Two former Orange County residents plucked by police from palatial Costa Rican homes on May 13 face extradition and an 83-count U.S. indictment charging them and seven others with running a complex international Ponzi scheme that defrauded investors of nearly $60 million.
Using the funds of some investors to pay "returns" to others and to finance lavish lifestyles, organizers of the scheme -- called the Genesis Fund -- took in more than $80 million between 1998 and 2002 while generating little, if any, profit, prosecutors say.
"They were marketing this as a private offshore fund outside the scrutiny of regulators like the IRS," said Nanette Davis, an attorney with the U.S. Justice Department's tax division who helped prepare the indictment. "All an investor had to do was follow the 'too-good-to-be-true rule' to avoid being duped."
Arrested were John S. Lipton, 58, formerly of Mission Viejo and Laguna Hills, principal manager of the fund; and Victor H. Preston, 64, a fund founder who lived in Huntington Beach and Laguna Beach while the venture operated out of Orange County.
Lipton and a third defendant, fund manager Richard B. Leonard, 71, formerly of Littleton, Colo., were taken into custody at the coastal resort town of Tango Mar. Preston was arrested at his home in San Jose, Costa Rica.
Others were arrested in Southern California, including David L. Johnson, 66, a Genesis Fund manager whose four-bedroom, six-bath home in Walnut was assessed at $1.8 million, and allegedly was bought with investor money. The 5,910-square foot home is being sought under federal forfeiture laws, as is Lipton's.
The arrests made headlines in Costa Rican newspapers. The men allegedly had been lured to the Central American country because of its stability and its sizable American expatriate population.
The Genesis Fund's collapse was notable because of the amount of money involved and the far-flung nature of its investors and defendants, investigators said.
During its eight-year run from 1994 to 2002, the fund took in nearly $100 million, leaving investors with losses of between $57 million and $60 million, prosecutors said. From 1998 until the fund collapsed, much of the money was used to pay new investors and to "personally enrich the defendants," according to the indictment.
Along the way, the fund used seven allegedly bogus entities -- including several incorporated in tiny Caribbean island nations -- to falsely assure investors that their money was being safely managed in foreign currency markets. They were told that their investments needn't be reported.
The 86-page indictment weaves a tale of fund managers playing financial hide-and-seek, hop-scotching across countries in a plot worthy of a John Grisham novel.
Problems began in May 1998, when an unnamed former Genesis Fund manager sued six of the defendants and others in Costa Rica and Ireland for refusing to honor withdrawal requests. The courts issued an injunction and ordered the fund to maintain at least $5 million in liquid assets.
Until then, the group had completed some currency transactions through a company based in Hong Kong and Macau. Those ceased following the court order, the indictment alleged, and money collected after May 1998 was diverted to cover company expenses, pay interest to new investors and purchase property, including several homes.
New investors drawn from among friends and relatives of fund managers were encouraged to invest at least $100,000 for 10 years to get a greater share of "profits." Withdrawal requests required 18 months' notice, but lenders were enticed by promised returns of 3% to 4% a month.
In September 1999, company assets were moved from a Wells Fargo bank in Laguna Beach to Costa Rica, then moved again to Hong Kong in November 2001, according to the indictment. In April 2000, 19 boxes of company records already requested by a federal subpoena were moved from one defendant's Anaheim home to an unnamed Costa Rica attorney, the indictment alleged.
In June 2002, weeks after assuring investors that the fund had $1.3 billion in assets, company principals announced they were suspending all investments, trading and payments by the Genesis Fund. Investors were told that their equity was protected and would be available later -- an empty promise, prosecutors said.
Also arrested were fund managers Teresa R. Vogt, 51, of Anaheim; William H. Nurick, 69, of Camarillo; Denise Taylor-Frazer, 51, and William Taylor-Frazer, 57, of Riverside. A ninth defendant, Marlyn D. "Milt" Hinders, 65, allegedly a leading promoter of the Genesis Fund who lived in Aurora and Parker, Colo., and later Mexico, is being sought.
The nine defendants were charged with conspiracy, obstruction, mail fraud, wire fraud, money laundering, tax evasion and failure to pay taxes. The overseas arrests were coordinated through the Costa Rican Judicial Police and Interpol, investigators said.