AG says everyone to blame in letting alleged FRM fraud fester

Attorney General Michael Delaney told Governor John Lynch and the Executive Council that "significant failures in all three regulatory agencies" — the Bureau of Securities Regulation, Banking Department and Department of Justice — enabled Financial Resources Mortgage, Inc. (FRM) to defraud at least 150 investors of at least $20-million.

But, Delaney reserved his harshest words for the securities bureau. Last month the bureau issued its report on FRM, claiming that had the banking and justice departments acted sooner, the losses to investors would have been reduced. At the same time, Mark Connolly, the director of the bureau, announced his resignation and charged state officials with "covering up" the lapses by regulatory agencies.

"You have heard there was a cover-up," Delaney told the governor-in-council. Acknowledging "finger-pointing" and "infighting," he said there was no evidence of a cover-up and added that "the only thing worse than a cover-up is an unsubstantiated claim of a cover-up."

The lapses by the agencies, Delaney wrote, "have been highlighted by the efforts of some not only to refuse to accept responsibility but also to pass off that responsibility to others." Relations between the securities bureau and Bank Department, he called "toxic."

When FRM collapsed in last November Bank Commissioner Peter Hildreth immediately claimed jurisdiction rested with the securities bureau. Connolly has challenged the assertion ever since. The bureau devoted a section of its report, buttressed by an expert opinion, to explaining that jurisdiction fell to the Bank Department. Insisting that the securities bureau had jurisdiction, Delaney described Connolly's decision to seek an opinion narrowing his agency's jurisdiction "unconscionable and contrary to the interests of investors."

The report, which runs to 58 pages accompanied by two appendices and more than 700 pages of exhibits, recounts the history of regulatory oversight of FRM and catalogs the shared responsibility of the three agencies for "the state's failure to detect and protect against the fraud inflicted on its citizens."

Although the securities bureau alone of the three agencies took enforcement action against FRM, the report finds that had the agency pursued its inquiries more aggressively the firm's fraudulent conduct would likely have been exposed earlier. After investigating a complaint filed in 2000, the bureau found in 2003 that FRM was selling unregistered securities in the form of promissory notes without a license. In the course of compelling FRM to make restitution, Delaney said the bureau failed "to follow the money to determine where the money was coming from and where it was going."

At the same time, the Banking Department, which licensed FRM, examined the firm seven times between 2001 and 2009, always finding what Delaney called "significant and repeated violations of state and federal laws" that indicated the firm was operating "in disregard of basic business, financial, governance and operational principles. These should have been red flags." The department twice contemplated enforcement action, including revoking FRM's license, but failed to pursue it.

Delaney found that the Bank Department "failed in its mission to ensure that FRM complied with sound financial management and compliance with state and federal laws and regulations" as well as deemed its enforcement action "deficient." However, while the report suggests that appropriate and timely action by the securities bureau would have foreshortened the fraud, it refrains from a similar finding with respect tot he Bank Department.

Delaney pointed to April 2006 as "a pivotal moment." At the time, while the securities bureau was pursuing enforcement action against FRM and the Bank Department had unsatisfactory examination results, the Concord Monitor reported a civil suit alleging fraud against the company. The Bank Department asked the securities bureau to accompany it on a joint examination of FRM, but the bureau declined, preferring to conduct its own investigation.

Without sparing the Department of Justice, the report concludes that it failed to adequately communicate, cooperate and coordinate with other agencies in handling complaints received and action taken against FRM. "We made serious mistakes and missed opportunities to expose fraud," Delaney said. "The department accepts its responsibilities."

Expressing "disappointment" with the report, Connolly said that the responsibility it assigned to the securities was misplaced. "Because we were investigating the unlicensed sale of unregistered securities does not make the bureau responsible for the Ponzi scheme," he said. "The Attorney General misunderstands our jurisdiction and authority. We do not have the authority to do what he believes we should have done."

Connolly said that since the Bank Department, which routinely examined FRM and renewed its license, never indicated that it was out of compliance with state or federal laws, let alone operating fraudulently or engaging in illicit securities transactions, the securities bureau had no reason to act more aggressively. Connolly was also troubled that the report stopped short of 2009, although among its exhibits is an e-mail from Mary Jurta, director of the Consumer Credit Division of the Bank Department to Hildreth and his deputy Bob Fleury, recommending that "someone such as the new AG who knows what will be needed to prove criminal fraud should direct the investigation." He noted that the e-mail is dated September 15, 2009 and remarked that FRM solicited $23-million in fresh investments in the two months before its collapse. He said that he did not understand why the report made no mention of the e-mail.

By contrast, Hildreth commended the Attorney General for his "fair and in depth report." He said "we accept that we screwed up," adding "what else can we say." Hildreth said that the department had already begun to consider steps to address the shortcomings identified in the report. "We intend to do whatever it takes to make sure something like this does not happen again," he declared.

“I am responsible for state government," said Governor John Lynch, "and I take responsibility as well. And I will take responsibility for making sure we move forward with fixing this system."

Lynch said that the regulatory agencies failed to use the tools at their disposal, but also questioned whether they have all the tools and resources they require. “The Attorney General’s report identified some clear areas where we need improvement," he said. "As you know the legislature has created its own review process, where, I am confident, it will consider the Attorney General’s recommendations and where it may identify additional issues that need to be addressed. I am committed to working with the legislature on this process."

However, Lynch said there are immediate steps the executive branch should take to address the concerns raised by the report. "First, there were clear management failures at Securities, Banking and Justice," he said, "and we must conduct a thorough assessment of the management, resources and structure of these regulatory agencies to ensure they are able to protect the citizens of New Hampshire." He also said he intended to establish a regulatory working group to improve communication and cooperation between agencies and to direct the the Department of Information Technology to develop a plan for posting information about complaints, findings and investigations of regulated entities on the state website.