Savings-Bank flotation fraudster pays back $11 million

LOSSES & LAWSUITS

Bert Fingerhut led a sophisticated scheme to circumvent federal and state banking regulations, in order to make lucrative stock purchases in bank conversions, the SEC claims. From January 1997 through January 2007, Fingerhut's group generated a total of more than $12 million in fraudulent profits from secondary market sales of bank stock illegally obtained in 65 public offerings.

The other three defendants, Fingerhut's nephew, a childhood friend and his brother, played active roles in the scheme and profited from it. The SEC alleges the defendants made numerous misrepresentations in stock subscription agreements and order forms to carry out their fraudulent scheme. The complaint also alleges the conspirators used fake identification cards and other documents in order to deceive the banks.

The scam revolved around the flotation of a number of US mutual banks. Using fake documents to prove in-state residency and with funds provided by Fingerhut, he and his co-conspirators opened accounts at hundreds of mutual banks across the US. When those banks went public and offered depositors the opportunity to buy stock before the open market at a preferential rate, Fingerhut would fund his colleagues' purchase of stock options.

This breached federal law, which makes each depositor who purchases stock sign an agreement confirming they are not intending to transfer their purchasing rights to another party – something Fingerhut's collaborators did more than 60 times.

Fingerhut took most of the operating profits while ensuring his partners turned a profit, albeit a significantly smaller one. Over the course of 10 years and 65 mutual conversions, Fingerhut and his team collected $12 million.

Fingerhut pled guilty to the criminal charges and, in connection with his guilty plea, agreed to pay a total of $11 million in forfeiture, representing his own illegal profits from the scheme. In contrast to Fingerhut's repayment, the combined forfeiture of his co-conspirators was just $589,000.

All four of the defendants in the civil case agreed to settle the SEC charges by consenting, without admitting or denying the complaint's allegations, to the entry of permanent antifraud injunctions.

"When banks convert from mutual ownership by their depositors to stock ownership by shareholders, the depositors are supposed to get first priority to purchase stock. Here, the defendants defrauded banks and depositors around the country and, in effect, jumped ahead of that line. As a result, they lined their pockets with money that should have gone to legitimate depositors. Spanning 10 years and 65 stock offerings, this is the most extensive bank conversion fraud we have ever seen," said Mark Schonfeld, director of the SEC's New York regional office.

The decision over whether affected depositors will launch a civil action suit against Fingerhut is still pending.

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