Opinion ID: 6500514
Heading Depth: 2
Heading Rank: 2

Heading: The FirstPlus Takeover

Text: In 2007, Scarfo and Pelullo stumbled on “the golden vein of deals” – an opportunity that seemed so lucrative, they thought they could ride it into retirement. (JAC at 1781-82.) 10 That opportunity was FirstPlus, a Texas-based mortgage company whose main operating subsidiary had recently exited bankruptcy after falling on hard times. Following that restructuring, FirstPlus began receiving periodic, multimillion-dollar “waterfall” payments from its bankruptcy trust.4 At that point, it was essentially a dormant parent company receiving the waterfall payments but doing no business. After the payments started coming in, a former FirstPlus employee, Jack Roubinek, had the idea to locate investors and gain control of FirstPlus. In early 2007, he contacted his attorney, William Maxwell, and asked him to research the possibility of investing in FirstPlus. At around the same time, Pelullo learned about FirstPlus from his business acquaintance David Roberts, a mortgage broker from Staten Island. A group including Pelullo, Roberts, Scarfo, Roubinek, and Gary McCarthy (Pelullo’s attorney and an eventual codefendant) 4 As part of the subsidiary’s bankruptcy, a creditor’s trust was set up to pay the subsidiary’s creditors, one of which was FirstPlus, which held an unsecured claim against its subsidiary. Income generated by the subsidiary from outstanding mortgages and investments flowed to the trust, which paid it out to creditors in order of priority, creating a “waterfall” of payments. Several years later, a grantor’s trust was established as a result of litigation with shareholders. That second trust was interposed between the creditor’s trust and the creditors: a portion of the money coming into the creditor’s trust was routed to the grantor’s trust, and from there it was disbursed to FirstPlus, other creditors of the subsidiary, and FirstPlus shareholders. 11 gathered in Philadelphia to discuss a potential takeover of FirstPlus. At first, according to Roberts, their thinking was “to try to raise money to buy [FirstPlus’s] stock[.]” (JAC at 1791.) That plan, however, fell through: the group realized that none of them had the money needed to buy the stock. Luckily for them, however, FirstPlus had recently fired Jack Draper, a high-ranking employee. Draper had griped about his firing to Roubinek – the two having become acquainted while employed at FirstPlus – and to William Maxwell.5 Those three were joined by Roberts and Pelullo for a meeting in Dallas, where Draper, bearing a grudge, told the group he was willing to “divulge all” and accuse the FirstPlus board and CEO Daniel Phillips of financial improprieties. (JAC at 1813-16 (trial testimony of Roberts).) That “completely changed the direction of the plan.” (JAC at 1815.) Seeing an opportunity, Pelullo, who was emerging as the leader of the takeover group, worked with William Maxwell to send letters to Phillips and other board members. The letters were purportedly written by Draper and threatened that he would go to “the FBI, the IRS[,] the U.S. Attorney’s [O]ffice[,] [FirstPlus’s] Bankruptcy’s attorney and the SEC” with claims of financial misconduct including bribery, money laundering, and Sarbanes-Oxley violations. 6 5 William Maxwell’s brother, John, is another of the Defendants here. We thus refer to each Maxwell brother using either his full name or just his first name. 6 The Sarbanes-Oxley Act of 2002 was enacted “[t]o 12 (JAC at 1822.) They also threatened to tell Phillips’s wife – who was then divorcing him – that Phillips had raped an assistant and used the company’s moneys to pay off the victim when she got pregnant. According to Phillips, all those claims were false, but he was nonetheless concerned that their dissemination would cause grave damage to his and the company’s reputations. The letters had their intended effect. Phillips met with William Maxwell and Pelullo, who indicated the allegations would be dropped if Phillips and the FirstPlus board handed the business over to them. Evidently, it was an offer he couldn’t refuse. Phillips swiftly persuaded the entire board to give up their positions rather than try to engage in what would be a messy and expensive fight with Pelullo’s group. Pelullo then selected a new board of directors for FirstPlus: William Handley (a friend of Pelullo’s who took over as Chief Financial Officer), John Maxwell (William Maxwell’s brother and the titular Chief Executive Officer), Roberts (who became secretary of the company), Harold Garber (Scarfo’s father’s attorney, who became the new board chairman), and Robert O’Neal (one of William’s clients, who later succeeded Garber safeguard investors in public companies and restore trust in the financial markets[,]” Lawson v. FMR LLC, 571 U.S. 429, 432 (2014), by mandating that public companies take particular steps to assure the integrity of their audits and financial reports. 13 as chairman). 7 The necessary corporate formalities were followed and, on June 7, just four days after sending the threatening letters, Pelullo and his cronies had total control of the company.