Re: 2/23/03 - Charlotte Observer: Tenacity yields millions for bilked investor; After 5 years, Charlotte broker brought to justice
Inside Banking
Posted on Sun, Feb. 23, 2003
Tenacity yields millions for bilked investor
After 5 years, Charlotte broker brought to justice
RICK ROTHACKER
Staff Writer
Just days before a surgeon would cut out his cancerous vocal cords, Belgian millionaire Luc Castelein could have been spending cherished time with his family back home.
Instead, the 65-year-old was in New York City last summer facing a barrage of lawyers' questions about an investment scam that had cost him $4.1 million. He soothed his aching throat with painkillers and a glass of water.
Five years earlier, a Charlotte stockbroker had offered Castelein profits of $100 million-plus in a complex bond-trading program. He thought it was too good to be true but signed up after he visited the broker and left with a letter stating it was legal.
Once his money disappeared, Castelein filed an arbitration claim, but it crawled along. The money trail touched a maze of players, including an Australian, the FBI, a brokerage unit later merged into Charlotte's Wachovia Corp. and a troop of lawyers.
Through it all, Castelein, who dropped out of school at age 15 but still built two successful companies, was determined to have his case heard and get his money back.
When he was forced to switch lawyers, twice, he hired new ones. When he was offered settlements that didn't cover his losses, he turned them down. And when doctors discovered the cancer, he delayed surgery so he could videotape his testimony.
"If I have to go now, I will do it now," he told his daughter, before flying to New York. "We won't have another chance."
His perseverance paid off last month in a rare -- and record -- multimillion-dollar award for an investor taking on the brokerage industry. At a time of rattled confidence in the markets, some see the victory as a sign of a securities-industry crackdown on wrongdoing.
A generation and an ocean apart, Castelein and Charlotte broker Douglas Reid were an unlikely pair to become entangled in a high-stakes investment scheme.
Castelein (pronounced CAS-ta-lin) joined his family's textile business in Belgium as a teenager, before starting a refrigerated truck company, then a firm that made large panels for commercial refrigerators.
The panel business took off, and about 12 years ago, he sold a 90 percent stake to a German steel conglomerate, making millions.
Reid spent his school years at Charlotte Country Day and graduated from N.C. State in 1985. Later, he raised money for the private school and was head usher at Myers Park United Methodist Church.
After a string of brokerage jobs, he opened his own office in 1993, trading stocks, bonds and mutual funds from an East Morehead Street building with a skyline view. He was a branch manager for Corporate Securities Group Inc., a Florida-based firm that had brokers nationwide working as independent contractors.
In the spring of 1997, their lives intersected through an Australian businessman named Walter Burke, who also had an office in Charlotte. Details of the encounters are fuzzy, but the findings of an arbitration panel, as well as federal court documents and interviews, outline the events that followed.
Introduced to Castelein through a business associate, Burke told the Belgian about a bond-trading program. Separately, he advised Reid of a potential new client who had millions to invest.
Castelein normally kept his money in Europe with private bankers, who made investments for him mostly in conservative bonds. He didn't like getting updates through mailed statements; he preferred quarterly meetings in person.
He was skeptical of Burke's incredible proposal, and so were his bankers, but he agreed to fly to New York in April 1997 to learn more about it.
There he met Reid, who gave him a business card and new-account forms with the logo of Bear Stearns Cos. Inc., a prestigious Wall Street firm. Castelein wasn't aware Reid didn't work for the New York-based company, which only cleared trades for Reid's firm, Corporate Securities Group.
Castelein asked his bankers about Bear Stearns, and they praised its reputation. His next step was to fly to Charlotte. A black Mercedes met him at the airport.
He made Reid outline the investment plan in a carefully worded letter. Castelein's money would be used to buy U.S. Treasury bonds and "all interest, profits and initial funds" would stay in a Bear Stearns account.
Two days later, Castelein wired $12.5 million to Reid. In about three months, most of it would be gone.
Starting to get nervous
The broker began trading with the money feverishly, according to federal court documents and arbitration findings.He was buying and selling mutual funds unusually fast, generating fat commissions for himself, and making other unauthorized trades.
He also moved money to a Wachovia bank account, where he wrote himself and Burke checks totaling $587,000, calling them management fees, the documents say. Next he transferred millions to a man in California named Thomas Johnson, allegedly as part of the investment program.
Castelein was becoming increasingly nervous.
He was calling the broker frequently about his money and getting vague responses. He wasn't receiving any statements from Bear Stearns or Corporate Securities Group because Reid was routing them to an address in Charlotte.
At one point, Castelein flew to Charlotte and Reid gave him a doctored statement showing more than $13 million in his account. In July 1997, Reid sent four letters to Castelein assuring him his money was safe and that promised profits were delayed for "stupid reasons," according to the documents.
While investigating Johnson in an unrelated case in California, the FBI became involved. A large wire transfer -- part of Castelein's money -- had shown up in one of Johnson's accounts and the government seized it.
Reid assured an increasingly annoyed Castelein that he had hired a Charlotte attorney to try to get the money back from Johnson and the government. The attorney, Lee Spinks, helped recover all but $4.1 million. But he withdrew from the case after he discovered Reid had been writing checks to himself.
Castelein then hired his own attorney to investigate and filed an arbitration claim in September 1999 with the National Association of Securities Dealers, alleging Reid had defrauded him. The self-regulatory agency provides a forum for resolving most securities industry disputes.
But his chances of winning weren't particularly strong. About 50 percent to 60 percent of claims decided by arbitrators result in an award, and punitive damages are rare.
Castelein's arbitration claim quickly ran into a series of legal hitches.
In late 2000, Charlotte-based First Union Corp. announced it was buying JWGenesis Financial Corp., parent of Corporate Securities Group, in a deal valued at between $90 million and $110 million.
