Legislature(1997 - 1998)
03/09/1998 01:35 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 TAYLOR announced the continuing inquiry into the time line
report received last week from the Legislative Budget and Audit
Committee. CHAIRMAN TAYLOR called MR. LARRY CARROLL to testify.
MR. CARROLL came forward and said he was with the Division of
Banking, Securities and Corporations (BSC) for 22 years and was the
senior examiner at the time of the World Plus, Incorporated (WPI)
matter. He said he is somewhat constrained by confidentiality and
certain aspects of the case may best be discussed in a private
session with the committee. CHAIRMAN TAYLOR responded that he would
like to keep the hearing open as long as possible. MR. CARROLL
replied his only concern was for certain people's personal
finances, which should not become public record.
CHAIRMAN TAYLOR asked if MR. CARROLL had had a chance to review the
time line provided by the auditors, saying there was concern on the
part of the committee based on this document. CHAIRMAN TAYLOR
expressed concern that it had been reported to him that the events
that had transpired may have affect his perception of his ability
to continue in state employment. CHAIRMAN TAYLOR, commending MR.
CARROLL as a person of high integrity, wanted to give MR. CARROLL
the opportunity to comment on that.
MR. CARROLL said reasonable people may disagree on courses of
action, and his determination to undertake or refrain from an
investigation may have been different from another persons, but
this decision was the purview of the Department of Law. He said he
did not agree with the decision to leave the matter to the federal
investigators. MR. CARROLL said he tried to persuade the Attorney
General to agree with him and failed to do so.
MR. CARROLL said he was not satisfied with the ongoing federal
investigation, but thinks the Attorney General acted in good faith
based on the information that he had. MR. CARROLL understood that
simultaneous investigations can interfere with each other, but
liked to think that with some discretion, a state case could have
been pursued. MR. CARROLL said Alaska statute does not allow for
the return of investors' funds, as there is no possibility for
rescission.
MR. CARROLL said the state did do a number of things in the World
Plus matter. He indicated that there was careful scrutiny of
registered individuals dealing with WPI and one person received a
letter of sanction, while another was suspended and fined. MR.
CARROLL said he contacted the U.S. Securities and Exchange
Commission, who then traveled to Fairbanks and eventually issued an
injunction. Mr. CARROLL said that the Attorney General had assured
him that if the federal government did not follow through and
deliver justice, he would revisit the matter.
LARRY CARROLL said, having done what they could do, his division
stepped back. He also said the evidence he obtained was not tainted
by the quashed subpoena, like the other evidence previously
amassed.
CHAIRMAN TAYLOR clarified that no state action was brought and
again asked MR. CARROLL if that lack of action affected his view of
his job. MR. CARROLL replied probably not. He cited the generous
Retirement Incentive Program offered at the time as his temptation
to leave, although he said he certainly was not pleased that the
state did not go forward with charges.
MR. CARROLL said that the first wave of investors they contacted
wanted the scheme to go forward so they could get paid. He said a
big part of the propaganda surrounding this scheme was "don't tell
anyone about any of this." He said he understands that there is a
group of investors in Fairbanks suing the state so he wouldn't say
anything further, on the advice of counsel.
CHAIRMAN TAYLOR asked if the federal authorities had brought in a
clean group of people after having recused the first set of
investigators. LARRY CARROLL replied that this was true, saying
they started over from square one and he provided them with all the
information he had. He also said that when the first glimmer of
this occurred, around November, he sent a bank examiner up to
Fairbanks to help the bankruptcy controller estimate the size of
the scheme. He said he was not happy that he was unable to continue
with the investigation after having started it.
CHAIRMAN TAYLOR inquired if, in his report to the Attorney General,
he had recommended state charges different from the federal
charges being pursued. MR. CARROLL said he had also recommended
charging people with false filings, that is providing sworn
information to his division that was untrue. He said none of that
would help return money to investors as the money is gone.
Number 202
CHAIRMAN TAYLOR understood that the money was gone, but commented
that if this woman had been stopped, a new round of Alaskans could
have been protected from investing money in her fraudulent scheme.
MR. CARROLL replied that the time frame suggests that the state
became aware of the alleged violation sometime in 1995 or 1996,
when the federal authorities were aware of it as early as 1992, and
yet did not make the state aware of it. CHAIRMAN TAYLOR said that
MR. CARROLL was aware of problems with WPI also in 1992, as
documented in correspondence between his division and the State of
Idaho. MR. CARROLL agreed, but said before they approved Ms.
