It is highly unlikely that such efforts to
eliminate private control of Nevada corporations will succeed because it is,
after all, no accident that Nevada’s corporate laws have developed as they have
over the last 80 years. Big-money
interests have caused Nevada’s corporate laws to develop as they have because
those interests need a place to do their own business privately. But they sure don’t want the “little guy” to
be able to avail himself of the same protection. In the end, articles like the one below can serve to sully the
image of Nevada corporations and perhaps that is all that is intended.
Fraud is fraud, Ponzi schemes are Ponzi schemes,
dirty dealing is dirty dealing—but individuals lacking integrity work their
schemes with or without private Nevada corporations. Anyone investing money in any business, anywhere, really ought to
do their due diligence properly to avoid being scammed.
There is a risk to offering contract
officers-and-director services, a risk which might not be covered by the very
nominal fee of $200 per year currently charged for such services, and that may
be the primary reason why so many incorporation-services companies in Nevada
have either raised their fees for such services to much higher levels or
dropped such services altogether.
For now, Budget Corporate Renewals, Inc. will
continue to offer contract officers-and-director service at truly Budget
prices, in the hope and expectation that potential liabilities as described
below arising out of the Patriot Act are not realized to the extent that
an individual acting as a corporation’s officers and director could or would be
turned into a criminal without mens rea, a criminal mindset.
In all fairness, we present the article by Steve
Kanigher of the Las Vegas Sun in its entirety below, with our comments
inserted in square braces and bold italics.
[QUOTING, emphasis added:]
By Steve Kanigher <steve@lasvegassun.com>
Las Vegas Sun, 10/16/05
Before retired Washington banker
Gary Capouch sank $175,000 in a Nevada corporation called Par Three Financial
Inc., he checked out the company and came away convinced that it looked
like a promising investment opportunity.
What he did not know then, but
ruefully learned later, was that a gaping loophole in Nevada law had hidden
from him the fact that the company was allegedly being run by an ex-felon
previously imprisoned on wire and money fraud.
“Had I known that, there would
have been no way I would have touched this deal with a 10-foot pole,” said
Capouch, who demanded a refund when a fellow investor warned him that Par
Three—billed as a firm that invested in check-cashing and payday loan
offices—was a potential scam. He
got $100,000 back, but still is trying to recover the other $75,000.
[We shall see, below, how well
this banker ‘checked out the company’ in which he invested his money.]
Far from an isolated instance of
an investor being burned in an alleged Ponzi scheme, Capouch’s
experience is a common [One example is given. If it is so ‘common’, could not the writer
have quantified how ‘common’ it is or at least provided a wealth of such examples? Is it any more common than frauds and alleged
(not demonstrated) Ponzi schemes run without Nevada corporations?] one
involving companies doing business in Nevada, where lax laws permit corporate
operators, legitimate or shady, to hide behind straw officers in public
records.
That is possible because state
law does not prohibit corporations from having so-called “nominee” officers,
individuals with no actual role in the companies who are little more than names
on papers that purportedly list firms’ top executives.
To some experts [at least,
to the one cited below, who is admittedly a ‘former white-collar
criminal’ himself], that loophole is one of the major downsides of
Nevada’s push to become the “Delaware of the West” by easing restrictions on
corporations to attract more companies.
In its rush to lure more corporations, they argue, Nevada instead has
created a perfect environment for white-collar crime.
“It’s an incredible loophole and
it allowed Par Three to operate,” said Barry Minkow, a former white-collar
criminal who appears regularly on television as a commentator on Wall
Street scandals. “It’s a major fraud
technique. It allows the perpetrator of
an illegal activity to hide his position.
I can’t believe the laws in Nevada are the way they are.”
Minkow is chiefly responsible for
Par Three’s demise. It was his Fraud
Discovery Institute [Are we to assume this is a non-profit or a
for-profit entity? Does Mr. Minkow, the
former white-collar criminal, actually make money from and have a vested interest
in sullying private Nevada corporations?] in San Diego that launched
the initial probe because of a concerned investor.
Federal and California
authorities say ex-felon Melvin Donald Ruth, 64, of Boca Raton, Fla., who
served in federal prison for 30 months until his release in December 2003,
operated Par Three under the radar of government regulators over the past year
and a half. Although the company
supposedly was headquartered in Las Vegas, it operated out of Florida,
authorities allege. [If that is
the case, proper structuring within all laws requires that the Nevada
corporation register to do business in Florida and it would then be treated
just like any other Florida-based corporation.]
During that time, Par Three
collected more than $8 million from 120 investors nationwide, according to the
Securities and Exchange Commission.
Advertising in newspapers such as the Los Angeles Times, San
Francisco Chronicle and Seattle Times, Par Three operated a
password-protected Web site and promised returns on investments of at least 24
percent annually. [If you invest
in a proposition offering 24-percent returns, are you not taking some risk,
even if you are a banker? And again,
you really ought to do your ‘due diligence’ properly before investing in
any proposition.]
