Conversion Solutions asset assignor awaits sentencing
stockwatch.com.
2008-04-01 12:20 ET - Street Wire
Also Street Wire (U-*SEC) U.S. Securities and Exchange Commission
by Lee M. Webb
Conversion Solutions Holdings Inc. asset assignor David Alan Hawkins, the man behind Pacific Beach Mortgage Co. Inc. and Mad Dog Builders Inc., has been convicted of fraud for a mortgage scheme involving some of the same bogus liens that underpin a purported $310-million security note dealt to Conversion. (All amounts are in U.S. dollars.)
Texas lawyer Harry Skeins, Mr. Hawkins's accomplice in the fraudulent mortgage scheme, has also been convicted of conspiracy and wire fraud. The two men are scheduled to be sentenced on April 25.
Conversion and its founder Rufus Paul Harris, a semi-literate Georgia promoter with a criminal record and a history of flaky promotional flops, are defendants in a separate securities fraud lawsuit filed by the U.S. Securities and Exchange Commission (SEC) in October of 2006.
As previously reported by Stockwatch, 67-year-old Mr. Hawkins of Seattle, Wash., and 71-year-old Mr. Skeins of Blanco, Tex., were indicted in August of 2006 for conspiracy and wire fraud in connection with a crooked mortgage scheme.
The convoluted scheme involved invalid liens, purported foreclosures, illegal conveyances, bogus title insurance and fraudulent mortgage applications that, at least temporarily, netted the pair of scammers approximately $1.56-million in loan proceeds.
Mr. Hawkins and Mr. Skeins entered pleas of not guilty and went on to incorporate separate claims of "diminished capacity" into their defences, basically arguing that different emotional and psychological upsets rendered them incapable of formulating the necessary intent to commit fraud.
Mr. Skeins put his alleged cognitive deficiencies down to the impact of a marital meltdown, claiming that he was befuddled after falling victim to a vengeful wife and a vindictive judge in a nasty divorce proceeding.
Mr. Hawkins traced his alleged mental woes back more than two decades to the 1983 collapse of his construction company, Mad Dog, and what he considered the failures of the legal system as he subsequently launched a spate of lawsuits in unsuccessful attempts to right perceived wrongs.
Assistant U.S. Attorney Vincent Lombardi countered that the defendants knew exactly what they were doing when they planned and perpetrated the complex fraud "that included preparing false title documents, recruiting and paying a 'straw buyer' to pretend to purchase the property, applying for mortgage loans to 'finance' the fictitious purchase, and then diverting the proceeds for their own benefit."
The case was tried in the U.S. District Court for the Western District of Washington between Dec. 3 and Dec. 14, 2007.
The jury rejected the diminished capacity defences and returned a unanimous verdict finding Mr. Hawkins and Mr. Skeins each guilty of the one count of conspiracy and two counts of wire fraud charged in the indictment.
A sentencing hearing for the aging fraudsters, who have been locked up since the jury returned its verdict more than three months ago, has been postponed a couple of times and is now slated for April 25.
The imminent sentencing may mark the final chapter in the intriguing story of Mr. Hawkins and Mad Dog, which was first reported by Stockwatch in November of 2006.
Mad Dog recap
The Mad Dog tale traces back more than 25 years to when Mr. Hawkins was developing a nine-story condominium project overlooking Seattle and Puget Sound.
As construction was nearing completion, Queen City Savings and Loan, a lender engaged in some rather shady practices that was financing the project, declared Mad Dog's loan in default and then served a notice of foreclosure.
Mad Dog filed for bankruptcy in order to obtain a temporary stay of the foreclosure, hoping to line up financing from another source.
In May of 1983, however, bankruptcy judge Samuel J. Steiner terminated the automatic stay and Queen City foreclosed on the property.
Mr. Hawkins quickly filed a fraud lawsuit against Queen City and went on to prevail in a jury trial in which the verdict and jury award were rendered in February of 1984.
According to Mr. Hawkins, however, the award "was deliberately, improperly, and unlawfully reported in open court by Judge James McCutcheon" to be $350,000 instead of the $3.5-million actually awarded by the jury.
In subsequent litigation over the allegedly misrepresented award, Mr. Hawkins claimed that Superior Court Judge Donald Thompson accepted the perjured testimony about the matter by the trial judge and his bailiff and "refused to correct and record the true jury award."
Mr. Hawkins battled on, filing appeals and launching approximately 10 civil actions in state and federal courts in addition to lodging complaints with various administrative bodies.
Over the next several years, the Mad Dog builder lost the lawsuits and appeals and evidently did not receive any satisfaction from administrative bodies such as the Washington State Commission on Judicial Conduct.