Bonham's exemptions, they had representations that all her Idaho
accounts were settled and there were to be no further sales of that
nature. CHAIRMAN TAYLOR interjected that in fact all of these
representations were fraudulent and yet no charges have ever been
brought against the attorney that submitted them. LARRY CARROLL
said this was true, but believed he was currently under suit by the
bankruptcy trustee.
CHAIRMAN TAYLOR stated that he was glad someone had cleaned house
and actually gone out and attempted to protect the people. He said
his main concern was the audit he received which reported that the
Attorney General was not sufficiently independent to make this
determination and should seek an independent prosecutor to make
recommendations on these offenses. CHAIRMAN TAYLOR expressed
concern that the statute of limitations might have passed on
infractions by state employees who deceived MR. CARROLL's division.
MR. CARROLL replied that the Securities Act was good for three
years from the infraction and he agreed that CHAIRMAN TAYLOR may be
correct.
CHAIRMAN TAYLOR asked if the federal government is prosecuting Ms.
Bonham for bad checks. LARRY CARROLL did not know, but said she did
issue bad checks. CHAIRMAN TAYLOR asked the amount and MR. CARROLL
said she did have an account she ran money through that ended up
about $80,000 overdrawn.
SENATOR WARD asked for clarification that LARRY CARROLL had spoken
to the A.G. and was told that if the federal government did not
come through he would pursue charges. MR. CARROLL explained that
what the Attorney General said was he would revisit the issue.
SENATOR WARD said he must have known that there was an issue, and
asked MR. CARROLL if he knew who had advised the Attorney General
to do this. MR. CARROLL said SENATOR WARD would have to ask the
Attorney General himself, but did know that he relied heavily on
his deputy, Lori Otto. SENATOR WARD said so it was Lori Otto who
advised him and MR. CARROLL repeated that SENATOR WARD would have
to ask the Attorney General. He did say Ms. Otto told him they ran
a great risk of "screwing up" the federal investigation if they
went forward. LARRY CARROLL said other things she said were best
discussed outside of the public domain. CHAIRMAN TAYLOR said he
would like to keep the proceeding open to the public as long as
possible but understood they were likely going to end up in
executive session. MR. CARROLL mentioned that Ms. Otto was his
attorney at the time and CHAIRMAN TAYLOR added that, tragically,
she was also the attorney for all the victims in the state and they
person they had to rely upon to protect them from a fraudulent
perpetrator like Ms. Bonham. MR. CARROLL said he did not argue with
this. CHAIRMAN TAYLOR replied that the most troubling part was the
question of why they chose not to go forward. CHAIRMAN TAYLOR said,
if they were to believe the words of the Attorney General as quoted
in the Daily News-Miner, the investigation did not go forward
because there were too many of their own people involved in the
scheme. LARRY CARROLL agreed there were a number of them involved.
CHAIRMAN TAYLOR said the feds also ran into the same problem of
having investigators involved, but they did the right thing by
recusing their people and bringing in new people to prosecute the
case. CHAIRMAN TAYLOR noted that they then had to rely on the work
done by MR. CARROLL and was glad no one in his department had
suggested they back off and not investigate in order to spare some
state employees. LARRY CARROLL said, to the contrary, he distinctly
recalls the Director saying to Ms. Otto, "we are not going to
ignore our law". CHAIRMAN TAYLOR asked why he would have made this
statement to Ms. Otto, and MR. CARROLL said in response to her
opinion that there was no need to proceed as there was a parallel
proceeding already underway.
CHAIRMAN TAYLOR asked if MR. CARROLL knew for a fact that Mr.
Kirkpatrick responded to something that indicated he disagreed with
Ms. Otto and would proceed with an investigation. CHAIRMAN TAYLOR
asked if Mr. Kirkpatrick was asked to back off or told that he
should do so. LARRY CARROLL said he was privy to this conversation
and, though not quite in this context, he thinks the rationale was
that the continued investigation could cause problems with the
federal proceeding especially in aspects such as immunization of
certain people. CHAIRMAN TAYLOR commented that this would only be
important if someone was trying to protect a person involved in the
scheme, probably a state employee. CHAIRMAN TAYLOR said all the
people involved in the case essentially ended up with total
immunity due to the fact that someone decided not to prosecute.
CHAIRMAN TAYLOR noted that Mr. Hompesch did not appear to be a
victim in the scheme; MR. CARROLL replied that Mr. Hompesch had
told him he was "equally bamboozled" by Ms. Bonham and that she had
lied to him as well.
