October 16, 2005

Laws open door for schemes
'Straw' officers in companies lead to shady deals
By Steve Kanigher <steve@lasvegassun.com>
Las Vegas Sun

Before retired Washington banker Gary Capouch sank $175,000 in a Nevada corporation called Par Three Financial Inc., he checked out the company and came away convinced that it looked like a promising investment opportunity.

What he did not know then, but ruefully learned later, was that a gaping loophole in Nevada law had hidden from him the fact that the company was allegedly being run by an ex-felon previously imprisoned on wire and money fraud.

"Had I known that, there would have been no way I would have touched this deal with a 10-foot pole," said Capouch, who demanded a refund when a fellow investor warned him that Par Three -- billed as a firm that invested in check-cashing and payday loan offices -- was a potential scam. He got $100,000 back, but still is trying to recover the other $75,000.

Far from an isolated instance of an investor being burned in an alleged Ponzi scheme, Capouch's experience is a common one involving companies doing business in Nevada, where lax laws permit corporate operators, legitimate or shady, to hide behind straw officers in public records.

That is possible because state law does not prohibit corporations from having so-called "nominee" officers, individuals with no actual role in the companies who are little more than names on papers that purportedly list firms' top executives.

To some experts, that loophole is one of the major downsides of Nevada's push to become the "Delaware of the West" by easing restrictions on corporations to attract more companies. In its rush to lure more corporations, they argue, Nevada instead has created a perfect environment for white-collar crime.

"It's an incredible loophole and it allowed Par Three to operate," said Barry Minkow, a former white-collar criminal who appears regularly on television as a commentator on Wall Street scandals. "It's a major fraud technique. It allows the perpetrator of an illegal activity to hide his position. I can't believe the laws in Nevada are the way they are."

Minkow is chiefly responsible for Par Three's demise. It was his Fraud Discovery Institute in San Diego that launched the initial probe because of a concerned investor.

Federal and California authorities say ex-felon Melvin Donald Ruth, 64, of Boca Raton, Fla., who served in federal prison for 30 months until his release in December 2003, operated Par Three under the radar of government regulators over the past year and a half. Although the company supposedly was headquartered in Las Vegas, it operated out of Florida, authorities allege.

During that time, Par Three collected more than $8 million from 120 investors nationwide, according to the Securities and Exchange Commission. Advertising in newspapers such as the Los Angeles Times, San Francisco Chronicle and Seattle Times, Par Three operated a password-protected Web site and promised returns on investments of at least 24 percent annually.

The SEC contends that money from newer investors paid interest to original investors, and that Par Three also used investments to pay for a yacht, a Porsche, a Mercedes Benz, jewelry and land in Florida.

The SEC and the California Department of Corporations stepped in after Minkow's outfit found that Par Three was not registered to sell securities, had unlicensed brokers and did not have financial statements prepared by certified public accountants.

In August the SEC convinced a federal court in Florida to issue a temporary restraining order against Par Three and freeze its assets, a week after California issued a cease-and-desist order against the company.

"One of the allegations in the complaint is that Ruth was an undisclosed principal of Par Three," said Nels Mitchell, associate director of SEC's Pacific Region in Los Angeles. "If people knew he was a convicted felon, that would have been a warning to investors."

California's cease-and-desist order stated that Ruth and his cohorts "held persons out as officers of Par Three who had no actual involvement with the company's operations but instead were 'nominee officers' who allowed Par Three to list them as officers for a fee."

The Nevada secretary of state's office does not track the number of nominee officers in its corporate files. And there is no way to determine the extent, if any, to which nominee services are being used by con men who have reasons to dodge public records.

But some Nevada businessmen who offer nominee services hold, at least on paper, hundreds of corporate positions. Topping the list in Nevada is Las Vegas businessman A.T. Mathis of Acorn Corporate Services Inc., who has been an officer or director of 3,990 Nevada corporations, state records show.

Nominee officers have become part of a cottage industry in Nevada.

Executive Solutions Web site highlights the advantages -- to corporate operators, not investors -- of nominee officers.

"Owners of Nevada corporations who wish to remain 'invisible' to prying eyes can achieve something unattainable otherwise," it says. "They can become the man/woman behind the actions, face and voice of the corporation -- like in the movie 'The Wizard of Oz' -- and invisibly control their corporation by using a 'nominee.' By employing a 'nominee,' corporate owners receive total privacy and anonymity protection."

An Internet search found that Nevada, Wyoming and Delaware are the only states where nominee officer services are widely advertised. Not coincidentally, the three states' corporate laws are among the least restrictive in the nation. A nominee officer in Nevada can simply be a name on a piece of paper, which is illegal in other states.

