N.Y. Resort Owners Charged With $96 Million Ponzi FraudChristie Smythe
A money manager and a real estate developer already facing a regulator’s fraud lawsuit were charged with running a $96 million Ponzi scheme and diverting the proceeds to their New York beachfront resort.
Brian R. Callahan, 43, and his brother-in-law Adam J. Manson, 41, were charged in a 24-count indictment unsealed today in federal court in Central Islip, New York. They pleaded not guilty and were released on bond.
The men are accused of telling investors that their money was going into hedge funds and other investment vehicles while actually much of it was going to the unprofitable 117-unit Panoramic View Resort & Residences in Montauk.
“The defendants used one of Long Island’s landmarks, the Panoramic View Resort, to perpetrate a wide-ranging fraud,” U.S. Attorney Loretta Lynch said today in a statement about the scheme, which purportedly took place from 2006 to 2012 and involved more than 40 investors. “To conceal their status as business failures, the defendants employed all the tricks in the typical con man’s bag.”
Callahan, of Old Westbury, and Manson, of New York, were partners in Distinctive Ventures, a real estate investment firm that purchased the resort in January 2007 for about $38 million, according to the indictment. Callahan, a former securities broker who was sanctioned by regulators in 2009, was also managing a group of offshore investment funds, for which he was soliciting money from investors, the U.S. said.
The funds at issue managed by Callahan include Pangea Offshore High Yield Portfolio LLC, Diversified Global Investments, Horizon Millennium Investments LP and Masters Global Fund LP.
Callahan used investor funds to cover part of the purchase price of the resort and also dipped into the money to help make loan payments for the property, according to the indictment. He drained more of the funds and continued to seek other investors as the property failed to generate enough income to pay its debts, according to the indictment.
Prosecutors alleged the men sent investors fake account statements and repaid them with some of their own money to keep the scheme afloat. Callahan also misled an auditor by creating bogus documents and impersonating some investors using a fake e-mail account and a forged signature, the government said.
In March 2012, Callahan was sued by the U.S. Securities and Exchange Commission over the alleged fraud. Manson was later added as a defendant in the suit. That case is pending.
Manson is accused of defrauding the New York-based lender that provided the men with a $45 million loan for the property. The lender isn’t identified by name in the indictment.
“Callahan gave his word that he would invest his clients’ funds safely and responsibly in established vehicles,” Lynch said in the statement. “Instead, he simply stole the funds to prop up his partner’s failing investment.”
Both men are charged with conspiracy to commit securities fraud, conspiracy to commit wire fraud, securities fraud and wire fraud. Callahan is also charged with aggravated identity theft. They face a maximum of 20 years in prison if convicted of securities fraud, wire fraud or conspiracy to commit wire fraud, according to prosecutors.
The defendants pleaded not guilty in Central Islip, said Robert Nardoza, a spokesman for Lynch. Manson was released on a $1 million bond and Callahan was released on a $2 million bond, he said.
The government said it seized more than $1 million in proceeds from the alleged scheme and is seeking the forfeiture of interest in the resort. Distinctive Ventures still owns the resort, according to its website. A representative who answered a phone number for the resort declined to give any comment.
In its complaint, the SEC said both Callahan and Manson asserted their Fifth Amendment privilege against self-incrimination when asked about the scheme during an investigation. U.S. District Judge Arthur Spatt in Central Islip has issued an order freezing some of Callahan’s assets and the funds he managed.
“It’s unfortunate that the government decided to escalate it,” Robert Anello, a lawyer for Manson, said in a phone interview today.
A lawyer for Callahan, Robert Knuts, didn’t immediately respond to a call and e-mails seeking comment on the charges.
The criminal case is U.S. v. Callahan; the civil case is Securities and Exchange Commission v. Callahan, 12-cv-01065, both in U.S. District Court, Eastern District of New York (Central Islip).