New Nevada Law Could Allow for Scams and Schemes

Gary Capouch, a retired Washington banker, invested $175,000 in Par Three Financial Inc. in Nevada. He was convinced it was a good investment opportunity and he went back to Washington.

He was unaware, but later regrettedly learned, that there was a loophole in Nevada law that had concealed the fact that the company was being managed by an ex-felon who was previously sentenced for wire and money fraud.

Capouch said, “Had that been known, there wouldn’t have been any way I would have touched that deal with a 10-foot stick.” Capouch demanded a refund after a fellow investor warned him about Par Three, which was a company that invests in payday loan offices and check-cashing. He received $100,000 back but is still trying to recover the remaining $75,000.

Capouch’s story is not a singular case of an investor being scammed in a Ponzi scheme. It is common for companies that do business in Nevada where there are lax laws that allow legitimate and shady corporate executives to hide behind straw officers.

This is possible because corporations can have so-called “nominee officers”, individuals who do not actually play any role in the company, and are merely names on papers that purportly list top executives of the firms.

Experts believe that this loophole is one of the main problems of Nevada’s efforts to be the “Delaware of the West”, removing restrictions on corporations in order to attract more businesses. They argue that Nevada has instead created an ideal environment for white-collar criminality by its rush to attract more corporations.

Barry Minkow, a former white collar criminal and commentator on Wall Street scandals on television, said that “It’s an amazing loophole” and allowed Par Three to function. It’s a major fraud technique. It allows the criminal to conceal his identity. It’s unbelievable that the Nevada laws are as they are.

Minkow is the main reason Par Three was destroyed. Because of a concerned investor, Minkow’s Fraud Discovery Institute in San Diego launched the initial probe.

Federal and California authorities claim that Melvin Donald Ruth (64), an ex-felon from Boca Raton, Fla. who was in federal prison for 30 month until his release in Dec 2003, ran Par Three under the watchful eye of regulators over the past one and a half years. Authorities claim that the company was not based in Las Vegas but it was actually based out of Florida.

According to the Securities and Exchange Commission, Par Three received more than $8M from 120 investors across the country. Par Three advertised in newspapers like the Los Angeles Times and San Francisco Chronicle. They also had a password-protected website that promised investors returns of at least 24% annually.

According to the SEC, money from investors newer than Par Three paid interest to their original investors. Par Three also used investments for yachts, Porsches, Mercedes Benzes, jewelry, and land in Florida.

After Minkow’s group discovered that Par Three wasn’t registered to sell securities and had unlicensed broker, the SEC and California Department of Corporations intervened. They also found financial statements not prepared by certified public accountants.

The SEC persuaded a Florida federal court to issue a temporary order against Par Three and to freeze its assets in August, one week after California issued cease-and-desist orders against the company.

Nels Mitchell, associate Director of SEC’s Pacific Region Los Angeles, stated that one of the allegations in the lawsuit is that Ruth was an undisclosed Principal of Par Three. Investors would have been warned if they knew that he was a felon.

California’s cease and desist order stated Ruth and his associates “held persons out [as officers of Par Three] who had no actual involvement in the company’s operations, but were instead ‘nominee officials’ who allowed Par Three list them as officers for an amount.”

The Nevada secretary-of-state’s office doesn’t keep track of the number of nominees in its corporate files. It is impossible to know if nominee services are being used to avoid public records, and if so, how much.

However, some Nevada businessmen offering nominee services have, at the very least, hundreds of corporate positions. A. T. Mathis, a Las Vegas businessman, is the top Nevadan, according to state records. He has been an officer of or director of 3990 Nevada corporations.

Nevada has a cottage industry that employs nominee officers.

Executive Solutions Web site highlights benefits of nominated officers for corporate executives, not investors.

It states that Nevada corporation owners who want to be invisible to prying eyes may achieve something impossible. A ‘nominee’ allows them to control the corporation and become the face, voice and actions of the corporation. This is similar to the film ‘The Wizard of Oz. Corporate owners can use a “nominee” to protect their privacy and anonymity.

A Google search revealed that only Nevada, Wyoming, and Delaware have nominated officer services. The three states’ corporate laws are not too restrictive, which is not surprising. In Nevada, a nominee officer can be just a name on paper. This is contrary to what is allowed in other states.

Jay Kassees (director of the Florida Division of Corporations) stated that a Florida corporate officer must play a part in the company’s operation. Kassees stated that he believes states like Nevada, Delaware, and Wyoming have, in their desire to attract more corporations to generate revenues, unwittingly created the conditions for white-collar criminals to abuse them.

Kassees stated that Florida has enough business to not need to make exceptions for corporations. Your state needs money really badly, and the citizens don’t care. Allowing surrogate officers is a violation of the law, I believe. States such as Nevada say, “Our corporate veil can be heavy. If you wish to hide behind it, then go ahead.” ”

Officials in Nevada praise the state’s business-friendly laws for generating revenue. Nevada was home to approximately 260,000 corporations, and the state generated $57million last fiscal year from annual corporate filings. When the Legislature passed laws to make it easier for Nevadans to incorporate, approximately 60,000 corporations paid $7 million annually in fees.

