RICO Complaint Seeks Return of $2.3 Million
LOS ANGELES (CN) - In a RICO complaint, an Idaho LLC claims it fronted apparent securities recidivists $2.3 million to launch an annuity scheme that never happened.
Idaho Falls-based R-LLC sued UMS Capital Group dba Insurance AnnuityGroup, Joseph Mermis, Xavier Barrios and C.M. Salazar, in Federal Court.
It claims the defendants sought, and got, venture capital money from it in 2009 to purchase annuity contracts, which Mermis claimed were "lying in the street ready to be plucked up."
R-LLC claims Mermis said the defendants would use its $2.3 million to buy Virginia-based Shenandoah Insurance, giving UMS the licenses it needed to pick up the contracts.
Mermis told R-LLC that he'd lined up a second investor who would match its $2.3 million pledge, according to the complaint.
This was not the first time round for Mermis, Barrios and Salazar, according to the California Corporations Commissioner, whose June 12, 2012 cease and desist order against the men is described later in this article.
In its complaint, R-LLC claims that under its investment agreement, UMS had to use the $2.3 million to buy Shenandoah, or return the money to R-LLC. Mermis said in early July 2009 that he expected to close the Shenandoah deal by that September, according to the complaint.
But the next week, R-LLC claims, it allowed an amendment to the agreement, permitting UMS to use the money to either buy Arizona-based Workmen's Life Insurance or fund its fledgling Insurance Annuity Group - including hiring actuaries, consultants and board members.
The amended agreement required UMS to provide budgets, invoices and other accounting information to R-LLC, according to the complaint.
In exchange for its $2.3 million, R-LLC says, it received 2.5 million ownership shares of UMS and was promised a 12 percent return on its investment.
Mermis and Barrios - who also held ownership stakes in UMS - promised to repay the entire $2.3 million within 12 months, R-LLC says.
But R-LLC claims Mermis and Barrios never invested their own money in UMS, and the matching investor never materialized.
Despite this, Mermis promised that R-LLC's money "would be sufficient to begin the acquisition of various insurance companies," the complaint states.
By late November 2009, R-LLC claims, it learned that another company - not UMS - had purchased up Shenandoah - a fact that Mermis denied. R-LLC says it verbally agreed to give UMS another year to repay its $2.3 million, and that Mermis promised that the purchase of both Shenandoah and Workmen's was imminent.
By late 2009, Mermis and UMS told R-LLC there was enough capital to buy Shenandoah, and that he'd found a second investor to pony up $2.5 million to buy Workmen's - an unnamed investor who "wanted proof from UMS that the funds would be returned quickly," R-LLC says in its complaint.
Mermis told R-LLC that UMS attorneys planned to meet with Shenandoah on Jan. 10, 2010 to "arrange for the purchase and closing of Shenandoah. Upon information and belief, this meeting never took place or, if it did, was not for the purposes stated by Mermis. In or about the beginning of February 2010, Mermis represented to R-LLC that the closing for Shenandoah was three to five weeks away and that Workmen's should close by mid to late February," according to the complaint.
To placate the long-suffering R-LLC, Mermis claimed he'd been approached by Jim Freeman, who had $500 million in annuities he planned to "park" with UMS. Mermis claimed that Freeman had a list of 56,000 government workers in California who held annuities and that UMS would manage those once it bought Shenandoah and Workmen's.
R-LLC claims that Mermis told it he needed another $1.5 million and the annuities would belong to UMS. That's when a UMS employee named Greg Grantham told Mermis that he "thought Jim Freeman had been convicted of fraud in 1996 for running a $26 million Ponzi scheme," R-LLC says in the complaint.
According to a March 12, 1996 report in the San Francisco Examiner, James Freeman, then 67, pleaded guilty to wire fraud and money laundering: targeting retired people with bogus investments offering annual returns of 12 to 20 percent. Seven other people, including Freeman's son, pleaded guilty in the case, according to the Examiner story.
A federal judge sentenced Freeman to 5 years in prison in June 1996, according to The Associated Press.
Freeman is not a defendant in the R-LLC complaint.
R-LLC claims that waited until mid-2011 to demand repayment of its $2.3 million "investment," granting UMS the year extension as agreed. In that time - nearly 15 months - R-LLC says, UMS did not buy Shenandoah, or Workmen's or any other insurance company.
"Mermis responded to the demand by stating that the UMS project had been 'delayed' and that before they were looking for '$5 million in financing, the figure being negotiated is now 20 times that amount in the U.S. and 20 times that in China.' Mermis also represented to counsel for R-LLC that it was his intention and the intention of UMS to 'be in touch with over [sic] the next 20 to 90 days to settle' the investment," R-LLC says in its complaint.
It claims the defendants have not repaid it dime one of its loan to UMS.
This is not the first time Mermis, Barrios and Salazar have been in trouble for securities fraud. Last year, the California Corporations Commissioner fined the three men for soliciting investors by claiming they had "acquired rights in technology that could recover oil from capped wells," according to Commissioner Jan Lynn Owens.
The commissioner found that the trio sold $790,000 worth of fake oil securities to at least nine California investors in 2005 and 2006. She added that Salazar - then known as "Butch" - had been convicted and sentenced to 4 years in prison in 1995 for offering fraudulent securities, "specifically interests in Limited Partnerships," and that losses to his victims in that case totaled more than $811,000.
In the filing, the commissioner ordered the men to pay full restitution to the victims and administrative penalties of $29,000. She also ordered them to "desist and refrain from the further offer or sale in the state of California of securities, including but not limited to, interests in limited liability companies and investment contracts, unless and until qualification has been made under this law or unless exempt."
R-LLC seeks actual and punitive damages for federal and California securities fraud, RICO violations, fraudulent and negligent misrepresentation and breach of fiduciary duty.
The company is represented by John D. Vaughn and Christopher W. Rowlett of the firm McKenna Long & Aldridge in San Diego.