The SEC contends that money from
newer investors paid interest to original investors, and that Par Three also
used investments to pay for a yacht, a Porsche, a Mercedes Benz, jewelry and
land in Florida.
The SEC and the California
Department of Corporations stepped in after Minkow’s outfit found that Par
Three was not registered to sell securities, had unlicensed brokers and did not
have financial statements prepared by certified public accountants. [Proper due diligence would have
uncovered these facts before money was put at risk, with or without a private
Nevada corporation structure in place.]
In August the SEC convinced a
federal court in Florida to issue a temporary restraining order against Par
Three and freeze its assets, a week after California issued a cease-and-desist
order against the company.
“One of the allegations in the
complaint is that Ruth was an undisclosed principal of Par Three,” said Nels
Mitchell, associate director of SEC’s Pacific Region in Los Angeles. “If people knew he was a convicted felon,
that would have been a warning to investors.”
California’s cease-and-desist
order stated that Ruth and his cohorts “held persons out as officers of Par
Three who had no actual involvement with the company’s operations but instead
were ‘nominee officers’ who allowed Par Three to list them as officers for a
fee.”
The Nevada secretary of state’s
office does not track the number of nominee officers in its corporate
files. And there is no way to
determine the extent, if any, to which nominee services are being used
by con men who have reasons to dodge public records.
But some Nevada businessmen who
offer nominee services hold, at least on paper, hundreds of corporate
positions. Topping the list in Nevada
is Las Vegas businessman A.T. Mathis of Acorn Corporate Services Inc., who has
been an officer or director of 3,990 Nevada corporations, state records show.
Nominee officers have become part
of a cottage industry in Nevada.
Executive Solutions Web site
highlights the advantages—to corporate operators, not investors—of nominee
officers.
“Owners of Nevada corporations
who wish to remain ‘invisible’ to prying eyes can achieve something
unattainable otherwise,” it says. “They
can become the man/woman behind the actions, face and voice of the
corporation—like in the movie ‘The Wizard of Oz’—and invisibly control their
corporation by using a ‘nominee’. By
employing a ‘nominee’, corporate owners receive total privacy and anonymity
protection.”
An Internet search found that
Nevada, Wyoming and Delaware are the only states where nominee officer services
are widely advertised. Not
coincidentally, the three states’ corporate laws are among the least
restrictive in the nation. A nominee
officer in Nevada can simply be a name on a piece of paper, which is illegal in
other states.
In Florida, a corporate officer
must have a role in the operation of the company, said Jay Kassees, director of
the Florida Division of Corporations.
Kassees said he believes states such as Nevada, Delaware and Wyoming, in
their zeal to attract more corporations to generate revenue, have unwittingly
set themselves up for potential abuse from white-collar criminals.
“We have enough business in
Florida that we don’t have to make exceptions to attract corporations,” Kassees
said. “Your state must need money real
bad, and the citizenry doesn’t care.
Allowing for surrogate officers, I think, crosses the line. States like Nevada are saying, ‘Our
corporate veil is heavy and if you want to hide behind our veil, go ahead.’”
Nevada officials laud the state’s
corporate-friendly laws as a way of generating revenue. Through June 30, Nevada had roughly 260,000
corporations and generated $57 million last fiscal year through annual
corporate filings. In 1991, when the
Legislature approved laws making it easier to incorporate in Nevada, there were
about 60,000 corporations that paid $7 million in annual fees.
Renee Parker, Nevada’s chief
deputy secretary of state, said the office does not have any regulatory
authority over commercial recordings.
“We’re essentially a filing
office,” Parker said.
Under state law, anyone who forms
a Nevada corporation must file with the secretary of state’s office the names
of the corporation’s resident agent, president, secretary and treasurer. Of those four positions, only the resident
agent must be based in Nevada. And the
real operators do not have to hold any of those positions.
“We have no way of knowing if
someone is a nominee officer or a regular officer,” said Scott Anderson, deputy
secretary of state for commercial recordings.
As for the number of nominee
officers who front Nevada corporations, Anderson said: “We don’t have the capacity to verify that.”
Charles Moore, securities
administrator for the secretary of state’s office, said he has voiced concerns
to co-workers about the use of nominee officers based on complaints—both civil
and criminal—from regulators in other states.
Current Nevada law makes it
easier for alleged schemes such as Par Three to occur by concealing the
identities of a company’s true operators.
That means that a prospective Par Three investor never could have
learned that the company was allegedly run by an ex-felon previously imprisoned
for a similar scam.
That was investor Don Scott’s
experience. A 79-year-old retired publishing
and advertising company owner from Sequim, Wash., Scott invested $210,000 last
fall on the recommendation of fellow investor Capouch.
