Sunday, October 2, 2011

Ex-leaders of Radical Bunny face SEC grilling

Two of the four former principals of defunct Mortgages Ltd. financier Radical Bunny LLC, including former lead manager Tom Hirsch, testified in U.S. District Court on Wednesday, hoping to avoid a possible civil contempt order.

The U.S. Securities and Exchange Commission accuses the two of failing to make a serious effort to pay federal fines levied against them. The SEC has been recommending jail time for the former executives of Radical Bunny, who have failed to make significant strides toward paying off court-ordered penalties totaling $2.6 million plus interest.

Judge Susan R. Bolton's ruling was postponed until early November so the lawyers could debate whether the court has jurisdiction to use civil contempt as leverage to make the defendants pay a multimillion-dollar fraud judgment levied against them.

A series of briefs arguing for and against the jurisdictional matter are due to the court in October.

At Wednesday's hearing, SEC attorneys Spencer Bendell and David Brown said the other two former principals, husband and wife Howard and Berta "Bunny" Walder, have reached an installment agreement to pay their fines and no longer are subject to civil contempt charges.

They said former Radical Bunny executives Hirsch and former business partner Harish Shah had yet to pay more than a few hundred dollars toward paying off their fines.

The purpose of Wednesday's hearing was to determine how much money Hirsch and Shah could pay realistically each month toward their federal fines.

Defendants' attorney Michael "Mick" LaVelle said Hirsch possessed the means to pay no more than about $500 a month.

At that rate it would take Hirsch, a certified public accountant, more than 266 years to pay the fraud judgment against him.

LaVelle said Shah, also a CPA, had the ability to pay about $1,100 a month.

His fine would be paid off in about 70 years at that rate, not including interest or penalties for late payment.

Brown and Bendell argued that both Shah and Hirsch were capable of paying much more, as evidenced by several recent transfers of large sums of money revealed in personal and commercial-banking statements and other documents.

Under Bolton's April 12 ruling, Hirsch is required to pay $1.6 million, the Walders are jointly required to pay $1.6 million, and Shah must pay about $927,000.

The outstanding judgment stems from a 2009 fraud lawsuit brought by the SEC against the former Phoenix-based Radical Bunny and its principals.

The SEC lawsuit accused the defendants of violating federal rules against fraud and failing to register with the SEC.

Hirsch, Shah and the Walders on May 20 filed for an appeal that still is pending.

Radical Bunny raised more than $197 million from nearly 900 investors and then used the money to make high-interest loans to commercial-real-estate lender Mortgages Ltd.

According to the SEC, the defendants then told investors that their money could be used only for commercial development, when in fact Mortgages Ltd. could use the money for anything.

Attorneys for the defendants have argued throughout the case that Hirsch, Shah and the Walders had operated Radical Bunny in good faith and had relied on the advice of attorneys and others they knew and trusted.

When Mortgages Ltd. went into bankruptcy, it had almost $1 billion in loans outstanding to developers.

Its then-chairman, Scott Coles, died of an apparent overdose of drugs and alcohol in June 2008. He was 48.

Since then, most of the firm's projects have stalled because of a shortage of money and the real-estate market's downturn. Several developers that had been getting loans from Mortgages Ltd. have since gone into bankruptcy.

SEC attorney Brown argued during a hearing in late July that all four defendants should be charged with civil contempt because of their lack of effort to pay. Possible penalties for civil contempt include fines and/or incarceration.

However, when Bolton asked Brown in July whether he believed any of the defendants was capable of covering the entire amount owed in a single payment, Brown said he did not believe so.

In his cross-examination of Hirsch on Wednesday, Brown focused heavily on a Phoenix-based company called Sunshine Instruments Inc., the bank records of which show multiple transfers and withdrawals of large sums of money by Hirsch.

But Hirsch said he had no financial interest in Sunshine, was not an owner and received no money for working on behalf of its owner, an Italian national.

The money he withdrew from Sunshine's account in 2011, totaling more than $30,000, was simply a loan, Hirsch said.

Arizona Corporation Commission records list Hirsch as the president and CEO of Sunshine Instruments and its sole director.

Hirsch told Brown he had made a mistake when describing his relationship to the company in commission documents. He said tax records show he does not own the company, which was incorporated in 1998.

The focus of Shah's cross-examination was a series of payments that his financial records show he had made in recent months, including a $10,000 payment to Sunshine Instruments.

Judge Bolton asked Shah why he had paid back in August what Shah described as an informal loan from Sunshine Instruments, rather than using that money toward paying off his court-imposed fine.

"I have no explanation for that," Shah said.

Bolton said she would rule on the SEC's request to hold Hirsch and Shah in contempt after both sides had filed motions on an argument raised by the defense that Bolton cannot use contempt as a means of coercing the defendants into paying their fines.

The final motion is due by Oct. 31.

Bolton closed out the hearing with harsh words for Hirsch and Shah.

"They didn't make any effort to show the court that they were willing to do anything," she said. "It doesn't show any concern for this court order that I previously issued."

by J. Craig Anderson The Arizona Republic Sept. 30, 2011 12:00 AM

Ex-leaders of Radical Bunny face SEC grilling

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