CEO Charged With Fraud
U.S. Technologies' Earls Allegedly Diverted Funds
By Renae Merle and Carrie Johnson
Washington Post Staff Writers
Friday, December 20, 2002; Page A01
washingtonpost.com
C. Gregory Earls, a Washington businessman who used his contacts in local charities and civic organizations to raise tens of millions of dollars for investment deals, was criminally charged yesterday with fraud and diverting millions in investor money for his own use.
Federal prosecutors in New York said Earls raised $20 million for a partnership to invest in U.S. Technologies Inc., where he is the chairman and chief executive, but diverted about $13.8 million of that to people including his ex-wife, investors in other failed investment partnerships and his children's educational trust fund.
Earls cultivated investors from a wide swath of Washington society, including the well-heeled and the less well-off, according to court papers. Investors spanned the gamut: former congressmen and senators, syndicated columnist George F. Will, the parents of Earls's receptionist, and the teacher of his children.
Earls recruited an all-star board to U.S. Technologies, including former FBI director William H. Webster. Webster's actions as chairman of U.S. Technologies' audit committee led to his resignation from a newly created accounting industry oversight panel and ultimately to the departure of Securities and Exchange Commission Chairman Harvey L. Pitt, who had nominated Webster for the oversight panel.
"Innocent investors entrusted millions of dollars to Earls, expecting that he would invest that money in U.S. Technologies," said James B. Comey, the U.S. attorney in Manhattan. "Earls repaid that trust with a naked theft of investors' money."
Earls surrendered to U.S. Postal Service inspectors yesterday afternoon in New York and was arraigned in the evening at the federal court building in Manhattan. Earls, with French cuffs on a finely pressed pink shirt dangling below his hands (the cuff links had been removed), agreed yesterday to post a $500,000 personal-recognizance bond, surrender his international travel documents, and travel only between Virginia and New York. A preliminary hearing in his case is set for Jan. 21.
Earls was charged with 10 counts of securities, wire and mail fraud after an investigation by the U.S. Postal Inspection Service that included cooperation with Earls's former bookkeeper, investors in his business deals and a former U.S. Technologies director. Earls faces a maximum of 10 years in prison on the securities-fraud charge and five years in prison on each of the nine mail and wire fraud counts.
Earls could not be reached for comment yesterday but has said in previous interviews that he did not misuse investors' money and did nothing wrong. The prosecutors' actions are "deplorable," said Tom Green, Earls's attorney. "The presumption of innocence has disappeared. That office seems more committed to self-promotion than protecting the rights of individuals."
Separately, the SEC filed a civil lawsuit against Earls and U.S. Technologies, charging them with breaking securities law and making misleading statements to cover up Earls's misdeeds. The agency will ask a judge to force Earls to turn over "ill-gotten gains" and will seek to bar him from serving as an officer or director of a public company.
The charges are just the latest in a stream of tribulations for Earls and U.S. Technologies, a Washington-based firm that ran outsourcing programs for prison labor and invested in small Internet companies. The company became the center of scrutiny as Webster was pushed out of his role as chairman of the new accounting board amid disclosures about U.S. Technologies' accounting problems and lawsuits against Earls. Pitt resigned after what was viewed as his mishandling of the Webster appointment. Webster is not a target of the ongoing criminal probe, an investigator said.
Lawsuits and accusations have followed Earls for more than 20 years, as the self-styled merchant banker has pursued investments in a variety of ventures, dabbling in B-grade movies, corporate takeovers, coal mines and even minor-league baseball. Earls, frequenting charity balls for the Washington Ballet and Choral Arts Society for more than 10 years, was more likely to appear on the society page than in financial news. He once lived in the Four Seasons for a year after separating from his wife and held Christmas parties there for the Boys & Girls Club of Greater Washington, where he was also a board member.
His investors included former congressman John Bryant, a Dallas police chief and a teacher who taught three of Earls's children at St. Albans School, a prestigious prep academy. According to the SEC lawsuit, they also included "a well-known merger and acquisition expert, a syndicated columnist, a speechwriter, a lobbyist, a former senator, and the parents of [U.S. Technologies'] receptionist." A source confirmed that columnist Will invested with Earls; Will declined to comment.
Earls's career has been dogged by lawsuits from investors who sued him for allegedly bouncing checks and refusing to make good on investment returns. U.S. Technologies' failure to disclose those disputes to shareholders violated securities law, the SEC said.
The Postal Service began investigating Earls in September, at the request of federal prosecutors in New York. They raided Earls's home and office on Prospect Street in Georgetown on Oct. 1, seizing paperwork and business materials. They also interviewed several "victim-investors" in Earls's labyrinth of partnerships, according to the criminal complaint.
The charges center on a partnership called USV Partners LLC, which Earls set up to inject capital into U.S. Technologies in 1998. He eventually raised $20 million from more than 100 investors to buy U.S. Technologies stock, but the SEC and prosecutors say only a small amount of the money raised went to U.S. Technologies; most of it was used for management fees and "expenses" charged to the partnership for services that Earls never provided, they say.
"Things were set up so that [Earls] had the only signatory authority for the bank accounts," said William Kezer, inspector in charge at the Postal Inspection Service's New York division. "He was USV's manager. The address was his. Essentially, he was making the decisions."
Investigators have secured handwritten notes from Earls to his bookkeeper, who is unnamed in court papers. Kezer said the bookkeeper will not face criminal charges. "We continue to review bank records to determine if others were involved in this scheme and to develop a possible case against them," Kezer said.
Cooperation from the bookkeeper and former investors will be key to the investigation, said Preston Burton, a former federal prosecutor who now defends corporate executives. "It helps to have a guide," he said.
Earls and U.S. Technologies also did not tell the agency or shareholders that half of its board of directors resigned in April, according to court papers. Webster and Arthur Maxwell, another audit committee member, have said they resigned after U.S. Technologies dropped insurance that covered directors.
"You have a very charming, very engaging guy, who has a lot of the right friends, who is arguably one of the best schmoozers ever, and he used those tools to build a facade based on fraud and deception," said Maxwell, who cooperated with investigators.
Staff writer Robert O'Harrow Jr. in New York contributed to this report.
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