CHAIRMAN TAYLOR asked MR. CARROLL if, in the process of conducting
his investigation, he received any unsolicited endorsements from
Ms. Bonahm's attorney, written by state employees, some of which
would be the very same people who would have been prosecuting Ms.
Bonham had the Attorney General decided to go forward with the
case. LARRY CARROLL said he received 35 such letters and CHAIRMAN
TAYLOR said someone had gone out and rounded those letters up,
especially from influential folks so BSC would not investigate.
LARRY CARROLL said, at that time, the only thing they had
considered was remedying the fact Ms. Bonham was selling
unregistered securities and then going forward with an exemption.
MR. CARROLL said he believes these letters were an attempt to
demonstrate that this was a legitimate business enterprise, which
turned out to be untrue. MR. CARROLL said, regardless of these
letters, his organization moved slowly on the exemption process, in
fact, imposing requirements for the filing of quarterly reports. He
said these reports were filed and were totally false.
CHAIRMAN TAYLOR expressed suspicion regarding these letters,
particularly one written by the very person who would have
investigated the scheme had it been pursued. CHAIRMAN TAYLOR
hypothesized that if he were Ms. Bonham, he might think it was a
good strategy to embroil the people who would prosecute him. He
might then have them send letters to BSC at the request of his
attorney, further entangling those who might prosecute him to the
extent that they are in jeopardy of losing their own funds if they
do so. LARRY CARROLL said he was also quite concerned with this
scenario, and got in a bit of trouble from an indignant Ms. Otto
when he chuckled about this very predicament.
CHAIRMAN TAYLOR mentioned his additional concern that, after the
heat on WPI began to build and further inquiries came in from both
the IRS and the SEC (who began putting pressure on Ms. Bonham), Ms.
Bonham was writing bad checks as well as witdrawing large sums of
cash. CHAIRMAN TAYLOR would like to know if there was any
investigation to determine whether there were any significant cash
deposits to the accounts of those people who sent in these written
endorsements about the same time these letters appeared. LARRY
CARROLL replied that the bankruptcy trustee has filed suit against
200-300 investors who had good returns, but there were no subpoena
of bank records by BSC.
SENATOR WARD asked how much money was invested in WPI after MR.
CARROLL recommended to Ms. Otto they pursue an investigation. LARRY
CARROLL replied there was none.
CHAIRMAN TAYLOR clarified that this type of scheme needs a
tremendous amount of money to flow in continuously in order to pay
off previous investors. MR. CARROLL said it needed to double.
CHAIRMAN TAYLOR asked if those people who knew Ms. Bonham was under
suspicion and wrote a letter to BSC did not benefit by assuring
continued investment and their own payoff in this scheme. MR.
CARROLL said, for the purposes of discussion, they should assume
the people who wrote the letters did so in good faith in response
to a request. Mr. CARROLL said, assuming all this, what Ms. Bonahm
had done with the letters is known as "lulling", meaning lulling
new investors into her scheme on the strength of these letters. MR.
CARROLL said the letters absolutely did help perpetrate the scheme,
but that he did not know that the people who wrote the letters
knew, at the time, that it was a scheme. CHAIRMAN TAYLOR noted that
no one has checked to see if, as the scheme began to crumble, these
peoples' bank accounts ballooned. Again Larry Carroll expalined
that the rationale was that there was an ongoing federal
investigation and the guilty parties would be held accountable. He
said those were the instructions received form the Department of
Law. Additionally, he said there is a letter to that effect the
committee may want to look at. CHAIRMAN TAYLOR asked if this letter
was written by Ms. Otto. LARRY CARROLL said it was, and the letter
was the result of several discussions with Ms. Otto.
CHAIRMAN TAYLOR asked if he could date when the first discussions
occurred. MR. CARROLL estimated the discussions began shortly after
Thanksgiving 1995 and ran through February 1996. CHAIRMAN TAYLOR
asked when WPI was shut down and MR. CARROLL replied it was late
November of 1995, to the best of his recollection.
SENATOR WARD commented that it had just occurred to him that a
letter from a prosecutor endorsing this deal would be a heck of a
selling tool. SENATOR WARD asked if Ms. Otto solicited these
letters and MR. CARROLL said he presumed the letters were solicited
by Ms. Bonham or Mr. Hompesch, and in fact Ms. Otto did not now
anything about them until informed by BSC.
CHAIRMAN TAYLOR asked if, during the course of an investigation,
MR. CARROLL found someone in his department was involved in a
fraudulent scheme, would he not recuse that employee immediately.
LARRY CARROLL affirmed he would absolutely recuse that employee
immediately. CHAIRMAN TAYLOR then asked if he would stop his
investigation because of it and MR. CARROLL said he would not.
