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Pension Plan Says Adviser Has Sticky Fingers

(CN) - Detroit's police and firefighters' pension plan claims in court that an investment adviser cost it more than $5 million - and pocketed $2.2 million of it.

The Police and Fire Retirement System for the City of Detroit sued Michael Abraham Leibowitz in Wayne County Court.

The pension plan claims Leibowitz lost $5.4 million and pocketed $2.2 million of it, from 2008 to 2010, using some of its $10 million to pay off credit cards and give his relatives cash gifts.

Leibowitz approached the pension plan in 2008 and suggested it invest in Invescor, a "national life insurance settlement brokerage firm" over which Leibowitz "exercised total control," the complaint states.

Life settlement businesses buy life insurance policies and sell them to third parties, often for more than the cash surrender value.

The pension plan claims Leibowitz persuaded it to invest by showing it financial statements that showed Invescor's net income as $260,370 in 2006 and $383,984 in 2007.

But "Invescor actually lost $1,326,100.49 in 2007," the complaint states.

It continues: "In a February 2008 presentation to plaintiff, Leibowitz represented that a capital investment was necessary for Invescor to provide 'additional operation infrastructure and personnel to service case volume' during an 'initial expansion phase,' and that a 'major portion of the funds raised will be strictly applied to expand operational capacity and support staff to process increased business flow.'

"Leibowitz also represented to the plaintiff's due diligence advisor that Invescor was a 'profitable company' that would be using the requested funds for 'expansion purposes only.'"

The pension claim says its Board of Trustees agreed to approve a $10 million investment loan, was secured by Invescor's assets and a limited personal guaranty from Leibowitz: a lien on all his shares of capital stock in Invescor.

"Although plaintiff sought a full personal guaranty of Leibowitz, Leibowitz strongly refused this effort and reiterated that Invescor's profitability and the planned use of the loan debt made a full guaranty unnecessary," the complaint states.

The pension plan claims it transferred $10 million to Investor via two $5 million loans, in 2008 and 2009.

Each time a transfer came through, Leibowitz immediately gave himself a six-digit salary, paid off thousands of dollars in personal credit card debt, and doled out hundreds of thousands of dollars in cash to cronies, the complaint states.

"From August 28, 2008 through the end of the year, Invescor ... paid Leibowitz's credit card bills in the amount of nearly $100,000; about half of that amount was paid in the mere five day time period from August 28, 2008 through September 2, 2008," the complaint states.

"In 2008, Invescor also paid at least $568,880 to individuals and entities associated with, controlled by or family members of a former attorney for Invescor.

"$380,000 of these funds were identified in Invescor's financial records as 'repayment of loans.'

"One loan, for $230,000, was a nine-day loan on which Invescor paid $5,000 in interest, an interest rate exceeding 90 percent.

"Another loan, for $150,000, was a 44- day loan on which Invescor paid $30,000 in interest, an interest rate exceeding 207 percent.

"In a matter of two weeks in 2008, Invescor also paid $60,000 to MAL Capital

Management, LLC ('MAL Capital'), a separate entity for which Leibowitz is the resident agent, and which, upon information and belief, Leibowitz is the sole member.

"All the while, in 2008, Invescor lost $2,440,817.43 on a cash basis.

"As of February 18, 2009, Invescor only had $4,224.48 in its bank account."

But on that day, the pension plan says, "pursuant to a disbursement request submitted by Invescor, plaintiff funded the $5,000,000 line of credit by wire transfer to Invescor."

The complaint continues: "The day after plaintiff funded the $5,000,000 line of credit, Invescor paid Leibowitz at least $105,000, and paid at least $22,000 of Leibowitz's credit card debt.

"In 2009, Invescor paid Leibowitz $371,400 in funds purportedly attributed to a note payable.

"In 2009, Invescor also paid Leibowitz $372,916.61 in salary.

"In 2009, Invescor also paid Leibowitz's credit card bills in an amount exceeding $130,000.

"In 2009, upon information and belief, Invescor paid relatives of Leibowitz over $60,000.

"In 2009, Invescor also paid $64,200 to MAL Capital.

"In 2009, Invescor lost $5,091,240.92 on a cash basis."

In an attempt to keep the gravy train rolling, Invescor asked for another $5 million "loan" on Jan. 6, 2010, the complaint states.

Leibowitz took a total of $2.2 million from Invescor between August 2008 and May 2010, while Invescor lost $5,336,057 "on a cash basis" during the same period, according to the complaint.

On March 31, 2010, Invescor failed to make interest payments of $131,250, so the plaintiff declared Invescor in default. When it demanded repayment of the loan, Leibowitz closed down his business, according to the complaint.

Next, the Retirement System says, it sued Invescor for breach of contract and default of the loan agreement. Since Invescor did not defend the action, the court awarded the Retirement System a $10,131,250 default judgment, according to the complaint.

While reviewing Invescor's financial statements, the pension plan says, it discovered Leibowitz's misuse of company funds and moved to file an amended complaint naming Leibowitz as an additional defendant.

During discovery, the police and firefighters say, they "learned that Leibowitz and Invescor classified life settlement policies ('policies') as 'accounts receivables,' defined policies as 'inventory,' and reported the 'amounts receivables' in various stages."

"Plaintiffs also learned that Leibowitz and Invescor recognized millions of dollars of 'inventory' without spending any cash or recognizing any legitimate debt.

"Using accrual based accounting, Leibowitz and Invescor were able to fictionalize estimated potential sales of policies and call them 'income.'

"The direct impact of Leibowitz and Invescor's financial and account methodologies was a gross overstatement of Invescor's assets and income, which deceptively represented Invescor's true income and financial status."

The pension plan claims that Leibowitz, "without restriction or check, freely used Invescor funds and adjusted his personal note to support his lavish lifestyle."

It claims it cannot collect on the judgment against Invescor because "Leibowitz drained all of Invescor's bank accounts." 90

It seeks to pierce the corporate veil and asks for judgment against Leibowitz for at least $10,131,250.

The pension plan is represented by Joseph Turner with Clark & Hill, of Detroit.

Leibowitz is represented by Steven Cohen with Cohen, Lerner, Rabinovitz & Witus, of Royal Oak.

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