October 2012

When Restructuring Reveals Fraud… MainStream Management Uncovers Ponzi Scheme

When MainStream Management’s Jim Burritt and his colleagues entered GLC Limited’s warehouse, they were stunned to find a rodent-infested mish-mash of food items, chipped pottery and clothing, instead of the appliances they expected. After investigating GLC Limited’s business practices and inventory, MainStream ultimately revealed a Ponzi scheme that had bilked investors out of millions of dollars.

When MainStream Management managing director Jim Burritt and his colleagues entered one of GLC Limited’s warehouses, they were stunned as a horde of mice scattered over their shoes. After a few days, the mice ceded their territory to rats that had descended on the warehouse inventory.

Unfortunately, that wasn’t the only surprise awaiting MainStream employees.

They expected to find an inventory of scratch and dent appliances that had been purchased by GLC Limited, a West Virginia-based corporation that sold close-out and customer returned merchandise through retail and wholesale channels. Instead, MainStream’s employees were shocked to discover a warehouse containing expired food items, mismatched knick-knacks, hundreds of pallets of chipped pottery and an assortment of more than one million t-shirts, socks and shorts in limited colors and sizes — all of it infested with rodents and teeming with droppings.

The contents of the warehouse were a closely guarded secret. Starting in December 2010, MainStream would launch an investigation into GLC Limited’s business practices and inventory, ultimately resulting in the U.S. Securities and Exchange Commission (SEC) alleging fraud to GLC for creating a Ponzi scheme that reached into the echelons of national college football.

Early Days of GLC Limited

GLC Limited, a wholesale liquidation business, was founded by Greg Crabtree, a West Virginia entrepreneur, who had plans to acquire merchandise from “Big Box” chains in which product sales volumes were too low to warrant retail space. While deciding how to fund the business, one of Crabtree’s first calls was to Jim Donnan, ESPN commentator, National College Football Hall of Fame inductee and former head coach at the University of Georgia.

Neither man had any retail experience, but together they created a plan. Crabtree would focus on the purchase of merchandise that was leftover lots, discontinued or returned items that could be sold at a profit. Donnan would secure the necessary funds from wealthy friends, sports commentators, other prominent coaches and former professional athletes in order to fund GLC activity. With promises of annual interest rates ranging from 50% to 380% and assertions that funds were to be used to purchase merchandise that had been pre-sold, it was a deal believed to have limited risk with huge potential returns.

From the summer of 2007 through the fall of 2010, GLC raised approximately $80 million in funding from non-bank sources, mainly through contacts of Donnan, and opened and closed multiple retail locations. Donnan’s influence in securing investors was effective. And, soon Crabtree, previously an inexperienced businessman, was suddenly flush with cash and enjoying a lavish lifestyle in West Virginia and Ohio. Donnan enjoyed commissions in excess of $13 million by acting as the solicitation partner.

But all was not right. In the fall of 2010, scheduled interest payments were repeatedly missed and the inability of Crabtree and Donnan to provide adequate accounting of their activities led a group of GLC investors to MainStream Management.

Within weeks, MainStream’s Burritt had been named chief restructuring officer of GLC Limited and the first course of action was to initiate a financial review. The required work then led to the fateful visit to West Virginia to assess company operations — only to realize that what existed was far from what GLC investors had been led to believe.

Investors Defrauded

Burritt and his colleagues’ visit to the warehouse was an eye-opening experience, as they were dealing with much more than a retail operation gone bad.

“We were told early on that GLC had roughly 35 to 40 investors that had loaned $30 million to $35 million to the company, with two-thirds of that money already having been paid back to investors,” said Burritt. What MainStream discovered after weeks of poring over bank statements and documents was that GLC had raised a total of approximately $80 million from 97 investors and had amassed an inventory that was virtually worthless. Of the roughly $80 million received from private investors, GLC purchased less than $12 million of inventory. Sales receipts indicated that of the $12 million in inventory, approximately $4.1 million had been sold through its retail and wholesale operations.

In short order, MainStream was able to determine that the inventory in GLC’s warehouses did not have a common theme and that the company lacked any processes for inventory control. The company’s employees were not trained in inventory management, and were simply stacking deliveries in the warehouses — many of which contained spoiled food, contributing to the rodent infestation.

“We had a suspicion going in that something was off because the early investor agreements promised such a high return on investment,” explained Burritt. “It took less than a day until our suspicions were confirmed — something unjust had happened and GLC was not a typical retail situation.”

As MainStream dug deeper into the issues with GLC Limited’s management and inventory, they realized that from all appearances, investigation, and corroboration by the SEC, the company had been operating a Ponzi scheme from mid-2007 through at least the fall of 2010. The hallmarks of a Ponzi scheme were clear — early investors were being paid out from funds received from later investors, records were not entered into an accounting system, and there was no clear documentation of how funds were being used or an understanding of who received benefit from the use of the funds.

MainStream quickly identified a common goal: to recoup as much of investors’ money as possible.

“The investors felt like victims, and rightfully so,” said Burritt. “They had been told one thing and what actually transpired was very different. Some very sophisticated business people were solicited and recruited by the confidence that they had in GLC’s leaders.

Burritt noted that investors were angry and some individuals felt foolish after being defrauded by Donnan, a charismatic leader, who was responsible for cultivating and securing investors. It is alleged that Donnan tapped former football players and high-profile coaches as investors, leading them to believe that an investment in GLC was virtually risk-free. And, as he allegedly told one former player, “Your ‘Daddy’ is going to take care of you, and if you weren’t my ‘son,’ I wouldn’t be doing this for you.” That player invested $800,000.

