Investment Losses and Investing and Banking & Finance and Securities fraud and Law

Decade-old Heartland fraud case nearing end

March 15, 2011

A 10-year-old federal lawsuit involving a local investment firm that bilked investors out of $29 million in a Ponzi scheme finally is drawing to a close.

The court-appointed receiver charged with distributing the assets of Kenneth R. Payne and others involved with Heartland Financial Services Inc. filed a motion on March 8 to disperse the last of the money to investors.

James Knauer so far has distributed more than $2.6 million to 455 investors and creditors, and notified a U.S. District Court judge in Indianapolis that just $75,274 remains. The amount left for investors is even smaller when accounting for $28,132 in attorney's fees and $9,921 in receiver fees he is requesting.

The return for investors breaks down to almost 9 cents for every dollar invested, which is better than average for most fraud cases, said local attorney Mark Maddox, who represented several of the ripped-off investors.

“It looked to me that Knauer did a good job going out and looking for every dollar he could find,” he said. “But unfortunately, most of the bad guys end up spending all of the money.”

The U.S. Securities and Exchange Commission brought its lawsuit against Payne, now 61, and others involved in Indianapolis-based Heartland in August 2000. Payne, though, fled the United States and was apprehended by federal marshals in Cancun, Mexico, a month later. Investigators said Payne made preparations to assume a second identity and possessed a supply of loose diamonds to finance his new life.

He pleaded guilty to five counts of mail fraud and one count of money laundering, and was sentenced in April 2002 to 17 years and seven months in federal prison. He currently is incarcerated in Texas. Payne also was ordered to pay restitution of more than $27 million for orchestrating the Ponzi scheme.

The SEC accused Payne and others of defrauding investors, many of whom were elderly, through bogus investment opportunities that included interests in an offshore bank in Belize.

Knauer recovered some offshore money and seized personal assets, including homes, automobiles, motorcycles and boats, which is “real typical” in these types of cases, he said.

But, similar to what’s occurring in the Bernie Madoff scheme, he also sued investors who profited from their investments.

“If you get paid late in the game, you’re getting someone else’s money,” Knauer said. “The fairest thing was to go after the profits the people made.”

Brad Skolnik, a former state securities commissioner, recalled the scheme as one of the more high-profile securities cases he was involved in during his eight-year tenure.

“Unfortunately, Ken Payne left a lot of victims in his wake,” he said. “I’m not at all surprised to see that the receiver is still taking steps to locate assets.”

The magnitude of the case may be most evident in a local storage facility, where 147 seized boxes of records sit. The cost of monthly storage is $38.43, which is included in the attorney's fees Knauer is seeking.

Knauer wants the storage facility to destroy the boxes, at a cost of $4.88 each, or a total of nearly $718.

“The receiver requests that notice of the filing of this motion be given to Mr. Kenneth Payne on behalf of Heartland’s principals and, unless Mr. Payne or someone on his behalf is willing to assume the continuing storage costs of the Heartland records, then the receiver should be authorized to have the storage facility destroy the boxes,” Knauer wrote to the court.
 

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