In Florida, a corporate officer must have a role in the operation of the company, said Jay Kassees, director of the Florida Division of Corporations. Kassees said he believes states such as Nevada, Delaware and Wyoming, in their zeal to attract more corporations to generate revenue, have unwittingly set themselves up for potential abuse from white-collar criminals.

"We have enough business in Florida that we don't have to make exceptions to attract corporations," Kassees said. "Your state must need money real bad, and the citizenry doesn't care. Allowing for surrogate officers, I think, crosses the line. States like Nevada are saying, 'Our corporate veil is heavy and if you want to hide behind our veil, go ahead.' "

Nevada officials laud the state's corporate-friendly laws as a way of generating revenue. Through June 30, Nevada had roughly 260,000 corporations and generated $57 million last fiscal year through annual corporate filings. In 1991, when the Legislature approved laws making it easier to incorporate in Nevada, there were about 60,000 corporations that paid $7 million in annual fees.

Renee Parker, Nevada's chief deputy secretary of state, said the office does not have any regulatory authority over commercial recordings.

"We're essentially a filing office," Parker said.

Under state law, anyone who forms a Nevada corporation must file with the secretary of state's office the names of the corporation's resident agent, president, secretary and treasurer. Of those four positions, only the resident agent must be based in Nevada. And the real operators do not have to hold any of those positions.

"We have no way of knowing if someone is a nominee officer or a regular officer," said Scott Anderson, deputy secretary of state for commercial recordings.

As for the number of nominee officers who front Nevada corporations, Anderson said: "We don't have the capacity to verify that."

Charles Moore, securities administrator for the secretary of state's office, said he has voiced concerns to co-workers about the use of nominee officers based on complaints -- both civil and criminal -- from regulators in other states.

Current Nevada law makes it easier for alleged schemes such as Par Three to occur by concealing the identities of a company's true operators. That means that a prospective Par Three investor never could have learned that the company was allegedly run by an ex-felon previously imprisoned for a similar scam.

That was investor Don Scott's experience. A 79-year-old retired publishing and advertising company owner from Sequim, Wash., Scott invested $210,000 last fall on the recommendation of fellow investor Capouch.

Before investing, Scott performed his due diligence. He contacted the secretary of state's commercial recordings division and the Better Business Bureau in Las Vegas. Neither entity reported problems with Par Three, so he assumed the company was legitimate.

But after vacationing in San Diego and watching Minkow during a television interview, Scott, who already had become concerned about oddities with Par Three, contacted Minkow's organization.

"None of the correspondence I got from them was ever signed," Scott said. "They never told me where the stores were that had my investments. I was told over the phone that they had 75 stores all over Texas and California and Florida. But it was just a glorious, embellished Ponzi scheme."

The SEC alleged that Par Three transferred money to Cash Plus Financial Inc., which had 10 check-cashing and payday loan stores in Florida. Ruth had authority over Cash Plus' bank accounts, and Par Three and Cash Plus shared the same office space in Boca Raton, Fla., the SEC stated.

Scott managed to get back $200,000 of his investment but still is seeking the remaining $10,000.

Fellow investors surely would have gone elsewhere had they known about Ruth, who was profiled in 2001 by the Broward-Palm Beach New Times, a Florida weekly, while he was still in Miami's Federal Detention Center.

The publication described Ruth as a "predatory swindler," a career con man who had a 1996 fraud conviction -- for which he was placed on probation for five years -- but managed to beat a string of other charges stemming from nonviolent crimes in Florida. He has used aliases and multiple Social Security numbers.

The FBI arrested Ruth in March 2000 in connection with a $1 million telemarketing scam involving foreign currency exchanges. He was released shortly thereafter to penetrate other boiler room operations as an FBI informant.

That turned out to be a big mistake, according to New Times, because Ruth instead participated in two other boiler room scams in which investors forked over $12 million to fund phony check-cashing businesses.

He was arrested again in July 2001 and sent to prison for fraud.

Shortly after Ruth left prison in late 2003, he became involved with Par Three, hiding his involvement behind the nominee officers, the SEC contends.

Ruth, for whom there is no phone number listed in Boca Raton, could not be reached for comment.

Par Three's latest nominee officer was Donald D. Merritt, a Carson City businessman who has a Las Vegas post office box -- and who, Nevada records show, has held at least 1,480 corporate positions with 758 Nevada companies over the years.

