Opinion ID: 6500514
Heading Depth: 2
Heading Rank: 3

Heading: The FirstPlus Fraud

Text: With FirstPlus in their power, the new officers and directors went to work – making the company work for them. Pelullo, along with William Maxwell, controlled the show. They even obtained stamps of the directors’ signatures so they could run the looting scheme without interference. The board entered into a “legal services agreement” with William, who became FirstPlus’s “special counsel.” (JAC at 5315-16; JAD at 1653, 1673-75.) The contract formally granted him significant power within the organization. It purported to give him “[a]ll legal authority for any matter involving” FirstPlus; the power to select and retain legal counsel, accountants, and, “in [his] sole discretion,” “any and all consulting firms”; and the right to “spend funds, incur legal expenses, and to expend fees in excess of [his] retainer and to seek reimbursement[.]” (JAD at 1673-75.) He could also “restrict disclosure of information … to any person[,]” including the members of the board. (JAD at 1674-75.) For his supposed labors, William made $100,000 a month, plus expenses of up to $30,000. 7 William Handley and John Maxwell became codefendants in this case. 14 With that authority, William hired Pelullo as a consultant to FirstPlus, a role that shielded him from public scrutiny. In practice, though, Pelullo was the “de facto president” of the company, according to FirstPlus’s public auditor, Anthony Buczek. (JAC at 7069.) John Maxwell was named as CEO, but he largely functioned under Pelullo’s control. Using his controlling position at FirstPlus, and with William’s help, Pelullo set up several channels through which money flowed out of FirstPlus’s accounts and into his and Scarfo’s coffers. For one, Pelullo set up a bogus trust that ostensibly had his children as its beneficiaries. In practice, however, according to codefendant Cory Leshner, the trust was “created for the purposes of owning” Seven Hills Management, LLC, a company with Pelullo’s brother-in-law, Alexander Lyubarskiy, listed as its head.8 (JAC at 3661.) Lyubarskiy’s supposed management of Seven Hills was strictly for show; “[e]verything he did was at the direction of Mr. Pelullo.” (JAC at 3665.) William Maxwell, on FirstPlus’s behalf, retained Seven Hills to provide FirstPlus with “consulting services.” (JAD at 675.) The agreement entrusted Seven Hills (and, through it, Pelullo) with “a litany of duties” that Leshner summarized as “helping run the entire operation” of FirstPlus. (JAC at 3755.) Seven Hills was compensated $100,000 each month, plus $15,000 in expenses. 8 Leshner served as Pelullo’s personal assistant and a vice president of Seven Hills. 15 Scarfo, meanwhile, profited from FirstPlus as well. Like Pelullo, he set up a trust that was nominally intended to “benefit[] [his] daughter” but in actuality served as a vehicle for his own gain. (JAC at 3673, 4026 (trial testimony of Leshner).) That trust, in turn, owned Learned Associates of North America, LLC (“LANA”); both entities were run “[o]n paper” by Scarfo’s cousin and codefendant John Parisi. (JAC at 3675.) That was a ruse to keep Scarfo’s name off the books; “[i]n reality,” it was Scarfo, not Parisi, who controlled the trust and LANA. (JAC at 3673-75.) LANA enabled Scarfo to get in on the take through a secondary consulting agreement between LANA and Seven Hills. The agreement obliged LANA to perform for FirstPlus “exactly the same” tasks that Seven Hills was already being paid to do, according to an FBI investigator. (JAC at 579.) In practice, LANA performed no work, but the deal entitled LANA (and, through it, Scarfo) to a roughly one-third cut of what Seven Hills was getting from FirstPlus. As the government puts it, those payments were “effectively ‘tribute’” to Scarfo. (Answering Br. at 18.) Those arrangements were all facilitated by William Maxwell, to whose attorney trust account the consulting fees and expenses were wired. William generally passed those on to Seven Hills, which in turn sent $33,000 a month, plus socalled expenses, to LANA. Pelullo was “completely involved with” and oversaw the flow of money from FirstPlus to Maxwell and on to the consulting firms. (JAC at 3933 (trial testimony of Leshner).) Pelullo and Scarfo also profited from FirstPlus by having it acquire three shell companies they owned. First up was Rutgers Investment Group, LLC, an unsuccessful mortgage loan provider majority owned by LANA and Seven 16 Hills. Rutgers’s single source of revenue was receivables it supposedly got from Shore Escapes, a defunct vacation sales company also owned by Seven Hills and LANA. It was makebelieve money, but on June 7, the new team’s first day in office, Pelullo got approval for the acquisition from the FirstPlus board, and the following month FirstPlus bought Rutgers for approximately $1.8 million and 500,000 FirstPlus shares. Two more acquisitions of companies owned by Seven Hills and LANA followed soon after. FirstPlus bought Globalnet Enterprises, LLC, a financially struggling cleaning company, for around $4.5 million and more than one million shares of FirstPlus stock. It then paid $725,000 – including $100,000 directly to each of Seven Hills and LANA – to buy The Premier Group, LLC, a company that Pelullo set up in May 2007 to hold the assets of a company at least nominally in the business of representing the interests of insurance policyholders. Pelullo made sure that FirstPlus bought his and Scarfo’s companies on preposterously favorable terms. To conduct valuations of the target businesses, he brought in Kenneth Stein, the head of a business brokerage firm. Stein told Pelullo that he (Stein) was unqualified to perform the valuations, but Pelullo said to “[j]ust go get it done[.]” (JAC at 4743-44.) Though Stein believed that the companies’ financials were “horrific” and “atrocious” (JAC at 4841), Pelullo pressured him into preparing nominally “independent” valuation reports that overvalued the businesses. William Maxwell covered up Pelullo’s involvement by listing his own name on the engagement letters and handling Stein’s payments. 17 Also helping grease the skids were two of Pelullo’s attorneys – David Adler and Gary McCarthy. Although FirstPlus’s public filings said that the acquisitions were “completed on an arms-length basis” (JAD at 2337), that was not even remotely true. Pelullo had his lawyers on both sides of the negotiating table, with Adler representing FirstPlus and McCarthy representing the shell companies. In the meantime, Scarfo, Pelullo, and William Maxwell began to take advantage of their ill-gotten gains. Scarfo bought a house and expensive jewelry for his wife; Pelullo purchased a Bentley automobile; Scarfo and Pelullo together bought a yacht; and William and Pelullo had FirstPlus acquire a plane for their personal use. The scheme was working as planned. Still, the fact that FirstPlus was a public company, with disclosure requirements under federal securities laws, added complications to the looting. To get around those requirements, Pelullo hired Anthony Buczek as FirstPlus’s auditor, based on a referral by Howard Drossner, who later became a codefendant. Pelullo pressured Buczek into hiding or obscuring material information about the company – such as the Rutgers and Globalnet acquisitions, the consulting agreements, and Pelullo’s prior federal fraud convictions 9 – even though FirstPlus was required to disclose that information in its SEC filings. 9 Pelullo knew that his prior felony convictions posed a problem: he told Leshner that he “didn’t want to be on the [FirstPlus] board of directors because of his previous convictions.” (JAC at 3650-51.) 18