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.