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.