© St. Petersburg Times
It's been nearly three years since the interest checks stopped coming and First American Capital Trust of Clearwater filed for bankruptcy.
Hundreds of investors, seduced by promises of 9.75 percent interest, are still $59-million short.
And the man they blame for their losses, David Allen Johnston, still lives in the lavish lakefront home in Pasco County that investors contend he bought with their money.
Most of the money never will be recovered, said Melvin Johns, a Venice retiree who serves on the creditors' committee for the bankruptcy case. What investors want now, he said, is revenge:
"They want him put out of business so that he can never do something like this again. They want him to suffer like we've suffered."
It's not surprising that Johns, 65, is upset. When he cashed out his retirement plan at GTE Corp., he invested $250,000 in First American notes on the recommendation of a trusted friend. Now all he has to show for nearly 40 years' labor is the $20,000 in payments he has received from the bankruptcy court.
First American's offering seemed solid: notes backed by loans on used cars. The loans were said to be insured, and the cars always could be resold if the borrowers defaulted. But such notes have sometimes proved to be lemons, just like some of the beatup cars that back them up. And First American never bought enough loans to back all the notes it sold.
These days investors' hopes for recovery and retribution are riding on bankruptcy trustee Derri Davisson's pursuit of Johnston and others in lawsuits. In the name of the First American Capital Liquidating Trust, Davisson is demanding the return of money she says Johnston stole or squandered. She's even going after a $25,000 contribution Johnston made to a Pasco County church he once attended. Many of the claims relate to a $500,000 payment sent to Johnston's Bahamian bank account in 1998.
"Johnston knowingly arranged the transactions for the purpose of stealing money from FACT," Davisson's lawsuit claims.
Johnston, 54, said he isn't to blame for investors' losses. Although he was with the company from its 1993 founding until November 1998, he said he turned over the reins to someone else in 1996.
"I don't know what went wrong," he said. "I had no decisionmaking power from February 1996 on. I was just overseeing the agents and making sure everything was handled right with noteholders as far as paperwork."
Davisson, who went to work for First American in 1995 and stayed on through the bankruptcy filing, disputes his account. She says Johnston called the shots until he left.
Johnston has been handling his own defense since his lawyer withdrew from the case for reasons the lawyer won't discuss. Since then, Johnston's legal arguments have been anything but ordinary.
Among the claims he has made: Anyone who mentions his name without his permission owes him $1-million plus damages. Guy Rasco, Davisson's lawyer, says Johnston has sent him bills for more than $100-million already. Johnston also says the bankruptcy court, which created the trust suing him, has no jurisdiction in Florida. He even tried to claim authority to dismiss the claims against him by incorporating his own company using the First American trust's name.
"It is so preposterous," Rasco said. "It's like somebody filing for the fictitious name Warren Buffett and then trying to sell Berkshire Hathaway," he said. "It a total sham."
Circuit Judge Thomas Penick Jr. got handed the case last month after Circuit Judge Susan Schaeffer removed herself. Johnston claimed Schaeffer was biased against him. She said she withdrew so he would not be able to continue using the tactic to thwart hearings. A tougher legal standard has to be met to disqualify a second judge.
In his first hearing with Penick, Johnston handed the judge a copy of his judicial oath and warned him, "Any ex-parte communications will be considered a violation of your oath."
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A former radio talk show host, Johnston sold cars and insurance, ran a trucking company and managed a Palm Harbor mobile home park before starting First American. He had a real estate sales license, which he recently allowed to lapse, and still has a Florida insurance license in good standing, although the Securities and Exchange Commission barred him from the securities industry in 1999.
In that case, Johnston ran afoul of federal regulators who said he sold phony certificates of deposit in Canadian Trade Bank, which was purportedly in Grenada. In reality, the SEC found, it was a scam Michael J. Randy ran out of his house in Illinois, using money from new investors to repay old ones, a classic Ponzi scheme. The regulators said Johnston and agents working for his company, Edison Worldwide Capital, sold at least $1.7-million of the CDs in 1992. The SEC fined Johnston $50,000 and ordered him to turn over $38,045 in profits and interest.