Frustrated by the perceived skulduggery of trial and appellate judges, lawyers, bank executives, county officials and others, Mr. Hawkins turned to another strategy in an effort to obtain some form of satisfaction.
In the early 1990s, Mr. Hawkins and Mad Dog began filing non-consensual liens and an "affidavit of obligation" in Washington's King county against a number of entities and individuals he believed had conspired to wrongfully frustrate his lawsuits related to the Queen City dispute.
In a flood of filings, Mr. Hawkins went on to name more than 50 alleged principal and accessory lien debtors including the United States of America, seven judges, at least six lawyers, a number of bank executives, and a handful of county officials, among others.
In October of 1994, Mr. Hawkins and Mad Dog assigned their purported interests in the liens to Pacific Beach Mortgage, another company controlled by Mr. Hawkins.
In November of 1994, however, a Superior Court judge issued an order striking the liens and associated documents filed by Mr. Hawkins, Mad Dog and Pacific Beach Mortgage.
Evidently Mr. Hawkins paid no heed to the 1994 Superior Court order that was intended to bring his "frivolous" and "malicious" activities to an end.
In fact, several years before teaming up with Mr. Skeins to use the bogus liens in the mortgage fraud that led to their conviction, Mr. Hawkins attempted to make some money by converting the invalid liens into other fraudulent assets.
Specifically, Mr. Hawkins bundled the bogus liens and the cockamamie affidavit of obligation into so-called Uniform Commercial Code (UCC) security notes, some of them supposedly valued at hundreds of millions of dollars, that he attempted to flog hither and yon.
The notes, one of which was touted as a valuable asset by Georgia-based Conversion, were actually worthless.
Worthless paper
As reported in November of 2006, a Stockwatch investigation traced the dubious provenance of the purported $310-million UCC security note used to launch Conversion's smelly promotion back to Mr. Hawkins.
Remarkably, the worthless note passed muster with Conversion's sloppy auditor Thomas Benson, who was then moonlighting from his day job as chief internal auditor with Michigan's Department of Natural Resources.
Mr. Benson was subsequently sanctioned by the Public Company Accounting Oversight Board, which yanked his registration after a scathing review of the grossly deficient audit he performed for Conversion.
When Stockwatch first reported on Conversion's worthless security note, the SEC had not yet indicated any interest in that purported asset, focusing instead on the company's other bogus claims regarding a bond portfolio.
The fraudulent bond claims, which were also examined in detail in a series of Stockwatch articles, were certainly worthy of attention. By the time the SEC suspended Conversion and then sued the company and its chief executive officer, the virtual fraud magnet was touting a staggering asset portfolio of more than $7.3-billion.
Subsequent to the Stockwatch article, it is clear that the SEC discussed the bogus $310-million UCC note with prosecutors handling the criminal case against Mr. Hawkins and Mr. Skeins.
In a Nov. 21, 2007, pretrial filing in that case, the prosecution made at least an oblique reference to Conversion while sketching Mr. Hawkins's efforts to issue securities against his bogus liens prior to engaging in the mortgage scheme that led to his conviction.
"While these efforts were unsuccessful in terms of putting money in Hawkins's pockets, that is not to say they did no harm," the U.S. Attorney stated in a footnote to the filing. "Over the years, the FBI and the SEC has received numerous complaints that these bonds or securities have been used to perpetrate frauds on other third parties.
"For example, a company in Atlanta sold stock supposedly based, in part, on a 'Note' acquired from Hawkins worth hundreds of millions of dollars.
"The Securities and Exchange Commission ultimately sued that company for fraud. The SEC estimates that investors lost in excess of $40-million in that scheme.
"That investigation is ongoing."
The Conversion scam featured explicitly and much more prominently in the prosecution's March 10, 2008, sentencing memorandum following the conviction of Mr. Hawkins and Mr. Skeins.
Indeed, in that March 10 filing the U.S. Attorney devoted significant space to discussing Mr. Hawkins's connection to Conversion and arguing that the $1.56-million fraudulently obtained in the mortgage scheme "is just the tip of the proverbial iceberg."
"According to a representative of the Securities and Exchange Commission (SEC), Hawkins's activities contributed to significant losses in a securities fraud scheme," the prosecutor noted.
Like Stockwatch, the prosecutor traced Conversion's purported $310-million UCC note to one of the company's precursors, Waatle Holdings Corp., and then back to Mr. Hawkins.
The prosecutor went on to offer a significantly understated account of the vaporization of Conversion's market capitalization after the fraudulent promotion caught the attention of the SEC.