Before investing, Scott performed
his due diligence. He contacted the
secretary of state’s commercial recordings division and the Better Business
Bureau in Las Vegas. Neither entity
reported problems with Par Three, so he assumed the company was
legitimate. [If this was the extent
of his ‘due diligence’, he simply does not know what the term means. He sought a promised 24 percent return based
on only the information obtained from the Secretary of State (that the
corporation was current in its list filings) and the BBB (which can only
accumulate information over time—and this was a relatively new company)? Note that the extent of the retired banker’s
due diligence is not disclosed. Why
not?]
But after vacationing in San
Diego and watching Minkow during a television interview, Scott, who already had
become concerned about oddities with Par Three, contacted Minkow’s
organization.
“None of the correspondence I got
from them was ever signed,” Scott said.
“They never told me where the stores were that had my investments. I was told over the phone that they had 75
stores all over Texas and California and Florida. But it was just a glorious, embellished Ponzi scheme.”
The SEC alleged that Par Three
transferred money to Cash Plus Financial Inc., which had 10 check-cashing and
payday loan stores in Florida. Ruth had
authority over Cash Plus’ bank accounts, and Par Three and Cash Plus shared the
same office space in Boca Raton, Fla., the SEC stated.
Scott managed to get back
$200,000 of his
investment but still is seeking the remaining $10,000.
Fellow investors surely would
have gone elsewhere had they known about Ruth, who was profiled in 2001 by the Broward-Palm
Beach New Times, a Florida weekly, while he was still in Miami’s Federal
Detention Center.
The publication described Ruth as
a “predatory swindler”, a career con man who had a 1996 fraud conviction—for
which he was placed on probation for five years—but managed to beat a string of
other charges stemming from nonviolent crimes in Florida. He has used aliases and multiple Social
Security numbers.
The FBI arrested Ruth in March
2000 in connection with a $1 million telemarketing scam involving foreign-currency
exchanges. He was released shortly
thereafter to penetrate other boiler-room operations as an FBI informant.
That turned out to be a big
mistake, according to New Times, because Ruth instead participated in
two other boiler-room scams in which investors forked over $12 million to fund
phony check-cashing businesses.
He was arrested again in July
2001 and sent to prison for fraud.
Shortly after Ruth left prison in
late 2003, he became involved with Par Three, hiding his involvement behind the
nominee officers, the SEC contends.
Ruth, for whom there is no phone
number listed in Boca Raton, could not be reached for comment.
Par Three’s latest nominee
officer was Donald D. Merritt, a Carson City businessman who has a Las Vegas
post office box—and who, Nevada records show, has held at least 1,480 corporate
positions with 758 Nevada companies over the years.
Merritt’s Par Three predecessor
was lawyer Michael L. Potter, who also is general counsel of Nevada Corporate
Headquarters Inc. in Las Vegas.
Typifying the overlapping relationships and the frequency with which the
same individuals or companies often are linked in these matters, NCH also
served as Par Three’s resident agent.
Potter, who has been affiliated
with 1,268 corporations, said he intended to serve as Par Three’s nominee
officer for only 30 days—from December 2003 through January 2004—while the
company selected more permanent officers.
When that did not happen, he resigned.
“I had nothing to do with the
company,” Potter said. “I’m an innocent
party who tried to do a simple service and it got me burned by the
customer.” Potter said he was unaware
that Merritt listed in state records the same Las Vegas post office box that he
had used.
Derek Rowley of Reno, president
of the Nevada Resident Agent Association, said he expressed concerns to fellow
resident agents about nominee officer services after Congress passed the
controversial Patriot Act, which gave law-enforcement agencies broader
authority to conduct investigations related to terrorist
activities. It is believed that the Patriot
Act makes nominee officers more liable for corporate wrongdoing, a reason
Rowley said some resident agents have dropped their nominee officer services.
Rowley, who frequently lobbies
the Nevada Legislature, said he is willing to propose that the 2007 Legislature
outlaw nominee officer services so long as it can be done without
harming other services provided by resident agents.
“There is too much potential to
bring a black eye to the Nevada corporation market, which is not good for our
industry,” Rowley said.
Assembly Majority Leader Barbara
Buckley, D-Las Vegas, who is in line to become Assembly speaker in 2007, said
she is willing to address the nominee officer issue.
“Nevada has passed more and more
laws to become the Delaware of the West,” Buckley said of corporations. “This type of situation can serve as a
wake-up call that we like their business but not if it’s going to deceive
people. I don’t think Nevada wants to
be a haven for crooks.”
Steve Kanigher can be reached at
259-4075 or at steve@lasvegassun.com.
[END QUOTING]
And there you have it: On the basis of ONE example, this
article through “guilt by association” sullies the image of all private Nevada
corporations. The fact is, however,
that in an increasingly UN-private world, Nevada corporations (for now, at
least) continue to afford individuals legitimate privacy in their
financial affairs.]