August 10, 10

NEWS / Lakeville Man Charged with Operating $80 Million Ponzi Scheme with Bank Money

A 40-year-old Lakeville man was charged earlier today in federal court in the District of Minnesota with operating a Ponzi scheme that resulted in a total estimated loss of $79.5 million for 17 lenders. Corey N. Johnston was charged via an Information with one count of bank fraud and one count of filing a false income tax return in connection to this crime.

The Information alleges that Johnston conducted the scheme from 2005 through March of 2009. The scheme purportedly involved overselling participation in large commercial and personal loans arranged by him through his company, First United Funding (“FUF”). Loan participation is a common 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. From that point on, the bank receives the loan payments from the borrower, as if the bank had made the loan in the first place. Johnston’s alleged scheme involved selling more than 100 percent participation in at least ten different loans arranged through FUF. In other words, he purportedly sold loan participation to banks after already selling that same participation to other banks. 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.

For example, Johnston allegedly oversold loan participation for a project known as White Out Way Investments. The original White Out Way loan, arranged through FUF, was for $7 million. Johnston reportedly sold 100 percent participation in that loan to Western National Bank. 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 addition, Johnston allegedly oversold loan participation for a project known as JM Land Development II. The original JM Land Development loan was for $8 million, and once again, Johnston sold 100 percent participation in the loan to Western National Bank. 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. Johnston allegedly solicited a total of $38.65 million for an $8 million loan. According to the charging document, six additional lenders also were defrauded during the course of this scheme, through overselling participation in other loans.

According to the Information, Johnston used some of the proceeds of the fraud to repay other loans and perpetuate the scheme. Moreover, he reportedly diverted some of the fraud proceeds for his personal use as well as for use by family members. Furthermore, Johnston allegedly failed to report the fraudulent income on his 2005 federal income tax return. That failure resulted in an underpayment of taxes to the United States of approximately $508,905.

If convicted, Johnston faces a potential maximum penalty of 30 years in prison on the bank fraud charge and three years on the charge of filing a false income tax return. All sentences will be determined by a federal district court judge.

This case is the result of an investigation by the Federal Bureau of Investigation, the Internal Revenue Service-Criminal Investigation Division, and the Federal Deposit Insurance Corporation. A receiver was also appointed by the Hennepin County District Court. The case is being prosecuted by Assistant U.S. Attorney Robert M. Lewis.

http://minneapolis.fbi.gov/dojpressrel/pressrel10/mp080610.htm

Tags: criminal investigation, document, corporation,