Merritt's Par Three predecessor was lawyer Michael L. Potter, who also is general counsel of Nevada Corporate Headquarters Inc. in Las Vegas. Typifying the overlapping relationships and the frequency with which the same individuals or companies often are linked in these matters, NCH also served as Par Three's resident agent.

Potter, who has been affiliated with 1,268 corporations, said he intended to serve as Par Three's nominee officer for only 30 days -- from December 2003 through January 2004 -- while the company selected more permanent officers. When that did not happen, he resigned.

"I had nothing to do with the company," Potter said. "I'm an innocent party who tried to do a simple service and it got me burned by the customer." Potter said he was unaware that Merritt listed in state records the same Las Vegas post office box that he had used.

Derek Rowley of Reno, president of the Nevada Resident Agent Association, said he expressed concerns to fellow resident agents about nominee officer services after Congress passed the controversial Patriot Act, which gave law enforcement agencies broader authority to conduct investigations related to terrorist activities. It is believed that the Patriot Act makes nominee officers more liable for corporate wrongdoing, a reason Rowley said some resident agents have dropped their nominee officer services.

Rowley, who frequently lobbies the Nevada Legislature, said he is willing to propose that the 2007 Legislature outlaw nominee officer services so long as it can be done without harming other services provided by resident agents.

"There is too much potential to bring a black eye to the Nevada corporation market, which is not good for our industry," Rowley said.

Assembly Majority Leader Barbara Buckley, D-Las Vegas, who is in line to become Assembly speaker in 2007, said she is willing to address the nominee officer issue.

"Nevada has passed more and more laws to become the Delaware of the West," Buckley said of corporations. "This type of situation can serve as a wake-up call that we like their business but not if it's going to deceive people. I don't think Nevada wants to be a haven for crooks."

Steve Kanigher can be reached at 259-4075 or at steve@lasvegassun.com.

__________________

U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19348 / August 25, 2005
SECURITIES AND EXCHANGE COMMISSION v. PAR THREE FINANCIAL, INC. and MELVIN D. RUTH, Case No. 05-807 (S.D. Fla.)
SEC HALTS MULTI-MILLION DOLLAR ONGOING SECURITIES FRAUD INVOLVING PURPORTED LENDING PROGRAM

The Securities and Exchange Commission ("Commission") on August 25, 2005, obtained a temporary restraining order halting an ongoing securities fraud by Melvin D. Ruth, age 64, of Boca Raton, Florida, and an entity that he controls, Par Three Financial, Inc., a Nevada corporation operating in Boca Raton, Florida. The Commission's complaint, filed today in United States District Court in Miami, alleges that, since approximately November 2003, the defendants have sold more than $8 million in securities in connection with a purported program to lend monies to check cashing/payday loan stores. The defendants represent that Par Three loans money to these check cashing stores at rates of interest sufficiently high to allow it to pay its investors returns of 2% per month or more.

The complaint alleges that, in reality, Par Three is not profitable and is operating an undisclosed Ponzi scheme-using new investor monies to make the interest payments to existing investors-in violation of the federal securities laws. The complaint further alleges that the defendants have misappropriated investor funds to purchase a yacht, automobiles, jewelry, and several parcels of real property, and to make undisclosed payments to sales agents. In addition, the complaint alleges that the defendants failed to disclose that Ruth is a control person of Par Three and that, in 2000, Ruth was convicted of a felony in connection with an investment scheme substantially similar to the Par Three scheme. Finally, the complaint alleges that the defendants engaged in an unlawful unregistered securities offering by selling Par Three's securities to at least 120 investors nationwide through advertising in newspapers and Internet publications.

Acting on the Commission's lawsuit, the Honorable Linnea R. Johnson, United States District Judge for the Southern District of Florida, granted the Commission's application for a temporary restraining order against the defendants and issued orders freezing the defendants' assets, appointing a temporary receiver over the assets of Par Three, prohibiting the destruction of documents by the defendants, granting expedited discovery, and requiring accountings from the defendants. The Court appointed Michael I. Goldberg, Esq. as the temporary receiver. The Court ordered the temporary restraining order and asset freeze to remain in effect until September 6, 2005. The Court will determine the date that it will hold a hearing on the Commission's motion for a preliminary injunction and appointment of a permanent receiver at a future time. In addition to emergency relief, the Commission's complaint seeks from each defendant preliminary and permanent injunctions, disgorgement with prejudgment interest, and a civil penalty.

The Commission's complaint alleges that the defendants violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act.

SEC Complaint in this matter

http://www.sec.gov/litigation/litreleases/lr19348.htm

__________________

__________________