LARRY CARROLL said in discussion with the Attorney General, he
asked what he should say if calls came in asking why the
investigation was not being pursued, and the Attorney General said
he would field those calls and he did.
CHAIRMAN TAYLOR asked if BSC had received calls prior to the Master
of Bankruptcy shutting Ms. Bonham down. LARRY CARROLL recalled only
one investor calling, who was having trouble transferring his note.
MR. CARROLL said it was a firm rule of Ms. Bonham that no investor
talk about the scheme. He said when people did began to talk, BSC
heard her four basic stories that she sold to investors. MR.
CARROLL said he doesn't know what she thought was going to happen,
as there was no legitimate business enterprise underlying the
scheme. MR. CARROLL explained that BSC had no idea the whole thing
was so huge, they honestly believed it was limited to 15 investors
dealing in airline mileage.
SENATOR WARD said he has been contacted by people who believe that
the state somehow held this whole thing together until prominent
people like lawyers and judges got their money and then allowed the
scam to fall apart. MR. CARROLL said, indeed, some of the people
who won big were prominent in Fairbanks. He did not go so far as to
agree with SENATOR WARD's statement, saying some of these people
also rolled over their money and lost. MR. CARROLL agreed with
CHAIRMAN TAYLOR's conclusion that to to really find out who won and
who lost would take a great deal of investigation. He did say they
had an open and shut case against Ms. Bonham.
CHAIRMAN TAYLOR clarified that MR. CARROLL was told by the A.G.
that if the federal authorities failed to catch the perpetrators,
he would revisit the case. MR. CARROLL agreed this was what had
transpired, and he was concerned about the direction of the case as
the search warrant had been quashed and the evidence was delivered
back to Ms. Bonham and he was not comfortable leaving the
investigation in their hands.
CHAIRMAN TAYLOR explained that he was concerned about the extent to
which BSC relied on these endorsements submitted by state
employees. He said it seemed there was a plethora of state laws
violated and the only person now being prosecuted is Raejean
Bonham. CHAIRMAN TAYLOR asked MR. CARROLL if, when he got that
committment from the A.G., he thought additional players would be
prosecuted. LARRY CARROLL said yes, to the extent that there were
other culpable players involved. MR. CARROLL indicated he
hypothesized that other people might have some problems that would
come to light in an investigation. He stated this, also, "did not
sit well".
TAPE 98-16, SIDE B
Number 001
CHAIRMAN TAYLOR asked to whom MR. CARROLL was referring by this
last comment and LARRY CARROLL replied he meant Ms. Otto, who
suggested he "be careful" making those types of styatements. He
said he indicated he was speaking to her as his lawyer.
CHAIRMAN TAYLOR asked if she told him to "be careful" about
investigating state employees and MR. CARROLL clarified she said to
"be careful" about making a statement implying the possible guilt
of state employees. CHAIRMAN TAYLOR said it was, though, ok to make
the statement that Raejean Bonahm was culpable and MR. CARROLL said
it was already apparent, through a preponderance of the evidence,
that she was implicated. MR. CARROLL said he still does not know if
there is anyone else who may be culpable, due to the fact that
there was no further investigation of the matter. He again
suggested that the committee look at the letter sent to the
division, which clearly sets out instructions given to employees of
the Department of Law. He stated very clearly that he is not
accusing anyone of anything, and indicated to CHAIRMAN TAYLOR that
they may be getting into that grey area he hoped to avoid.
CHAIRMAN TAYLOR thanked MR. CARROLL for his testimony.
LARRY CARROLL expressed appreciation for the opportunity to speak.
He said the division does a lot of good work and catches a lot of
bad guys. He said this scam turned out to be one of the biggest,
and was taken over by the feds who finally completed it. He said he
is sorry for the people who lost their money and he is glad to have
aided the federal investigation. He concluded by saying he makes no
apologies for what he did and CHAIRMAN TAYLOR replied that he hopes
others will be able to make that same statement.
CHAIRMAN TAYLOR said the Legislative Auditors had been authorized
to do an audit of BSC and the Department of Law relating to their
decisions surrounding this case. He hopes to see a preliminary
report in 30 days, and indicated that, at that point, it may be
necessary to go into executive session.
MR. CARROLL remarked he wanted to be clear that he is no longer
affiliated with BSC, and that he is not a spokeman for them.
CHAIRMAN TAYLOR aknowledged this was understood and, with no
further business to come before the committee, adjourned the
meeting at 4:02.
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