Michael Brick, 9/24/1999
It was almost like he came from nowhere.
Frederick C. Brandau offered investors nationwide the chance to make big profits by purchasing the insurance policies of terminally ill patients who needed cash. Now he is in jail, charged with defrauding 5,000 of these investors of more than $100 million.
His record, checked by some careful investors, appeared to be clean. The Florida insurance department had logged no complaints against Brandau or his investment company.
But everybody comes from somewhere.
And nobody -- from the fund managers who gave him retirees' money to the federal prosecutors who unveiled a 44-count indictment against him in West Palm Beach, Fla., earlier this month -- had uncovered a secret in Brandau's past, one that might have given investors pause. Namely, the same Frederick C. Brandau never paid any part of a $95 million
judgment against him in California in 1996. The civil claims upheld against him in a patent dispute were similar to the criminal charges he now faces. They included fraud and conspiracy to breach fiduciary obligations.
A simple Internet search could have raised investors' suspicions. If investors had entered the name Fred Brandau into one popular search engine, they would have retrieved one item: an article in the Kansas City Business Journal in 1996 about the $95 million civil judgment. But apparently even careful investors and federal investigators never did that.
'I did as much checking as I could on him,' said one Brandau investor, who spoke on the condition of anonymity. Told of the $95 million judgment, this investor said: 'I wouldn't have done business with him. Nobody in their right mind would've.'
The case provides an object lesson for investors of any type. 'Clearly if someone had kicked over a basic stone or two, his name would have bubbled over,' said Michael Allison, chairman of International Business Research, a Princeton, N.J., corporate investigation firm. 'There's really no need to be a victim of the Fred Brandaus of the world in the Internet age.'
Theodore Klein, a Miami defense lawyer who has appeared in court as Brandau's temporary counsel, said he was unaware of the judgment against Brandau. Given two days to talk to Brandau and formulate a response, he said, 'I got your message. I got nothing to say.'
As federal prosecutors tell it, Brandau's story begins in Davie, Fla., in 1996, when he started persuading investors to put money in viatical settlements, financial arrangements to buy the life-insurance policies of the terminally ill. Investors can make returns of 40% or more if the patients die in the expected time period.
But according to the indictment for conspiracy, money laundering, wire fraud and mail fraud, Brandau and his company spent only around $6 million of the $115 million on insurance policies. Early investors were paid returns out of later investors' pockets in a classic Ponzi
scheme, the indictment charges. The rest of the money went for cars, helicopters, boats and such.
Federal officials who have detailed the past three years of his life are only now beginning to discover that for Brandau, another set of legal troubles actually began more than a decade ago.
In the late 1970s, Brandau was employed by a struggling Missouri mattress company called General Bedding. According to court records, Brandau had come up with a design for the Somma mattress, a water mattress consisting of several polyvinyl tubes instead of one large
chamber. The company sent him to Los Angeles to help develop the water mattress with Angel Echevarria Co., which supplied mattress covers to General Bedding.
Instead, court records state, Brandau eventually told General Bedding that the Los Angeles company was not interested in the design.
But in March 1978, the company's owner, Angel Echevarria, applied for a patent for the invention, and the following month the pair signed a written agreement to split the profits, court records show. In June, General Bedding ceased operations.
The patent was granted in 1980.
But it was not until 1987 that the owners of General Bedding, who had kept their business licensed but no longer active, discovered that Brandau and Echevarria were making millions of dollars on the Somma mattress. The patented mattress was a work made for hire, they
claimed, and they were entitled to royalties as Brandau's employer.
A jury agreed, granting the General Bedding owners a $95 million judgment in 1996.
Echevarria settled for less than $1 million and filed for Chapter 11 bankruptcy. As a result, Brandau was liable for the remaining $94 million.
Echevarria disputes the court's original findings, saying he, not Brandau, invented the mattress. He has no fond words for his former partner. 'It was a long, drawn-out, nasty case, he said. 'He took credit for something I did.'
Brandau never paid up, according to Merrill Talpers, a lawyer for General Bedding who says he last saw Brandau in 1993, when he gave a deposition in the case. Brandau was already living in Florida at the time. The former proprietors of General Bedding have been curious to
see whether the Frederick Brandau now in jail is the Fred Brandau they remember.
He is. The Social Security number associated with the Florida driver's license of the Brandau in jail matches the Social Security number in the tax records of the Brandau sued in California.
The General Bedding owners had assumed Brandau was broke and had all but given up on recovering any money from him, Talpers said.
With Brandau in jail as the lead defendant in the insurance policies case, federal investigators are rounding up his assets and the investigation is still under way. Brandau's bond hearing has been delayed until he appoints a permanent lawyer.
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