The Enablers of the Fraudsters, Part I

Insolvency, Regulatory 01 Sep 2015

fraudsterI recently discussed with Attorney Wes Christian a lawsuit in Broward County against Signature Bank and related parties, one that alleges fraud, breach of fiduciary responsibility, conspiracy, etc.

Christian is working these days for a group of plaintiffs suing Signature Bank N.A. and related entities, importantly including Barry Florescue and William Landberg.

Landberg – the fellow portrayed above – was the principal of the fraud the plaintiffs allege. The others are charged with aiding, abetting, and conspiring with Landberg to cheat his clients out of millions of dollars.

Landberg is at present residing at the U.S. Prison Camp in Lewisburg, Pa., having pled guilty to securities fraud in 2011. Landberg, through his alter egos, West End Financial Advisors LLC and West End Capital Management, and other bodies collectively known in Christian’s complaint as the West End entities, allegedly misled investors into thinking their money was safely and productively employed to the end of producing a steady stream of income. Indeed, he commonly told investors that he was investing mostly in blue chip corporations.

Keeping Up a Lie

In fact, Landberg employed risky and speculative trading strategies that failed. As they failed, he struggled to keep up the lie that everyone’s money was safe, and he did all the things that unscrupulous managers in such situations generally do to preserve that illusion. The bag of tricks included the use of fraudulently obtained bank loans to make distributions to investors; thereby (as the SEC put it in a complaint in 2011) “sustaining the illusion that West End’s investments were performing well.” Thus, what began as a genuine though poorly managed investment fund became over time a blatant Ponzi scheme.

Christian sees Signature Bank as having been an enabler of this transition into Ponzi world.

“Signature had knowledge of Landberg’s scheme from at least April 2008 when Signature first allowed funds to be transferred [from an interest reserve account] with full knowledge that the transfer was impermissible,” the complaint charges. Further, not only did Signature fail to stop the Ponzi scheme as it developed, Signature continued it, leading the lambs to slaughter so to speak, “actively taking more of Plaintiffs’ money into the bank after having knowledge of the wrongful and illegal actions taken by Landberg.”

Barry Florescue was a director of Century Bank, and in that capacity the complaint alleges that he “aided and abetted and conspired with Landberg to use over $1,000,000 of Plaintiffs’ funds to support” that entity, “which failed and was subsequently seized by the government.”

As this case moves forward, one lesson of it may prove to be: don’t over-rely on a blizzard of different corporate designations to obscure the economic realities. The realities usually become clear. This complaint specifies, for example, that despite “the limited partnerships that purportedly pursued different investment strategies and had different investors, Landberg unlawfully managed and controlled, de facto, each of the entities on a day-to-day basis, indiscriminately using employees of one entity to perform functions for various entities.”

Sloppy Penmanship, Signature

The bank, Signature, allowed the accounts of many of the West End entities to remain overdrawn for extended periods, and allowed the shuffling of fund in a way that should have raised alarms.

As usual in the 21st century, there is a cyber-trail rather than a paper trail, a trail of emails.

On February 8, 2005, Landberg wrote to Chris Efstratiou, one of his main contacts within Signature, “Please move $511,000 from amaganasett realty to l.c. family lp. Then take 25,000 from l.c. to cover Louise’s [overdraft]. Thanks.” Louise Landberg was William Landberg’s wife.

By December 2007 such shifting-around must have seemed routine. Between Christmas and New Years’ Eve, Efstratiou emailed Landberg that one of his accounts “has been overdrawn for 76 consecutive days and must be covered.” Not to worry, though, it would be: “Charlie [Liggio] has suggested that we move the funds from the 1500216731 account to cover the overdraft, and we will do so unless we hear back from you by 11am today.”

On June 2, 2008, Landberg wrote again to Efstratiou, one of his main contacts at Signature, “I have $2 million in a reserve account and I am not supposed to touch it. It is the interest reserve on the hard money fund….:” So he knew what he wasn’t supposed to “touch,” but proceeded to touch it.

Of course a complaint only begins an action. But this complaint is symptomatic, I submit, of the new level of scrutiny to which a large number of actual or potential enablers of fraudulent activity may be held in the years to come, both by private litigants and by public agencies. In a forthcoming follow-up, I hope to discuss the law behind this lawsuit.

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