MANHATTAN (CN) - A Palm Desert, Calif. man duped more than 1,200 investors out of $138 million in a Ponzi scheme disguised as an equipment leasing business, then killed himself as the plot unraveled, three alleged victims claim in Federal Court.
The plaintiffs, two LLCs and a corporation, say John W. Otto controlled several companies under an umbrella entity known as the Manufacturing Acceptance Corporation (MAC), all of them ostensibly in the equipment leasing, investment and securitization businesses.
Otto and his alleged co-conspirators, including his wife Kathleen, promised that returns on investments in an entity called HL Leasing, a subsidiary of MAC, "would be generated by equipment leases acquired ... at a discount, and that the leases were 'seasoned' leases, meaning that they had a good track record with regard to payment by the lessees," according to the 25-page complaint.
Investors were told that such leases would serve as collateral for their loan and that Otto personally guaranteed payment of interest on their investments, the complaint states.
"From its infancy, HL Leasing/Heritage [Pacific Leasing, another of Otto's shell entities] aggressively targeted investors with promises of a high rate of return based on the purported business of equipment leasing," the complaint states.
Court documents cite mailings HL Leasing sent to investors in September and October 2008, in which it stressed "its high interest rates; represented a growth of its business of 60%; and advised of its acquisition of million of dollars in additional leases from American Express," the complaint states.
Plaintiffs Cobalt Investments LLC, Dragga LLC and Real Estate Network Inc. Profit Sharing Plan say they collectively were bilked out of $700,000. They say it was a classic Ponzi scheme, with old investors paid off with new money. When the stream dried up, Otto's scheme quickly unraveled, the plaintiffs say.
Six months after telling investors of the acquisition of those "million of dollars in additional leases," Otto informed them that Heritage/HL Leasing would not be making its monthly interest payments.
In the April 28, 2009 letter, Otto claimed he had made an agreement with another company to sell HL Leasing by May 8.
A second letter to investors, dated May 8, 2009, and sent by HL Leasing's law firm, defendant Callahan & Blaine, stated that Otto had suffered a stroke, which caused the deal with the undisclosed company to fall apart, the complaint states.
A few days later, Otto committed suicide.
"Based on information and belief, Heritage/HL Leasing, together with their entity instrumentalities, human accomplices and institutional confederates, each playing key roles, had committed fraud by representing security interests in loans held by investors that never existed or were sold off," the complaint states.
The plaintiffs seek compensatory and punitive damages for fraud, conspiracy, negligent misrepresentation, breach of fiduciary duty, and breach of contract.
They are represented by Howard Wexler with Herzfeld & Rubin.