The U.S. Attorney’s Long Island office has filed two indictments against seven defendants in 2 cases related to a bankrupt online mortgage lender. Filed in the U.S. District Court, Eastern District of New York, the indictment accuses the defendants of deceiving investors and warehouse lenders, manipulating the publicly traded shares of bankrupt AppOnline.com, Inc. and using warehouse funds — intended for loan fundings — for daily operations.
Previously known as Island Mortgage Network Financial Corporation, the publicly traded company’s “chief venture” was Island Mortgage Network, Inc. a retail residential mortgage banker with more than 50 offices in 17 states by June 2000. According to the indictment, the company changed its name to AppOnline.com in 1999.
The defendants named in the first case are Carl Delia, Donald Catapano and Craig Brandwein, each a registered representative; and George Carhart & Rocco Siclari, undisclosed principals of a New York broker-dealer where defendant Ashley Nemiroff served as president and trader.
Paul Skulsky — named as a coconspirator in the case but not as a defendant — was an undisclosed principal of AppOnline.com who owned his interest through two corporations. USA Today reported in July 2000 that Skulsky served four years in prison for tax evasion, mail fraud and racketeering in connection with a cable TV company called Cable/Tel, according to public records. His brother, Jeff Skulsky, was president of AppOnline.com.
The U.S. Attorney alleges that “a principal goal of the coconspirators was to manipulate” the share price of AppOnline.com “so that it would remain artificially high.” Some of the defendants are accused of accepting substantial undisclosed payments — in the form of cash, securities and other items of value — as compensation for recommending and selling the stock to investors. According to the indictment, the secret payments were often as much as 50% of the price of the securities involved.
Several companies were allegedly used by the defendants to hide their ownership.
A separate indictment was filed against Jeffrey Schneider, a CPA and auditor accused of using “a number of misleading accounting entries” to hide AppOnline.com’s true financial condition. Schneider was extensively involved in the accounting work for AppOnline.com, according to the indictment, and eventually maintained an office at the company.
That indictment accuses AppOnline.com of directing warehouse lenders — including Residential Mortgage Services, Prudential Securities Credit Corp. and Greenwich Capital Financial Products — to wire mortgage funding proceeds to escrow accounts secretly controlled by AppOnline.com and its principals. The company was able to use warehouse proceeds from one loan to make up the “haircut” — or two percent of the loan that it was supposed fund — on other loans. It also allegedly used the warehouse proceeds to illegally fund its operating expenses.
The indictment said that eventually, the company began falsely representing that loans were ready to close. If the loan did not close within five days, AppOnline.com would go to another warehouse lender to fund the loan and payoff the previous warehouse lender. By June 2000, the company had $37 million in outstanding loans due and needed $30 million to cover outstanding checks. At that point, AppOnline.com’s primary warehouse lender shut down the line. This was followed by a revocation of its license by the New York State Banking Department and a Chapter 11 bankruptcy petition.
A July 2000 Specialty Lender Weekly article said that at that point, the company had collected fees from consumers in connection with roughly $150 million in loans that had yet to close. That story went on to say that AppOnline.com’s acquisition strategy suggested that it had been urgently chasing cash or cash-ready assets. In just over a year, the company reportedly made nine acquisitions, primarily of small mortgage banks that do only originations.
The second indictment went on to say that Schneider’s accounting improprieties enabled AppOnline.com to provide financial statements to the Securities and Exchange Commmisiion and to its warehouse lenders that allowed it to remain in business far longer than it would have with legitimate financial statements. The warehouse liabilities were disguised in the financial statements as a payable to a related party. This debt, which ultimately grew to approximately $47 million, was partially offset by the issuance of more than 18 million shares of AppOnline.com’s stock.
A Long Island, N.Y. Internet advertising company filed a lawsuit against CNN analyst Courtney Smith (among other defendants) for “talking up” AppOnline.com’s stock when he allegedly had a stake, according to an article in the New York Law Journal earlier this year. Cyber Media reportedly asserts that it agreed to a sale of the company to Apponline.com in a stock-for-stock purchase agreement after Apponline.com principals directed Cyber Media officers to watch a CNN program in which Smith said that Apponline.com was a “double your money stock.” The article said Cyber Media alleged that Smith was an officer in the venture capital fund Inculab, whose stock was directly tied to Apponline.com, and that he benefited from the “double your money stock” statement.
