A federal jury in White Plains has ruled that an insurance company was justified to rescind a professional liability policy for accountants several months after it learned that an Armonk CPA firm had bilked investors for $2.1 million.
As a result of the jury”™s verdict and previous judicial rulings, the victims of Marshall Granger & Co.”™s Ponzi scheme cannot recover any of their losses from Continental Casualty Co.
Continental sued Marshall Granger and its general partners, Laurence M. Brown of Katonah, and Ronald J. Mangini of Mount Kisco, in 2011. The insurer claimed the accountants had failed to disclose ongoing fraudulent activities in their application for a $4 million professional liability policy.
U.S. District Judge Cathy Seibel ruled two years ago that Continental was entitled to rescind the policy, due to misrepresentations, but allowed the case to go to trial on an issue raised by Joseph Boughton Jr., a long-time friend and client of Brown from Alpharetta, Georgia.
Boughton was not a victim of the Ponzi scheme but he could be the biggest loser in the insurance case because his Northstar Investment Group loaned nearly $1.2 million to the accounting firm. Boughton could not be reached for comment.
What”™s more, Brown and Mangini stole the corporate identity of one of Boughton”™s companies to use in the fraud scheme. It was Boughton who reported the scheme to the U.S. Securities and Exchange Commission, and that information was central to Continental”™s claim that it should be allowed to rescind Marshall Granger”™s liability policy.
From the time Continental first learned of irregularities to when it filed the lawsuit to rescind the policy, nine months had passed. Boughton argued that Continental had taken so long to act that it had waived its right to rescind the policy.
On June 3, after a three-day trial in White Plains, the jury in effect ruled that it was reasonable for Continental to take time to carefully investigate the allegations before rescinding the policy.
Continental first learned of the fraud scheme in 2010. In May of that year, Mangini, for reasons that are unclear, told Boughton that Brown was pretending to be an officer of a dormant company owned by Boughton. Mangini left out the part where he too posed as a company officer.
Boughton demanded that Marshall Granger repay the loans.
Then Mangini, invoking the professional liability policy, notified Continental of Boughton”™s claim. He also sought reimbursement for an alleged $680,000 embezzlement by a bookkeeper.
Tipped off by Boughton, the SEC filed an emergency enforcement action against Marshall Granger, Brown, 63, and Mangini, 61, to freeze their assets. The commission also sued Brown”™s wife, Susan, his daughter, Sloan, their Infinity Farms Ltd., Mangini”™s wife, June, and their company Maylil Inc., as “relief defendants” for the purpose of recovering assets.
For two years, according to the SEC, Brown and Mangini had been selling stock and promissory notes in Infinity Reserves ”” Tennessee, a natural gas gathering and pipeline system. The notes promised a 10 percent annual return and they could be converted to stock at any time.
The accountants described Infinity as a secure investment. The offering statement said the company had a stable supply of gas, a captive market, opportunities to acquire more gas, low drilling and leasing costs, unexplored marketing opportunities and high-quality gas that could be sold at a 20 percent premium.
Brown signed documents as Infinity Reserves president. Mangini signed as company vice president or secretary-treasurer. In fact, Infinity was solely owned by Boughton and had been dormant for many years, as the Westchetser accoutnants knew from preparing a 2007 tax return for Boughton.
Brown and Mangini sold the investments to 15 people, many who were clients or friends. A Mount Kisco man, for example, invested $350,000 meant for a retirement account. A couple from Cortlandt Manor invested $125,750.
Brown and Mangini told prospects that they had invested their own money.
“This is the pipeline that we have owned for the last 15 years,” Mangini wrote in an email to a Manhattan investor. “Between us we have over $3 million into the line and are about to embark on a program to increase through-put. With the price of energy, the time couldn”™t be better. Let me know if you are interested.”
The man invested $180,000.
As quickly as money was deposited in Infinity”™s bank account, Brown siphoned it off for personal uses. A small amount, $136,000, was returned to investors as “interest,” in classic Ponzi fashion, the government said, to keep the scam going.