Johnston also acknowledged selling two notes in 1991 in Premier Benefit Capital Trust. That Pinellas County scam was run by Jan Weeks-Katona, who was convicted in 1994 of fraud, money laundering and conspiracy to murder the federal judge who put her out of business. No charges were brought against Johnston.
First American adopted Premier Benefit's strategy of raising money by selling nine-month notes rather than longer-term securities. The nine-month offerings held particular appeal to elderly investors accustomed to bank CDs. In addition, the notes were the subject of a legal controversy in the late 1990s that worked to Johnston's advantage. While lawyers argued whether nine-month notes were or were not securities, regulators concerned about First American's operations were temporarily kept at bay. By the time the court ruled in the regulators' favor, investors' money was gone.
About 1,200 investors bought $93-million worth of First American's notes, which were sold through a network of insurance agents and brokers. Johnston offered them a terrific deal: A 6 percent commission up front and 6 percent more every time the notes matured and the money was reinvested. The big selling points for investors were the 9.75 percent interest rate and the security of the insured car loans that were supposed to back up the notes.
"My other investments weren't paying as much, and it sounded great," GTE retiree Johns said. He said his notes matured three times, and he reinvested the money each time. "I thought things were going pretty good."
Because First American was state licensed as a lender, many investors were under the false impression that the state had approved the company's finances.
"Johnston would do things to confuse that issue," Davisson said. "When the Department of Revenue came in to audit the car paper to make sure the documentary stamps were paid and sales tax was paid on the contracts, he would send out a letter to agents and interested noteholders advising them that FACT had passed its annual audit by the state."
Davisson was office manager and oversaw collection efforts at First American. Because of her familiarity with company operations, the creditors' committee asked her to stay on as trustee in the bankruptcy case, and Bankruptcy Judge C. Timothy Corcoran III confirmed the appointment.
She said Johnston made a good impression on agents and investors by being a stickler for details when it came to investor paperwork.
"He didn't accept any application that was incomplete," she said. "He had this appearance of total compliance and attention to detail to give people that level of comfort.
Davisson said that when investors or agents showed up at the company's Clearwater office, they got a grand tour, including the safe where car titles were kept and, if they asked, bank statements showing large balances.
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Johnston's expertise at raising money didn't carry over to buying and servicing car loans, Davisson said.
"It would be tough to succeed when you have nine-month, very expensive money that you are raising and using to acquire very risky long-term assets," she said. The company specialized in auto loans to people with bad credit. Davisson said some loans were purchased directly from car dealers, while others were purchased from companies controlled by Johnston or his associates, sometimes at inflated prices.
"Everything that he did allowed fraud and defaults to be perpetrated," she said. "It was doomed from the start."
But Davisson said First American's problems went far beyond that.
In the lawsuit she filed against him, she said Johnston stole money from the company and diverted money to friends and relatives, charges he denies.
One of his techniques, she said, was having First American buy bad investments from other companies that he or his friends owned. Although he told investors their money would be used for car loans, Davisson said, First American paid Johnston-controlled companies more than $100,000 to acquire stock in a cell phone company, a pay phone company and a company that provided continuing education for insurance agents. She said Johnston also used First American's money to pay business expenses for his other companies and to acquire stock for himself in companies owned by friends.
Davisson said he also lent First American's money to other companies, including $3.2-million in loans to a group of automobile-related companies. First American got a judgment against the companies, but they didn't have the money to pay it. A $13.25-million loan to another group of companies also is in default.
In two instances cited in the lawsuit, First American sent money to South Florida businessmen who turned around and gave most of it to Johnston.
In one case, in 1996, First American wired $300,000 to a company controlled by Larry Courtney, who returned $225,000 to Johnston. Davisson calls the transaction theft. Johnston calls it a "leveraged buyout" in which Courtney bought First American from him. Courtney said in a deposition that he never bought the company.
In another case, which coincided with Johnston's 1998 departure, First American sent $600,000 to a company controlled by Spiro Lazarou, a South Florida car dealer who had previous business deals with First American. He immediately wired $500,000 to Johnston's bank account in the Bahamas. This time, Lazarou acquired ownership of First American as part of the deal.
