Older investors caught in an alleged $159-million securities fraud got a close look Monday at the man accused of masterminding the scheme, while a federal judge appointed a permanent receiver to liquidate the man's company.
E. Frank Cossey, former chief executive of TLC America Inc. in Brea, sat slightly hunched, clenching his jaw, in federal court in Santa Ana as a standing-room-only crowd of about 60 investors, insurance agents and estate planners measured their chances for recovery.
Cossey is accused of misleading investors and diverting their funds for his own use.
Calling the evidence of wrongdoing "overwhelming," District Judge David O. Carter made permanent his prior appointment of Robb Evans of Los Angeles as receiver and continued a freeze on Cossey's assets. Evans will sell all assets of TLC, which invested in real estate, and return as much as possible to more than 2,000 investors nationwide, whose average age is 67.
The investors, who were promised annual returns of 12% to 15%, had been repaid some funds before the Securities and Exchange Commission moved to seize TLC on Oct. 3. But they still have about $130 million tied up in the company, and Evans predicted "significant" losses, though he wouldn't estimate how much.
Tangled Properties Will Slow Resolution
TLC investments include hundreds of troubled properties being fixed up for resale and raw land under development in Arizona. Evans said it could take years to complete the liquidation. Court filings have valued TLC's holdings at $42 million to $175 million.
Surrounded outside the courtroom by investors and financial professionals who said they marketed TLC investments in good faith, Evans said he will soon start selling property, including $5.5 million in racehorses and racing dogs Cossey allegedly purchased with TLC funds and held in his name.
"The bad news is you'll lose a lot of money," he said. "The good news is you'll get a lot of it back eventually."
He said he will brief investors when he better understands the situation, perhaps in six weeks. Meantime, he said, he will post updates on his Web site, http://www.robbevans.com.
Evans said Cossey would not be allowed to act as a consultant in the company's liquidation, as some professional advisors had urged.
"We'd like to see Cossey complete those [real estate development] programs under court supervision because he knows them better than anyone," contended Hector Serrano, an Encinitas insurance agent who said he had carefully reviewed TLC's investments and is sure they can be profitable.
Serrano and other financial advisors said they were unaware that TLC funds were used for anything except real estate.
Cossey and co-defendant Gary W. Williams, TLC's chief financial officer, refused to testify, invoking their 5th Amendment privilege against self-incrimination. Besides being defendants in the SEC case, they are targeted in a federal criminal investigation by the U.S. attorney's office in San Diego, which is seeking to seize Cossey's $1.2-million home.
Cossey is also accused of spending more than $700,000 of company funds on personal plane charters, of having TLC contribute $1.5 million to his son's high school, and of putting $20 million into what the SEC calls a "prime bank scheme," a separate alleged investment fraud that remains under investigation. TLC's losses on the bank scheme currently appear to total about $5 million, said Thomas A. Zaccaro, an SEC attorney.
Another SEC lawyer, Marianne Wisner, told Carter the government is tracing funds it believes were transferred overseas.
Investors, meantime, were angry. Ann Felter of Buena Park invested her mother's $300,000 nest egg with TLC on the advice of an expert recommended by a nursing home. The idea was to earn enough to pay for the private care needed by her mother.
For a year, the investment returned 14%, and Felter said she reinvested--just shortly before regulators sued the men and halted the operation last month.
"I knew it sounded too good to be true," she said.
If she doesn't have access to her funds, her mother, Sylvia McCully, 86, must be transferred from a Fullerton care facility to a facility that accepts MediCal, the state medical insurance fund for the poor.
"Every penny of my mother's money is invested" with TLC, Felter said. "If I can't pay her rent in the convalescent hospital, they'll move her out in the street."
Investor George A. Ottiniano of Torrance was worried about what would happen to his nephew's insurance settlement. The nephew received $170,000 after a near-fatal traffic accident five years ago and much of the money was invested with TLC.
Evans told Ottiniano that his first job will be fending off the "bottom feeders" he said were sure to emerge, hoping to acquire TLC property on the cheap.
"Our objective is to get top dollar for this," he said. "This is not going to be a fire sale."
Legal Fees Allowed, but With a Caveat
Carter ruled favorably for Cossey and Williams, both 54-year-old Diamond Bar residents, in one matter: He allowed them to use $125,000 each in TLC funds for legal fees. But he allowed the receiver to seek to recoup the funds should Evans later determine that the money comes from investor funds.
Carter also denied Cossey and Williams the use of the frozen funds for living expenses while they defend themselves against the fraud charges.
He declined to continue an asset freeze against a third defendant in the SEC case, Thomas G. Cloud of Atlanta, who is accused of marketing TLC fraudulently through Christian-oriented Internet sites.
The SEC says Cloud claimed to be making nothing from his recommendation when in fact he was paid more than $1 million in commissions. He wasn't represented at the hearing.