A new report from the State of New Hampshire looked at how a hard-money lender and a mortgage servicer colluded to carry out a Ponzi scheme by misleading investors, auditors and regulators.
Financial Resources & Assistance of the Lakes Region Inc. was incorporated in New Hampshire in May 1989 by Scott Farah, according to findings of fact released Monday by New Hampshire Secretary of State William Gardner. While the company initially had four directors, including Farah’s father, by 1992 Farah was the sole director.
The company had been licensed since 1997 in New Hampshire as a first- and second-mortgage banker and mortgage broker.
In June 2007, the company registered the trade name “Financial Resources National.” Later that year its corporate name was changed to Financial Resource National Inc., and that was followed in October 2008 to another name change — this time to Financial Resources Mortgage Inc.
Financial Resources acted as a hard-money lender, obtaining capital from individual investors who were solicited by “false, misleading and deceptive” direct mail marketing. Once an investor called, they were given access to a Web site with data about available loan packages. Many of the victims were lured by “extremely persuasive” informational packages.
Investor-victims who performed varying degrees of due diligence found no regulatory actions against Financial Resources or complaints about the company online.
Their investments ranged from $200,000 to $2 million. Most said that they trusted Farah — who told some to fund their investments from self-directed IRA accounts.
Investors were promised one year’s interest before they closed the loan — believing that the up-front fee was funded through points. But the funds were actually taken from other investors in a classic Ponzi scheme.
They were provided with monthly reports on the loans.
Also in on the scheme was CL and M Inc., which was incorporated in Nevada in June 2005 by Donald Dodge. CL&M’s was a mortgage servicer, though it never registered with New Hampshire as is required by law.
According to the state, CL&M served as a “conduit for lender-advanced funds into what proved to be non-earmarked, commingled accounts that became the Ponzi scheme.”
In June 2005, CL&M provided Farah with a $10 million line of credit — though borrowed funds eventually exceeded $20 million. Funding for the line was taken from the lender-advanced funds accounts — which were supposed to be segregated.
Financial Resources hid the illegal activity from its auditors through two sets of books by portraying the funds from the line of credit as income instead of liabilities. When the auditors contacted Dodge, he didn’t let on that the money actually came from credit lines.
“It was all an illusion,” Farah reportedly testified.
Another company, Dodge Financial Inc., was incorporated in New Hampshire during 1989 to simultaneously originate a loan with multiple lenders. And another firm, Greatland Project Development Inc., acted as a mortgagee when multiple investors were involved in a loan.
The New Hampshire Department of Justice was first tipped off about possible criminal activity in October 2005 then again in May 2006. But, according to the report, no action was taken.
Things began to fall apart in 2007, as subprime lending disappeared and borrowers were unable to refinance their balloon payments.
As the situation grew more desperate, Farah leaned on prior investors to put up more dough.
Both Financial Resources and CL&M stopped doing new business on Nov. 6, 2009, and closed down. Involuntary bankruptcy followed two weeks later for both firms.
Farah was sentenced in January to 15 years in prison, while Dodge was sentenced to six years.
