Posted on 26 Jan 2009
By Jean Ortiz
January 23, 2009
An alleged Ponzi scheme by a Grand Island insurance agency that recently filed bankruptcy listing more than $100 million in debt is being investigated.
Attorney General Jon Bruning this week authorized the State Patrol's investigation into First Americans Insurance Service and its three principals: James Masat, Stella Levea and Kenneth Mottin -- all of Grand Island. The patrol is working with the departments of insurance and banking to piece together how more than $100 million disappeared -- with Bruning believing some of it may have been paid out to other investors.
A loss of that magnitude indicates there may be criminal activity involved, Bruning said.
"This seems to have many characteristics of a Ponzi scheme,'' Bruning said.
A Ponzi scheme, or pyramid scheme, is a scam in which people are persuaded to invest in a fraudulent operation that promises unusually high returns. The early investors are paid their returns out of money put in by later investors.
Bob Craig, an attorney representing First Americans in the bankruptcy case, said it's easy to label it a Ponzi scheme, but he's not ready to call it that.
"It appears to me that what it is is borrowings that got out of hand,'' he said.
As the interest rates given to investors rose, that put a squeeze on cash flow and ultimately the agency's ability to pay back investors, he said.
First Americans filed for Chapter 11 bankruptcy protection on Jan. 12, claiming between $100 million and $500 million in liabilities. Craig said the principal liabilities are closer to $104 million, but that figure could rise if claim holders seek interest.
The filing lists more than 200 creditors, with the top 20 including mostly individuals and couples from Nebraska. Individual creditors from Montana and Georgia also made the list.
Assets were estimated at $1 million to $10 million, according to the filing.
The Department of Insurance has also begun the process to revoke the insurance licenses of Masat, Levea and Mottin.
Last Friday, the Department of Banking and Finance ordered First Americans and its officers and agents to immediately stop selling more promissory notes.
That order said that from 1998 to 2006, the agency filed a notice with the department claiming an exemption from the registration requirements of the Securities Act of Nebraska. In 2007, the agency agreed to stop selling promissory notes, other than renewing those that already existed, until it resolved matters raised by the Department of Insurance.
That involved the sale of a related agency called CBS Insurance that involved one or more of the principals, said Ann Frohman, director of the Department of Insurance. That examination determined there were no insurance issues, she added.
Earlier this month the Department of Banking learned the agency sold a $50,000 note to a Kansas resident and at least three other notes to Nebraska residents between October 2007 and November 2008. From October 2007 and on, the principals failed to register the securities in Nebraska, and failed to file for an exemption from registering, according to the order.
The order names Levea as the agency's president, treasurer and director; Masat is vice president, secretary and director and Mottin as well is named a vice president.
Phone messages left at the agency's Grand Island office for all three was not immediately returned.
The agency, incorporated in 1980, touts services to American Indian tribes in more than 20 states on its Web site: "Long before corporate America took notice of tribal organizations and businesses -- First Americans Insurance Service was dedicated to preserving the sovereign culture of Native Americans.''
Bruning said it's interesting that First Americans said it needed capital to shore up its reserves. "That makes sense if you're an insurance company, not an insurance agency,'' he said. "But I'm not sure how they were holding themselves out.''
This was an agency insisting it needed capital, and that was the scam, Bruning said.
Lloyd and Jean Johnson of Genoa are listed as the second-largest investors, investing more than $3.8 million with First Americans, according to bankruptcy filings.
Jean Johnson said that payments had been coming regularly, until December. She said she and her husband had invested with First Americans since the 1990s. She declined to comment further.
Investors with questions or complaints can call the Nebraska Department of Banking and Finance at 402-471-2121 or its toll-free consumer number at 877-471-3445. Insurance customers with questions should contact the Nebraska Department of Insurance on its toll-free consumer hot line at 877-564-7323.
First Americans' bankruptcy attorney, Craig, said his objective is to stabilize the agency. And while bankruptcy documents indicate there will be money to repay some creditors, Craig couldn't say to what extent that might happen.
"I know of nothing to suggest they'll be able to pay back the debts that are on the books,'' he said.
If investigators find that the agency engaged in a $100 million Ponzi scheme, it would be one of the largest in U.S. history. The largest such scheme is being investigated and allegedly involved New York investor Bernard Madoff, whose clients have claimed losses of $50 billion.