Castelein's attorney worked at a Charlotte law firm that represented First Union, and the bank asked that the lawyer be removed from the case to avoid a conflict of interest. The same thing happened with a new lawyer a few months later when First Union announced its Wachovia merger.
In early 2002, Castelein hired his third lawyer, David Rudolf, a well-known N.C. criminal defense attorney who had never handled a securities arbitration case. The Belgian, who would eventually spend a total of $750,000 in legal fees, had grown increasingly frustrated by the delays.
"I want a hearing quickly," he told Rudolf. "I am tired of waiting."
`He ripped them off'
Not long after Castelein filed his claim, the FBI began to close in on Reid.
Agents searched his office and Myers Park home in April 2000 and interviewed him a few weeks later. They weren't looking at him for just the Castelein case.
Between 1997 and 2000, Reid had made unauthorized trades on another customer's account and lost $500,000. When the client wanted his money back, Reid, again using the Bear Stearns ruse, obtained $1 million from a wealthy French investor. He used that money to pay off the original client and for personal uses, according to court documents.
The U.S. attorney's office obtained an indictment against Reid for fraud and money laundering in the scams. He pleaded guilty and was sentenced last year to more than four years in federal prison.
"You have a person who the public was entitled to trust, and he ripped them off," said FBI agent Eric Davis, who investigated the cases.
In his sentencing, Reid's defense attorney argued that his client made extraordinary efforts to pay back the $1 million to the French investor, selling his home in Myers Park and cashing out an inheritance of nearly $400,000.
The U.S. attorney countered that Reid used part of the proceeds from the home sale to buy a house valued at about $600,000 in an exclusive development near Pawleys Island, S.C.
Meanwhile, Rudolf was preparing for an arbitration hearing in August 2002. He requested documents from the companies involved and talked to Reid's attorney about the broker's role in the scam.
Castelein's testimony also would be important to the case. After his cancer surfaced in June 2002, Rudolf hastily arranged the New York deposition on July 5.
During more than eight hours of testimony, Castelein grew exasperated as a lawyer for Corporate Securities Group, now part of Wachovia Securities Financial Network Inc., asked him why he had invested in the scheme. "I didn't believe it, but they wrote it on paper," he said in a raspy, accented voice.
A month later at a Charlotte hotel, a closed hearing before three arbitrators began, operating much like a trial.
Rudolf was gunning for punitive damages, not just the $4.1 million still missing, and he may have been helped by the actions of the involved companies.
At the hearing, Wachovia Securities and Bear Stearns were slow to turn over requested documents, prompting a subpoena from the panel, according to the arbitration findings.
After the sixth day of testimony, an attorney representing Wachovia Securities withdrew from the case after one of his witnesses had given false testimony. The panel later said it was apparent Wachovia Securities had provided the lawyer with incomplete information.
Reid, who never worked for First Union or Wachovia, testified about his unauthorized trading and what he called insufficient supervision by his Corporate Securities Group bosses.
"Mr. Reid has accepted full responsibility for his actions and done what he could do to make the situation right," his attorney James Wyatt said. "He testified at length during the hearing. He was brutally honest."
After the hearing, Rudolf received a settlement offer of $3 million. He didn't take it to his client.
Castelein had told him he wanted to get at least $8 million, which included all of his expenses and the interest he could have earned since April 1997. It's what he called his "moral restitution."
Later, Rudolf received two more offers, one for as much as $8 million. After five years, Castelein felt that his retribution was near, but now he wasn't sure whether he should settle.
He asked his attorney what he should do. Rudolf liked their chances with the panel.
$12.3 million of punishment
The arbitrators' findings arrived by mail on Jan. 27. Digging through a 20-page document, Rudolf found the amount: $12.3 million. Not a bad award, he thought.
Then he realized that was just the punitive damages -- there was also an award for the $4.1 million taken from the account. The punitive damages were the maximum allowed by N.C. law, three times compensatory damages.
All told, including legal expenses, interests and other costs, Castelein was looking at nearly $18 million.
The panel called Reid's actions "reprehensible" and his bosses poor supervision "willful and wanton." Reid and Wachovia Securities were held jointly liable for most of the damages, while Bear Stearns was ordered to pay $200,000.
Castelein learned of the award from his daughter, Charlotte Castelein. He immediately called Rudolf. "Thank you and congratulations," he told him, using a device that allows him to speak through an opening in his throat. "I am very happy."
For a securities arbitration, the punitive damages were the largest on record for an investor against a major broker-dealer, according to Richard Ryder, founder of Maplewood, N.J.-based Securities Arbitration Commentator Inc., which tracks arbitration awards.
Experts said the steep punitive award could be a sign the panel was displeased by participants' actions. Rudolf said the case sends a message to the industry that arbitrators will levy punitive damages. He is considering more legal steps against Wachovia over actions during the hearing.
A Wachovia spokesman said the company was disappointed with the decision and is considering an appeal. These awards, however, are rarely overturned. Bear Stearns did not return calls for comment.
Reid, 41, doesn't have money to pay damages, his attorney said. He is at his S.C. home awaiting assignment to federal prison.
In a hand-written note presented at sentencing, his wife said taking him away from the family "will kill the spirits of our (four) children and damage them for life."
Burke, the Australian go-between, and Johnson, the California contact, have not been charged.
Castelein, still recovering from his surgery, was unable to be interviewed for this story. During the past five years, his daughter said he often grew frustrated with the American legal system and wanted to quit.
"I think they wanted us to give up," Charlotte Castelein said from Belgium. "They didn't think we would go through with it until the end."
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Rick Rothacker: (704) 358-5235; rrothacker@charlotteobserver.com.
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