The prosecuting attorney indicated that Conversion's market capitalization was approximately $46-million at the time the SEC suspended the stock and sued the company and its founder. In fact, immediately prior to the SEC action, Conversion's market cap was well in excess of $200-million.
"Over time, as the company has failed to retain counsel to represent it in the lawsuit and failed to maintain any real pretense of continuing to do business, market confidence has continued to erode," the prosecutor commented, going on to peg Conversion's current market capitalization at less than $140,000.
"Put another way, Conversion Solutions used a bogus 'UCC Note' issued by Hawkins as part of a portfolio also composed of other bogus assets to sell stock," the U.S. Attorney stated. "All of those assets are worthless, resulting in millions in losses to the investing public.
"While those losses are once or twice removed from Mr. Hawkins's activities in this case, they arise out of the same common root."
Crime and punishment
Mr. Skeins played no part in Mr. Hawkins's attempts to peddle the worthless UCC notes, but the prosecution claims that the disgraced Texas lawyer, "acting out of pure greed," was instrumental in the fraudulent mortgage scheme that marked the culmination of the Mad Dog principal's "decades-long vendetta against judges, bank officers and others he felt had wronged him."
According to the prosecution, Mr. Hawkins and Mr. Skeins had at least another eight fraudulent mortgage transactions in the works when they were arrested.
The government wants Mr. Hawkins and Mr. Skeins each sentenced to 57 months in prison, to be followed by five years of supervised release. The prosecution says that a 57-month sentence represents the bottom of the guideline range calculated by the probation office.
In addition, the government is seeking orders for restitution of the $1.56-million scammed from the mortgage lender.
Lawyers for the convicted fraudsters separately argue for downward departures from the sentencing guidelines.
Mr. Skeins's attorney Howard Ratner claims that his client, notwithstanding his disappointing demeanor on the stand and his refusal to admit his intent to defraud, "is sorry, ashamed and remorseful for his conduct."
"He no longer practices law and will be disbarred," Mr. Ratner notes. "Perhaps his greatest punishment for this offense is his shame in loss of honor. He is a broken man."
According to Mr. Ratner, a short jail sentence, preferably served in Texas, followed by a three-year term of supervised release would be sufficient punishment for Mr. Skeins.
Representing Mr. Hawkins, lawyer Robert Goldsmith says that his client committed the crime because of mental illness triggered by the historical injustice he suffered following the collapse of Mad Dog.
"Clearly, he is a man who suffered an injustice but could not get over it," Mr. Goldsmith argues. "As a law-abiding, hard-working man, he could not cope with the fact that he never could get a remedy.
"That search for a remedy or for justice has always been his motivation, albeit misguided by his obsession and mental illness.
"Money was not his primary goal in this offense."
Mr. Goldsmith says that one year and one day of imprisonment, three years of supervised relief and mental health treatment as needed is a sufficient sentence for Mr. Hawkins.
Barring any further delays, Judge Ricardo Martinez will mete out the appropriate punishment for Mr. Hawkins and Mr. Skeins on April 25.
Conversion diversion
While 16 months elapsed from indictment to conviction in the criminal case against Mr. Hawkins and Mr. Skeins, the SEC civil case against Conversion and Mr. Harris is still unresolved more than 17 months after the U.S. regulator filed suit in the U.S. District Court for the Northern District of Georgia on Oct. 24, 2006.
Neither Mr. Harris nor the once heavily touted multibillion-dollar Conversion has legal representation and defaults were entered against both defendants in November of 2006. Still, the case drags on.
There are currently four outstanding motions, three of them dating back to November of last year, awaiting rulings by Judge Clarence Cooper.
In a following article Stockwatch will provide a recap of the case and review the outstanding motions, three of which were submitted by Mr. Harris, who has been representing himself throughout the case.
Meanwhile, Internet stock forums that once boasted fairly large numbers of boisterous cult-like Conversion followers have now become little more than an occasional diversion for disillusioned shareholders, though a few faithful "true longs" continue to congregate and swap resurrection fantasies on a message board controlled by Mr. Harris.
The market clearly does not share the fantasies of the few remaining Conversion zealots. The stock, which traded as high as $4 per share at the peak of the promotion, now only ekes out a few subpenny trades.
With 192,300 shares changing hands in the last trading session of March, Conversion closed at two-10ths of a cent.
Comments regarding this article may be sent to lwebb@stockwatch.com.
(More information regarding Conversion Solutions Holdings Corp. is available in Stockwatch articles published on Oct. 13, 16, 18, 20, 24 and 26; Nov. 2, 3, 7, 10 and 16; Dec. 5, 7 and 11, 2006; May 9, 10, 11, 14, 17 and 22; June 12; and July 11, 2007.) |