Brown took at least $501,154 in cash withdrawals. He diverted $241,400 to his daughter, $24,250 to his mother, Florence, and $7,435 to his wife, Susan. Infinity Farms ”” a name perhaps inspired by Infinity Reserves ”” owned by Brown and his daughter in Katonah, got $223,400.
Brown”™s wife and daughter spent another $281,099 on American Express cards paid with investor funds.
The government says the Browns used the stolen money for mortgages on homes in Westchester County and Wellington, Fla., payments for luxury vehicles and for support of Sloan Brown”™s amateur equestrian activities.
Brown also diverted $484,400 to accounts controlled by Mangini and his wife.
In 2011, the government indicted Brown on charges of securities fraud, wire fraud and money laundering. Brown had “fleeced clients and fattened his own wallet,” U.S. Atty. Preet Bharara said in a press release.
It was not Brown”™s first experience with the feds. The SEC had sued and convicted him on criminal charges in the mid-1990s. As sole owner of Phoenix Capital Group Inc., an unregistered securities broker-dealer, he had sold $2.7 million in phony government securities.
Brown was granted leniency on the criminal charges and did not go to prison. A federal judge ordered him to disgorge profits and interest totaling $3.7 million.
In the Infinity Reserves case, Brown eventually pleaded guilty. Again, he wanted leniency.
“The life of luxury alluded to by the government simply does not exist,” his lawyer argued.
He also had contributed to charities, his lawyer noted. He suffered from chronic obstructive pulmonary disease and had recently undergone surgery to insert four stents in his heart.
“Given Mr. Brown”™s advanced age and terrible physical condition,” his lawyer told the court, “it is unlikely that he will survive any lengthy prison sentence.” Hs lawyer requested probation with home confinement.
The government reminded the court that Brown was a recidivist, having previously committed a similar crime. Government lawyers said Brown had used well over $1 million for himself and his family, and he had control over all of the stolen money.
Charitable works are common in white-collar crimes, according to the government”™s sentencing memorandum, because such activities elevate one”™s position in society and foster trust. But what made Brown”™s actions nefarious, the government said, is that he deceived his own clients and friends.
“Brown had a unique inside view into their financial wherewithal,” the government said. “He targeted precisely the people he knew had extra cash to invest.”
The government asked the court to sentence Brown to up to nine years in prison. The court sentenced him to five years. He served a little more than three and was released from prison in April 2015.
Besides Brown”™s 1994 securities fraud, there were other clues that diligent investors could have found in public records.
In 1997, Brown was sued in a securities case that involved Infinity Reserves.
In 2002, Mangini was sued for breach of fiduciary duty.
In 2005, Brown”™s CPA license was suspended for professional misconduct.
In 2009, in the midst of the Ponzi scheme, Mangini filed for personal bankruptcy. He declared assets of $883,000 and liabilities of $2.4 million. His monthly expenses were nearly four times greater than his monthly income, and a bank was foreclosing on his house in Redding, Conn.
After the SEC got involved, the accountants”™ finances deteriorated further.
In 2012, a federal judge ordered the defendants to disgorge their ill-gotten gains. Brown was on the hook for nearly $2.2 million and Mangini for $512,625 plus a civil penalty of $484,000.
Susan Brown was liable for $143,265, Sloan Brown for $564,531 and Infinity Farms for $236,612. June Mangini was held accountable for $327,592 and the Manginis”™ Maylil Inc. for $319,649.
A year later, Sloan Brown filed for bankruptcy. She had $1.6 million in assets, mostly in two houses in Katonah, one in which her parents had lived, and an Oldenburg horse valued at $125,000. She had liabilities of nearly $2.6 million and a monthly income of only $823 from her work as a horse manager.
Last month, a bank sued for foreclosure on her house in Katonah. She owed $459,000 and had not made a payment since July 2010.
It is unclear from court filings whether Boughton or the victims of the Ponzi scheme have recovered their losses.
The only restitution noted on Brown”™s criminal docket are payments made in April and May. He paid a total of $100.