The many individual stories of loss and betrayal were a motivating factor for MainStream as it began the full-scale investigation into what took place at GLC Limited. “At the end of the day, while our work was complicated, our goal was simple: to get as much money back as we can for each of the investors and creditors,” said Burritt.

But making good on that promise would prove to be a challenge. First, MainStream needed to untangle the accounting complicity created by GLC Limited’s management.

Following the Money Trail

Early in its investigation of GLC Limited, MainStream determined that the company held nearly 30 different bank accounts and that GLC did not have documentation for deposits or withdrawals. Following this trail of money would prove to be MainStream’s main task as it fought to recover funds for investors.

Characteristic of fraud, GLC Limited did not maintain any financial records to indicate the individuals that had invested and those that had received interest payments. Laurie Rueber, director of business consulting at MainStream, created a plan to track the origination of the money during the three years in question, document how the money had been used and who had received payments, and determine which investors had profited and which had been defrauded from GLC’s act.

Working in conjunction with the company’s legal team and the creditor committee counsel, MainStream rebuilt three years of financial data. This forensic accounting analysis required the company to recreate a cash-basis financial statement covering records from 28 financial institutions from 2007-2010. More than 250,000 pages of information was accumulated and served as the baseline for all litigation support for the period of time that the Ponzi scheme had been in operation.

Once GLC’s assets were uncovered, which included its warehouses totaling 315,000 square feet and costing more than $60,000 per month, MainStream was in a better position to recover investor dollars. So, in late February 2011, approximately 100 days after MainStream was engaged, five of the remaining GLC retail outlets were closed and four warehouses were combined in to three, GLC Limited filed a Chapter 11 liquidating plan.

When legal action against GLC Limited began, MainStream’s efforts to track the money trail were applauded by in court by Frank DeBorde, an attorney with the Atlanta law firm Morris, Martin and Manning. During a hearing in the Southern District of Ohio courtroom, DeBorde commented to Judge Jeffery P. Hopkins, “The records of GLC Limited were really in disarray and that suggests that they were simply all over the place, but that’s really not enough, in a lot of cases the records just simply didn’t exist. What MainStream Management has done, I hope I can do justice to the amount of work that they’ve put into this. I’m an accountant early in my trade and given what these records were like, I find it quite incredible they were able to put that all together.”

Civil Litigation

In late July 2012, a federal bankruptcy court judge approved a settlement plan for Donnan, in which creditors claim that GLC owes them more than $40 million. Donnan’s bankruptcy plan comes months after an Ohio bankruptcy court approved GLC Limited’s Chapter 11 plan.

MainStream’s continuing work in following the GLC money and inventory trail along with their re-creation of the financial data is aiding federal authorities as they investigate the actions of GLC Limited, and the principals involved. “We’ve been working with the SEC and IRS in helping them understand what transpired at GLC,” said Burritt. “The same information that Laurie [Rueber] recreated is being used by these agencies in their investigations.”

MainStream Management, with the legal team from Cincinnati law firm Frost Brown Todd, LLP, are in the process of reimbursing those investors and creditors who committed funds in the Ponzi scheme. To date, MainStream and Frost Brown Todd have been able to claw back money in 20 of 20 “net winner” cases (people or entities that received more money than they invested). They have also assisted in bringing about four of four fraudulent conveyance cases and were instrumental in reaching a settlement with GLC’s former owners/officers and directors.

Jim Frooman, the lead litigator from Frost Brown Todd, has said, “The work that MainStream completed was so effective, that while we had to argue law in the complaints filed against certain parties, we have never had to argue whether the amount of money involved was correct. That fact alone has increased our probability of success significantly.”

While Donnan chose to file personal bankruptcy in lieu of returning his net winnings, GLC Limited worked together with Donnan’s counsel to develop a joint plan and disclosure statement that provided significant benefits to the company’s creditors.

On August 16, 2012, the SEC announced fraud charges against Donnan and Crabtree, noting their involvement in the $80 million Ponzi scheme. “Donnan and Crabtree convinced investors to pour millions of dollars into a purportedly unique and profitable business with huge potential and little risk,” said William P. Hicks, associate director of the SEC’s Atlanta Regional Office. “But they were merely pulling an old page out of the Ponzi scheme playbook, and the clock eventually ran out.”

Burritt, who remains as GLC Limited’s chief restructuring officer and plan administrator, has testified in court hearings about GLC activity under its former owners. He and MainStream Management remain committed to recouping as much funds for GLC investors as possible.

“A lot of people got hurt in the venture and we are working to correct as much of the wrong as we can,” Burritt said.

Laura Keyser Brunner is president at MainStream Management. She has oversight for the major functions of the company including strategy, operations, consulting delivery, product initiatives, marketing, and business development. She is responsible for steering the company toward long-term growth opportunities and extending the company’s worldwide market presence. Prior to MainStream, Brunner was a member of the ESI International executive management team for over 13 years. In 2008, Brunner was promoted to SVP of Global Client Services. She was responsible for ESI’s North American client operations, with offices spanning the U.S., Canada, and Brazil. From 2004 to 2008, she served as SVP of Business Development at ESI. From 1998 to 2004, Brunner positioned the company for a major sales and marketing expansion as VP of Business Development. Prior to joining ESI, Brunner had a ten-year career with AT&T. Brunner earned a Master of Business Administration in Marketing and a Masters Certificate in Project Management from The George Washington University. She earned a Bachelor of Science in Natural Resources in Forestry & Geology from The University of the South. Brunner recently completed an Executive Education program in leadership Yale University. She is a member of the TMA and ABI.