Tuesday, March 4, 2008
Provo firm, FranklinSquires, ascribes closure to state probe , Posted by Robert Paisola
Provo firm, FranklinSquires, ascribes closure to state probe
Grace Leong - DAILY HERALD
A Provo company that is being investigated by the Utah Division of Securities has blamed the securities watchdog and the ongoing subprime lending crisis for its recent downsizing move.
FranklinSquires, a business and real estate development company, quietly closed its East Bay office and laid off the remaining 44 of its former 80-plus work force on Feb. 11 -- a move company founder Rick Koerber blames on what he claims is a "malicious and politically-motivated" investigation by the securities division. The division is undergoing a state audit, which began in November, for alleged mismanagement and unfair prosecutions.
Koerber said he is among those who asked for an audit of the securities division after one of FranklinSquires's units, Founders Capital, was implicated in a criminal investigation of a Provo lender, Paul Bouchard, who was recently charged with securities fraud in a real estate scam involving hundreds of investors, most of them in Utah County and southern Salt Lake County area.
Bouchard's company, Hunters Capital, gave unregistered promissory notes to investors in exchange for millions of dollars of their investments, and then gave those funds to Founders, according to the Utah Attorney General's office. Bouchard allegedly told the investors their funds were used to buy and flip homes, but instead, some of those funds were used to make interest payments to earlier investors, court documents said.
"The investigation into Founders is a large reason behind the downsizing," Koerber said. "When Hunters engaged in business that was outside the norm, that taints any company they do business with. Hunters claims they raised money legitimately. But they were raising money from investors that weren't accredited, and that's very disturbing to us."
"The investigation is costing us lots of money. We're also spending between $20,000 and $30,000 a month to pay our attorneys to work with state regulators who've asked us for financial disclosures and information in their investigation of Bouchard and Hunters," he said. "So far, we've not been named in any of the securities division's actions."
Koerber said former Utah Securities Division director Wayne Klein -- who resigned earlier this month amid growing criticism of the division -- had threatened in June 2007 to seize the assets of FranklinSquires and its units including Founders because Koerber had "criticized the securities division of wrongdoing, and Klein had to take action."
But Klein disagreed. "We seek to preserve assets for the benefit of investors if we find any violations."
"We categorically deny that we are responsible for any of FranklinSquires's problems," Klein said. "Anybody who takes money from investors in violation of the law is obligated to repay that money. It's not the division's fault if Koerber is unable to repay the money to investors. And the question is what he did with all the money he took."
Koerber said FranklinSquires's problems were compounded as its real estate subsidiaries, New Castle Holdings and Hill Erickson, faced mounting cash flow problems in the wake of the subprime lending crisis, which affected its ability to make about $98 million in mortgage and lease payments, and other property-related expenses to 170 creditors, Koerber said. That, along with growing state scrutiny of its operations in recent months, caused the company to downsize its operations, he said.
"FranklinSquires has had to pump in $250,000 a month into New Castle and Hill Erickson to keep them running since February last year," he said. Both real estate units have total assets estimated at around $129 million, he said.
Meanwhile, Hunters Capital and Bouchard are now seeking to recover about $17.3 million in funds it had loaned to Founders.
Bouchard, who settled on Feb. 15 without pleading guilty to the criminal charges, was ordered to pay restitution to its 140-plus real estate investors. The amount of restitution is still being decided by federal prosecutors and will be part of his sentence.
"If required, Bouchard may have to sue for enforcement of the promissory note or loan contract between Founders and Hunters in order to meet his obligations to pay back the investors," said Justin Elswick, Bouchard's attorney. "If we are compelled to sue, we will also seek to have (Koerber's) numerous companies stripped of their entity 'veils' to see how they are related."
But Koerber disputed Elswick's allegations.
"In November, I offered them full repayment of their entire investment plus 12 percent interest. In addition, they were also given an opportunity to exchange their note for equity in Founders. But they did not accept either offer," Koerber said.
Elswick said Hunters could not accept the exchange option because of the criminal charges against Bouchard.
Founders, a private equity company that made high-interest short term bridge capital loans to real estate investors and longer-term loans to small businesses and startups, had nine accredited lenders as of Dec. 1, 2007, according to Koerber.
The lenders include Hunters, Matson Magleby, FranklinSquires, AKL LLC, HIJ Investments, McGuire Group, Michael Kipp, MIWE Holdings and Strategic Holdings. Except for Hunters and Matson Magleby, all the other lenders converted what they were owed to equity in Founders, Koerber said.
Klein declined to comment on whether FranklinSquires' downsizing will affect the division's ability to collect restitution for the Hunters' investors.
"Some of the money that Hunters collected did go to Founders, which is run by Koerber. I won't answer at this point if the money has gone to FranklinSquires. If we find violations of the law, we're only allowed to speak of them publicly through enforcement actions," Klein said.
Klein said separate criminal charges have been filed against Poulson Investment of Spanish Fork, SGS Capital of St. George and Prosperity Capital of Eagle Mountain -- which are accused of securities fraud. The companies allegedly solicited up to $785,000 from investors, and gave those funds to Founders, he said.
But Koerber disputed those allegations, saying Founders "has never done business with Poulson, while SGS Capital and Prosperity Capital have never loaned money to Founders."
Koerber, who settled charges of selling unregistered securities with the Wyoming Securities Division in 2000, is the subject of a lawsuit filed in Denver, Colo. on Feb. 18, alleging securities fraud violations and racketeering.
The suit accused Koerber's partner, Gabriel Joseph and his company, Annuit Coeptis, of engaging in a "wide-ranging Ponzi scheme in which they induced students of their real estate instruction programs to use their home equity to invest in promissory notes, and then used the investors' funds to pay the interest or principal of notes sold to earlier investors."
The Colorado suit also claims Koerber and Joseph, a partner in FranklinSquires, paid for their lifestyle with funds obtained through the Ponzi scheme.
But Koerber denied involvement in the Colorado case, saying "the dispute is with Gabriel Joseph."
Annuit Coeptis is also implicated in a lawsuit filed by the Idaho Department of Finance in the fourth district court of Idaho in December. The suit accused Streamline Financial, which is managed by Michael Breinholt, of selling more than $3 million in unregistered securities to investors, and sending those funds to Annuit Coeptis, which in turn sent the money to Founders.
But Koerber denied doing business with Streamline Financial. "Annuit Coeptis did loan money to Founders, but we have no idea if that money came from Breinholt," he said.
LYR Enterprises LLC, a Spanish Fork company that had made loans to Founders for real estate investment purposes, is accused of selling unregistered securities in Alabama, according to a cease and desist action filed by the Alabama Securities Division in January. LYR is owned by a Spanish Fork couple, David and Lesa Ridge.
"David Ridge and LYR in the past had loaned money to Founders. But that money was repaid," Koerber said.
Despite its financial problems, FranklinSquires, which is currently managed by eight owners and six contracted workers, has no plans to file for bankruptcy at this time, Koerber said. Its former 15,000-square-foot office at East Bay is now occupied by another FranklinSquires affiliate, Free Capitalist Enterprises. Other affiliates including Founders Capital, VIP Media, East Bay Studios, and American Founders University are still located in the FranklinSquires building in Provo.