Renee Parker is Nevada’s chief deputy Secretary of State. She stated that the office has no regulatory authority over commercial recordings.

Parker stated, “We are essentially a filing room.”

Anyone who creates a Nevada corporation is required to file with the secretary-of-state’s office the names and addresses of its resident agent, president, secretary, treasurer, and secretary. Only the resident agent can be located in Nevada. The real operators don’t have to be in any of these positions.

Scott Anderson, deputy secretary-of-state for commercial recordings, stated that “we have no way to know if someone’s a nominee or regular officer.”

Anderson stated that he couldn’t verify the number of Nevada corporation nominee officers.

Charles Moore, the securities administrator for the secretary-of-state’s office, stated that he had voiced concerns with coworkers regarding the use of nominee officials based on civil and criminal complaints from regulators in other countries.

Nevada law allows for schemes like Par Three to be carried out by hiding the identities of true operators. Par Three investors would never have known that the company was run by an ex-felon who was previously in prison for a similar scheme.

This was Don Scott’s experience. Scott, a retired publisher and advertising company owner in Sequim, Wash., invested $210,000 last autumn on the recommendation from Capouch, a fellow investor.

Before investing, Scott performed his due diligence. Scott contacted the Better Business Bureau in Las Vegas and the commercial recording division of the secretary of states. He assumed that the company was legitimate because neither Par Three nor any other entity had reported any problems.

Scott was in San Diego on vacation and saw Minkow during a television interview. He became more concerned about Par Three’s oddities, so he contacted Minkow’s organization.

Scott stated that Scott did not sign any correspondence he received from them. They never gave me the addresses of the stores that held my investments. They had 75 stores in Texas, California, and Florida, I was informed over the telephone. It was a giddy, elaborate Ponzi scheme.

Par Three was accused of transferring money to Cash Plus Financial Inc. which owned 10 payday loan and check-cashing stores in Florida. According to the SEC, Ruth was the person who had control over Cash Plus’ bank accounts. Par Three and Cash Plus also shared an office in Boca Raton.

Scott was able to return $200,000 but he still wants the remaining $10,000.

If they had known about Ruth, fellow investors would have moved on if they knew. Ruth was profiled by the Broward-Palm Beach New Times in 2001, a Florida weekly, while still at Miami’s Federal Detention Center.

According to the publication, Ruth was a “predatory con man” who was convicted of fraud in 1996 and placed on probation for five year. However, he managed to avoid a series of charges for nonviolent Florida crimes. Ruth has been known to use multiple Social Security numbers and aliases.

Ruth was arrested by the FBI in March 2000 for a $1 million telemarketing fraud involving foreign currency exchanges. Shortly thereafter, he was released to assist in other boiler room operations.

According to New Times, that was a huge mistake. Ruth actually participated in two boiler room scams where investors paid $12 million to fund phony check-cashing companies.

He was again arrested in July 2001, and sentenced to prison for fraud.

Ruth was released from prison in late 2003. He soon became involved with Par Three. The nominee officers kept him out of the public eye, according to the SEC.

Ruth, for which there is no Boca Raton phone number, was unable to be reached for comment.

Donald D. Merritt was Par Three’s most recent nominee officer. He is a Carson City businessman with a Las Vegas Post Office Box. Nevada records also show that Merritt has held at least 1,480 corporate positions in 758 Nevada companies.

Merritt’s Par Three predecessor was Michael L. Potter, who is also general counsel for Nevada Corporate Headquarters Inc. in Las Vegas. NCH was also Par Three’s resident agent, typifying the overlap in relationships and the frequency with the same companies or individuals being linked in these matters.

Potter, who was affiliated with 1,268 companies, stated that he planned to serve as Par Three’s nominee officer for just 30 days — December 2003 through January 2004, while the company chose more permanent officers. He resigned when that didn’t happen.

Potter stated that he had no business dealings with the company. “I was an innocent party trying to perform a simple service, and it got me burned. Potter claimed that Merritt had not listed in state records the same Las Vegas postal box that he used.

Reno’s Derek Rowley, president of Nevada Resident Agent Association, expressed concern to his fellow resident agents regarding nominee officer services following the passage of the controversial Patriot Act. This gave law enforcement agencies greater authority to investigate terrorist activity. Rowley stated that some resident agents have resigned their nomination officer services because of the Patriot Act, which makes nominee officers more accountable for corporate wrongdoing.

Rowley, who regularly lobbies the Nevada Legislature said that he was willing to suggest that the 2007 Legislature ban nominee officer services, so long as it doesn’t harm other services provided to resident agents.

Rowley stated that there is too much potential for Nevada to be a black eye on the corporation market. This is bad news for our industry.

Barbara Buckley (D-Las Vegas), Assembly Majority Leader, said that she is open to discussing the issue of the nominee officer.

Buckley stated that Nevada has been transforming itself into the Delaware of the West by passing more laws. This type of situation could serve as a wake-up call to say that while we love their business, it is not going to deceive anyone. Nevada is not a place for crooks, I think.

Here is more information about nominating officers for your Nevada corporation: