. MS. DAVIDSON commented            
that a copy of WPI's tax returns would have provided a better                  
picture of their financial situation. In February 1993 another                 
schedule was provided by Mr. Hompesch to BSC intending to                      
demonstrate that all investors as of 1992 had been paid off or were            
in the process. Court records indicate that, in fact, there were               
259 investors with contracts totaling $4.8 million outstanding.                
Again Mr. Hompesch indicated to BSC sales of new contracts worth               
$300,000, within the limit of $500,000 imposed on WPI by BSC by                
that time . Again, court document indicate outstanding contract                
total about $16 million.                                                       
                                                                               
MS. DAVIDSON noted that BSC had taken steps to limit WPI's                     
contracts by May of 1994, reducing the number of allowed investors             
to 15 with contracts to total no more than $250,000. Again, court              
records show contracts far exceeding these limits. In January 1995,            
the IRS seized the records of WPI.                                             
                                                                               
In July 1995, Mr. Hompesch again submitted records to BSC showing              
WPI was within their limits. Again, court records showed this to be            
false. December 1995 found Mr. Hompesch notifying BSC that he was              
withdrawing his representation of WPI. WPI was dissolved in the                
same month and entered into bankruptcy, initially trying to claim              
chapter 11, but having that claim rejected, moved to chapter 7                 
bankruptcy.                                                                    
                                                                               
In February 1996 Attorney General Bruce Bothelo indicated he was               
going to allow the federal prosecutor to pursue the criminal                   
aspects of this investment scheme. In April 1996, the federal                  
Securities and Exchange Commission (SEC) filed a civil suit against            
Ms. Bonham and WPI for $2.1 million. By September 1996, the                    
bankruptcy trustee had begun filing cases against investor seeking             
the return of illegal profits. In October 1997 the Attorney General            
stated a potential conflict of interest and declined prosecution of            
the case. In this same month, Ms. Bonham was indicted by a federal             
grand jury on 53 counts of mail fraud, 8 counts of money                       
laundering, and 18 counts of monetary transaction violations. MS.              
DAVIDSON reported that this is the picture to date. She said that              
on page 4 of the report, they identify the lawsuits that have been             
filed against Ms. Bonham, Mr. Hompesch and certain WPI investors.              
Additionally, a lawsuit has been filed against the state,                      
specifically BSC, regarding actions taken or not taken on behalf of            
some investors, according to MS. DAVIDSON.                                     
                                                                               
SENATOR WARD commented that the presentation was very thorough. He             
asked if the Attorney General had put in writing why he was not                
pursuing the case. MS. DAVIDSON repeated that, due to ongoing                  
litigation, she could not talk about some things. She did say that             
the AG stated publicly that, due to a conflict of interest, he was             
allowing the federal court to pursue legal action.                             
                                                                               
CHAIRMAN TAYLOR noted that the federal U.S. Attorney had recused               
some of their people ho had been involved in the scheme and put new            
people on to pursue the investigation. CHAIRMAN TAYLOR said it                 
apparently went even further than that when the Justice department             
took over the prosecution form the U.S. Attorney. MS. DAVIDSON                 
agreed and introduced MR. MERLE JENSEN for further comment.                    
                                                                               
MR. JENSEN also agreed with CHAIRMAN TAYLOR, saying the U.S.                   
Attorney's office started the investigation but, because they had              
a staff attorney who was involved with the scheme, the Department              
of Justice recused everyone on the case and began their own                    
investigation. CHAIRMAN TAYLOR was glad someone had followed the               
required ethics. He asked why the state, through either the                    
Attorney General or the Division of Banking, Securities and                    
Corporations could not do the same thing as the Justice Department,            
meaning recruse the people involved and bring in new prosecuting               
district attorneys. MR. JENSEN said he would feel uncomfortable                
addressing that issue in its entirety, but could say there was no              
reason why it couldn't have been done, in his opinion. He was not              
able to comment on what had been done, but did say what the U.S.               
Attorney did was the appropriate thing to do.                                  
                                                                               
CHAIRMAN TAYLOR asked MS. DAVIDSON to review violations of state               
laws. MS. DAVIDSON pointed to page eight of the report and                     
enumerated several violations to title 11 and title 45 of the state            
statutes. she said it appears these charges could be brought                   
against Ms. Bonham. CHAIRMAN TAYLOR interjected that testimony he              
heard from Fairbanks alleged she had written at least $1.5 million             
in bad checks and she had not even been brought up on a bad check              
charge.                                                                        
                                                                               
MS. DAVIDSON indicated that Mr. Hompesch might possibly be liable              
for knowingly providing false information to BSC. CHAIRMAN TAYLOR              
clarified that Mr. Hompesch was the person who sent the unsolicited            
letters and the one who was continually submitting information to              
BSC saying WPI was within it's established limits. MS. DAVIDSON                
replied yes. CHAIRMAN TAYLOR commented that someone must have                  
relied upon this information or would have done a more thorough                
investigation. MERLE JENSEN noted that it is the practice of BSC to            
rely on counsel for information regarding securities.                          
                                                                               
PAT DAVIDSON  said other people providing endorsements could be                
open to prosecution and any of these people who are state employees            
may be subject to ethics violations as well. Attorneys involved                
might be  subject to actions by the bar association. She said none             
of this has been done to date and they believe that if the AG had              
obtained a special prosecutor, and their decision making process               
could be made public, a lot of questions could be cleared up.                  
CHAIRMAN TAYLOR noted that several state employees had provided                
written support to BSC, which may be a violation under the ethics              
act in addition to title 45, yet no public accusations have been               
filed with the Alaska Personnel Board. He asked how these people               
could supply these  apparently fraudulent endorsements to BSC and              
escape even a mention of it in their personnel files. MS. DAVIDSON             
said, to the extent that an investigation had uncovered anything,              
it would have been filed with the personnel board, but that has not            
occurred.                                                                      
                                                                               
CHAIRMAN TAYLOR remarked that he was initially shocked by the scope            
of this fraud, and more so after holding a hearing in Fairbanks and            
listening to people who had sought help from the district attorney             
and troopers to no avail. CHAIRMAN TAYLOR stated he has never seen             
an audit like this that recommends, "the Attorney General is not               
sufficiently independent to make this determination and therefore              
should obtain assistance from a independent prosecutor to make                 
recommendations."                                                              
                                                                               
CHAIRMAN TAYLOR thanked the auditors for the thoroughness of their             
work and asked if they were aware of other confidential information            
the committee should see in reviewing this matter.                             
                                                                               
CHAIRMAN TAYLOR replied that this was simply a time line, an audit             
had not yet been conducted but could be and would afford access to             
all materials. She suggested the committee would want to talk to               
Mr. Kirkpatrick (Director of BSC) and either Attorney General                  
Bothelo or a member of his staff, who might be able to provide a               
more comprehensive picture. She indicated that because of ongoing              
lawsuits, this likely would have to be done in executive session.              
                                                                               
CHAIRMAN TAYLOR again thanked the auditors for their excellent work            
and mentioned he would speak with Mr. Kirkpatrick and Mr. Larry                
Carroll and, to reassert some level of public trust in our judicial            
system and the banking and securities division, take the necessary             
steps to find out what happened here. CHAIRMAN TAYLOR concluded                
that if their recommendation  proves to be the bottom line, it is              
incumbent upon the committee to notify the Attorney General he                 
should appoint an independent prosecutor because he is too                     
conflicted to do the work.                                                     

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