back to Niagara Falls Reporter archive
It seemed too good to be true. And it was.
Last week, state and federal law enforcement agencies closed in on an alleged investment scam that may have bilked as many as 300 area residents out of more than $14 million.
"This is, without a doubt, the biggest investment scam ever to hit Niagara Falls," said a source familiar with the case.
So many victims have been identified that Diane LaVallee -- the Buffalo-based assistant New York State Attorney General handling the case -- has been scheduling interviews as much as three weeks in advance. Individuals have reported losing amounts varying from $10,000 to more than $1 million. In many cases, the victims are retirees whose investments represented their entire life savings.
Sources close to the investigation told the Reporter the probe is focusing on Richard Muto, a prominent Niagara Falls financial advisor, who reportedly sold unregistered securities in the form of promissory notes issued by a shadowy organization called the Sweetwater Development Corp.
Several people who bought Sweetwater notes from Muto said they were lured by the promise of returns of as much as 20 percent on their investments, as well as Muto's reputation in the community. Muto is not licensed to sell securities in New York State.
| "We were told repeatedly by Rick Muto that our money was safe. We were told that right up to the beginning of this year." -- An investor who asked not to be identified |
"There aren't a lot of investment opportunities in Niagara Falls. We really don't even have a decent stockbroker anymore," said one investor, who managed to get his money out before the house of cards collapsed. "And then Rick comes along with this, and people trusted him."
Repeated calls to Muto's business, Richard Muto Investment Strategies, were picked up by an answering machine and went unreturned. Angry investors now talking with investigators from the New York Attorney General's office and the federal Securities and Exchange Commission say their calls get the same response.
"I want this guy hung out to dry," said disabled retiree Wayne Edwards, who, along with his wife, lost $99,000. "He knew a year and a half ago that something was wrong with this."
Edwards and other investors -- including many well-known Niagara Falls residents -- began to get suspicious when Sweetwater began drawing dividend checks on banks in the Grand Cayman Islands and the Central American country of Belize. Before the payouts ended altogether in November, 2001, checks were also drawn on Muto's account, sources said.
"At that point, (Muto) said he was going to be the president of Sweetwater and would be issuing the checks himself," one investor said. Checks signed by Muto and made available to the Reporter show they were issued under a variety of corporate names, including Financial Group LLC, Tower Equities Inc. and the DebRick Trust.
The DebRick Trust refers to Muto and his wife, Deborah, who has been subpoenaed to testify in the case, sources said.
Investigators now believe the entire Sweetwater deal was nothing more than an elaborate "Ponzi scheme" in which a steady stream of new investors were taken to pay back the high interest rates promised to earlier investors. As recently as March 18, investors who hadn't been paid in months received anonymous letters signed by "The Sweetwater Management Team" which claimed the venture would be back on track shortly.
"The Sweetwater project is and always has been a viable real estate venture," the letters said.
But Sweetwater was already in deep trouble. In Connecticut, the state Department of Banking ruled in November, 2000, that the promissory notes being issued by the company constituted unregistered securities, illegal and likely not worth the paper they were written on. The state issued a cease and desist order barring further sale of the notes, and fined the company $20,000.
Sweetwater officials didn't even bother showing up at the hearing to defend themselves, records show.
According to several Sweetwater investors here, the money they put in was to have been loaned to a company called Goldcrest Construction, which was involved in building a housing subdivision for senior citizens called Spring Lake Village in Kissimmee, Fla.
Numerous problems and shoddy workmanship uncovered by building inspectors more than a year ago halted construction and, on April 25, Goldcrest partners Michael Ussery and Jeffrey Klein were fined by Florida officials and barred from ever again working as contractors in the state.
The subdivision remains incomplete, and many elderly individuals who put large deposits down on build-to-suit homes were left holding the bag.
But sources close to the investigation now say that Sweetwater Development's claim to be financing the Spring Lake Village development may simply have been another lie.
"There is a development, but what the development's relationship to Sweetwater is, no one seems to know," one source said.
In Niagara Falls, nervous investors began approaching Muto as early as spring, 1999, they said. They were assured there was nothing to worry about, as the Sweetwater notes were insured by the Tangent Insurance Co. and bonded by New England International Surety.
"We were told repeatedly by Rick Muto that our money was safe," said one investor who asked not to be identified. "We were told that right up to the beginning of this year."
What Muto failed to tell the investors is that both Tangent and New England International are offshore shell corporations, unlicensed to do business in either Florida or New York. The names of both companies have come up in a number of fraud investigations in the past, along with those of two men identified to investors here as principals in the Sweetwater scheme, James T. Staples and Francis Clarkson.
Clarkson, a disbarred attorney from Charlotte, N.C., and Staples, of Nashville, Tenn., were arrested in Florida in October, 1998, in connection with a fraudulent scheme remarkably similar to the Sweetwater deal.
In that case, worthless promissory notes totaling $10.9 million were sold to finance a company called Legends Sports Inc., which claimed to be involved in the development of a "sports and entertainment complex" that was never built.
Legends Sports Inc. and Sweetwater Development were linked in a March, 1998 investigation by the Arizona Corporation Commission, in a case involving unlicensed brokers selling unregistered securities to the tune of $3.4 million.
The defendants in the Arizona case were ordered in 1999 to pay fines and restitution totaling nearly $5 million.
Another parallel between the Sweetwater and Legends Sports deals is the use of offshore banks. Sources close to the investigation told the Reporter that money was funneled to accounts in the Grand Cayman Islands and from there to banks in Belmopan, Belize. Both countries employ banking laws that make it very difficult -- if not impossible -- for law enforcement officials to keep track of transactions, illegal or otherwise.
"Every bank in the world has an office in Belize," the source said. "The American government can keep track of money once it's transferred from here to the Caymans, but once it goes from there to Belize, it's gone."
Contacted by the Reporter, local attorneys Ned Perlman and William Berard said they have been approached by numerous victims of the scam, raising the possibility of a class action lawsuit. Perlman said that such litigation should likely wait until the outcome of the state and federal investigations.
"You don't want to start a lawsuit and basically replicate the work the Attorney General's office is doing," he said.
Perlman said he is directing victims who contact him to the state Attorney General's office in Buffalo.
| Niagara Falls Reporter | www.niagarafallsreporter.com | May 7 2002 |