"This deal was too good to be true, so I did not want to damage it with a due diligence," Lazarou said in a deposition filed in the case. Lazarou, who divides his time between Pompano Beach and Athens, Greece, resigned from First American in less than a year. Davisson is still trying to collect a judgment against him for $595,000.
Davisson said part of the $500,000 payment Johnston got in 1998 can be traced directly to his 1999 acquisition of 10 acres in Odessa, the Pasco County community just north of the Hillsborough County line. He began construction on a lavish house on the property the same year.
The house, which is currently listed for sale for $959,000, is in a gated subdivision, Keystone Park. It has an exercise room, a game room, a family room with a double-sided fireplace and an entertainment center in its 4,357 heated square feet. There's also a three-car garage and an extra-large lanai overlooking the pool, spa and dock on Lake Ann. According to the real estate listing, the house comes with $35,000 worth of electronic equipment.
Davisson said that because the house was built with stolen money, it should not be protected from creditors under Florida's homestead law.
Johnston acknowledges that he got the $500,000 payment, but denies that any money from First American was used to buy or improve the house.
Davisson also is attempting to reclaim gifts that she says came from the $500,000 payment, including $84,000 worth of checks written to Johnston's daughter and son-in-law and a $25,000 donation to the In the Name of Jesus World Outreach Center in Odessa. The pastor of the church, Curtis Bradford, said Johnston dropped the check in the offering plate one Sunday morning, noting on the check that it was a tithe on a transaction. He said the church is seeking legal advice on whether to return the money.
Since leaving First American, Johnston has been involved with at least two other enterprises. One, Associated Tax Consultants, advised people how to avoid paying income taxes. Another, E-Comm Solutions, provides services to small businesses.
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Johnston says First American had $60-million in car loans and $8-million in cash when he left the company in 1998, but Lazarou said the picture was much less rosy. He said Johnston told him the company had $3-million to $5-million less in assets than showed up on the books. But when he examined the records, he said he found the company was actually $35-million short.
The real gap between what the company owned and what it owed to investors may have been even wider.
"Many of the assets were worthless," Davisson said. She said only about half the money Johnston raised went to buy car loans, and those were often purchased at inflated prices.
First American was forced to file for bankruptcy in 1999 when it no longer had enough cash to pay agents their commissions or investors their requested redemptions. Davisson valued its assets at the time at about $22-million, including a $13.25-million loan she still is trying to collect from Courtney, the South Florida businessman, and companies he controls. Three years into the bankruptcy proceeding, investors have received only $5.25-million on the $64-million worth of claims they filed to recover their principal. Their promised interest is lost.
Davisson said investors may get another 10 percent of what they are owed, at best, if she is successful in the lawsuits she has brought against Johnston, Courtney and others.
"It's just a frustrating process," she said. "When I started this, I thought surely we would recover the money and that some things would be pretty swift. But we've sued so many people who just went out and filed bankruptcy."
She said she turned over information to the U.S. Attorney's Office in April for criminal investigation and is disappointed that nothing has happened yet. A spokesman for the office said he could not confirm or deny the existence of an investigation.
"It's frustrating that folks can get away with this," she said. "You can incorporate, accept a lot of money, allow your corporation to be dissolved and take the money and run."
Davisson said one of the most difficult aspects of her work is seeing the toll it has taken on investors.
Some investors who bought their notes through licensed brokers have won arbitration awards or settlements from their brokerage firms. Clearwater attorney Joel Goodman said he has recovered "tens of millions" for First American investors.
But most investors have not been so fortunate, and many have died waiting for results.
"We receive death certificates weekly," Davisson said. "One 40-plus year marriage ended in divorce specifically because of the loss of this investment. I have one pair of sisters in Pennsylvania who call me every month. One of them turned 100 in November, and the other is 97. Their nephew sold them the investment, $25,000 each. They really need their money back. It's worrying them to death."
-- Helen Huntley can be reached at email@example.com or (727) 893-8230.
From the AP
From the state business wire