BULLETIN: Minnesota Ponzi Scheme Bilked Banks Of $80 Million, Feds Say; Corey N. Johnston Charged With Bank Fraud, Tax Crime

Another spectacular Ponzi case has emerged in Minnesota just months after federal prosecutors charged Trevor Cook in an alleged $190 million scam and Tom Petters was convicted in a $3.65 billion scam.

Charged in a new scheme today was Corey N. Johnston of Lakeville, a Minneapolis suburb. The Minneapolis/St. Paul region also is the home base of the Cook and Petters’ cases, and a number of smaller cases.

Johnston is charged with fleecing banks on loan deals through a company known as First United Funding (FUF). Prosecutors estimated losses at $79.5 million, describing the crime as a “loan participation” scheme in which Johnston oversold interests in the same loan to multiple banks.

Loan participation is a practice in which a bank pays an original lender all or a portion of a
particular loan and then assumes that loan, along with its associated risk.

“Johnston’s alleged scheme involved selling more than 100 percent participation in at least
ten different loans arranged through FUF,” prosecutors said. “In each instance, Johnston
failed to disclose that the total participation exceeded 100 percent of the original loan, making it impossible for the participating bank to receive the full amount of money expected.”

On one deal involving a project known as White Out Way Investments, Johnston sold 100 percent participation to Western National Bank, prosecutors said.

“At the same time, however, he allegedly convinced several other banks to participate in the loan, including 100 percent participation by The National Bank in Bettendord, Iowa, as well as partial participation by four other lending institutions. In all, Johnston purportedly solicited and received $23.65 million from six banks for the $7 million loan.”

In a second deal for a project known as JM Land Development II, Johnston once again targeted Western National, selling it 100 percent participation.

“Simultaneously, however, he reportedly obtained full loan participation from Choice Financial, The National Bank, and Hillcrest Bank, along with partial participation from four other banks,” prosecutors said. “Johnston allegedly solicited a total of $38.65 million for an $8 million loan.”

Johnston was charged with filing a false tax return amid allegations he failed to report his fraudulent income and underpaid his taxes in 2005 by nearly $509,000, prosecutors said.

All in all, the scheme ensnared 17 lenders, prosecutors said.

“Johnston used some of the proceeds of the fraud to repay other loans and perpetuate the scheme,” prosecutors said. They added that he “reportedly diverted some of the fraud proceeds for his personal use as well as for use by family members.”

Cook pleaded guilty in April and is awaiting sentencing. On Wednesday, the court-appointed receiver in his case announced that federal agents had found more than $400,000 in loot from the scheme July 23, months after Cook had been ordered to reveal the whereabouts of assets to investigators. The loot allegedly was in the control of Graham Cook, Trevor Cook’s brother.

Trevor Cook was jailed in January for contempt of court after a federal judge ruled that Cook had disregarded an order designed to preserve assets for victims.

Petters was found guilty in December and sentenced in April to 50 years in federal prison. He is appealing the sentence. The Petters’ fraud is believed to be the largest in state history and one of the largest in U.S. history.

In February, the U.S. Secret Service seized about $26 million from bank accounts related to INetGlobal, a Minneapolis-based autosurf firm. INetGlobal is under investigation amid allegations it was operating a Ponzi scheme.

In November 2009, Gerard Frank Cellette Jr. was implicated by prosecutors in an alleged $53 million Ponzi scheme in Minnesota. In April — on the very same day Petters was sentenced — a federal judge froze the assets of Renee Marie Brown after the SEC accused her of ripping off clients by persuading them to invest in a mysterious vehicle known as “Fund X.”

Brown also lives in the Minneapolis region.

Other recent fraud cases in Minnesota included the Charles “Chuck” E. Hays case ($20 million), and the Kalin Thanh Dao case (up to $10 million).