SENATE JUDICIARY COMMITTEE October 10, 1997 2:00 p.m. MEMBERS PRESENT Senator Robin Taylor, Chairman MEMBERS ABSENT Senator Drue Pearce, Vice Chair Senator Mike Miller Senator Sean Parnell Senator Johnny Ellis COMMITTEE CALENDAR SB 201 - "An Act relating to prohibiting recovery of damages and prohibiting a remedy to a person in a civil action." PREVIOUS SENATE COMMITTEE ACTION No previous Senate committee action. WITNESS REGISTER Michael A. MacDonald Downes MacDonald Levengood 1008 16th Avenue Fairbanks, Alaska 99701 POSITION STATEMENT: Supports SB 201. Larry D. Compton 400 D Street, Suite 210 Anchorage, Alaska 99501 POSITION STATEMENT: Provided information about the Bonham case. Bill Fister 14 + Mile Old Nenana Highway Ester, Alaska 98725 POSITION STATEMENT: Commented on the Bonham case. Larry Schafer 13 Mile Old Nenana Highway Ester, Alaska 98725 POSITION STATEMENT: Commented on the Bonham case. Jim Dunlap 238 Ellington Fairbanks, Alaska POSITION STATEMENT: Commented on the Bonham case. Paul Carter 4134 Palo Verde P.O. Box 81250 Fairbanks, AK POSITION STATEMENT: Supports SB 201. Pat Fox P.O. Box 74596 Fairbanks, AK POSITION STATEMENT: Commented on SB 201. William R. Satterberg, Jr. 709 4th Ave. Fairbanks, AK POSITION STATEMENT: Commented on the Bonham case. Nancy Larson P.O. Box 83404 Fairbanks, AK 99708 POSITION STATEMENT: Commented on the Bonham case. Gisella Dykema P.O. Box 80641 Fairbanks, AK 997098 POSITION STATEMENT: Commented on the Bonham case. Scott Calder P.O. Box 75011 Fairbanks, AK 99707 POSITION STATEMENT: Commented on SB 201. ACTION NARRATIVE Tape 97-39, Side A Number 001 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.