This case concerns several folks who placed money with a bogus company call "The Alps", whose owners held it out to be a Swiss Bank, but instead it was just a shell company that took their money and put it into speculative real estate investments in Washington state where it was mostly lost.
Victim #1 was Mr. Thomas E. Alexander, the plaintiff, a real estate agent in Anchorage who was concerned about his obligations in an real estate project that was going south (along with the rest of the national real estate market) in 2008.
Desiring to protect some money from creditors in case things got worse financially, but being apparently too cheap to hire an attorney experienced in such planning, Alexander went online and eventually found his way to the Companies Incorporated website at http://www.companiesinc.com and called their number 1-800-COMPANIES.
The receptionist put Alexander on the phone with Kevin W. Wessell (I'm redacting the name at his request), a named defendant in the case we are discussing. Wessell told Alexander that the best thing would be for Alexander to create a company in Nevis (an island in the Caribbean that is well-known as a tax-haven and debtor-haven), but have the bank account for the corporation opened elsewhere.
Alexander told Wessell that the money should go into a Swiss bank account, but Wessell instead recommended to Alexander that the money go into a Swedish bank by the name of "The Alps", which Alexander had never heard of.
Several months later, Alexander got a call from Paul Hesse a/k/a Paul Matthew Hesse, using the alias "Matt Mitchell" (we'll call him "Mitchell" because that's what the Court does in its Opinion), who would also be a defendant in the case. Mitchell told Alexander that an LLC could be set up in Nevis, and that yet another soon-to-be defendant, Casey Lawrence, would held Alexander to set up the bank account.
Thereafter, Alexander was sent copyrighted forms bearing the name "Presidential Services Incorporated", and other materials that represented that Companies Incorporated was a "full service solution" and "trusted since 1977".
Alexander had soon set up his new Nevis company, Cold Play Ventures LLC, and next sought to open an account with The Alps. Going to The Alps' website, Alexander saw:
The home page of the website conveyed to Alexander that The Alps was the Wells Fargo and the Bank of America of Sweden; and that a bank that has its headquarters in the World Trade Center must be a pretty substantial bank.
And further:
Wessell represented to Alexander that Sweden had the best banking regulations anywhere, that Sweden did not have branches in the United States, that Sweden was better than Switzerland, that many or most of Wessell's clients are in Sweden at a bank called The Alps, and that he would recommend that Alexander deposit his money with The Alps.
Indeed, all three defendants -- Wessell, Mitchell and Lawrence -- held The Alps out to be a good Swedish bank and claimed that Sweden was a better place to do banking business than Switzerland.
What the defendants did not tell Alexander was that The Alps wasn't a bank at all. Instead, The Alps was a credit union formed in Sweden and, unlike banks, credit unions there are not regulated. Moreover, the directors of The Alps were Wessell and Mitchell.
The defendants also failed to disclose to Alexander that his money in The Alps would not be safely kept as a deposit, but instead would be used to make real estate investments in Washington state.
What was clear is that Alexander did not perform any due diligence himself on The Alps, but instead relied upon Wessell, Mitchell and Lawrence to do it for him. Instead, trusting in his new advisors whom he had met through their website marketing, Alexander ultimately transferred $525,000 to The Alps. This was in January, 2009.
That Alexander could have seen at least one red flag is clear from the following:
After Alexander had wired money to The Alps, Alexander's brother sent Alexander an email directing his attention to The Alps' website's “About Us” page. The information on that page indicates that The Alps is not a bank, it's nothing like the United States' equivalent of a credit union, that there might be delays in receiving a withdrawal request, and that The Alps invests in real estate. Alexander had not looked at this page before sending his money to The Alps.
So, Alexander should have known that this was not going to turn out well, and it didn't. A couple of years later, in July 2011, when Alexander and his wife were attempting to buy a property in Hawaii, he tried to have $320,000 transferred from his account with The Alps to a title company on the Big Island. But the money never arrived.
Alexander e-mailed The Alps to inquire about his money, but received no response. Alexander finally called The Alps:
but was told by the person who answered that he had called an answering service for over 200 companies.
Suffice it to say that Alexander never received his money back from The Alps.
Victim #2 was Pankaj Topiwala, Ph.D, a well-educated mathematician whose company had just won a $5 million payment on a patent license, and he was looking to safely put some money back to pay his taxes (Note to file: Next time just file an estimated return).
Topiwala also found Companies Incorporated through the internet, called, and spoke with Mitchell and Wessell numerous times. Topiwala was also looking for tax advice, and that he did not instead seek the advice of a tax attorney speaks volumes for the fact that a genius mathematician may still lack common sense.
To his credit though, Topiwala did ask Mitchell and Wessell about The Alps' management structure, whereupon they lied and denied they had any management relationship to the company. Mitchell and Wessell also told Topiwala that while The Alps was a "privately held credit union", the information about the company was not publicly available. Moreover, Mitchell and Wessell:
told Topiwala that the assets of The Alps were well protected because they were deposited in a much larger well-known publicly traded Swiss bank called Bank Vontobel.
Whereupon, Topiwala transferred $5.5 million to The Alps. Later, when Topiwala wanted to get his money back, he could not get any answer from The Alps. When Topiwala contacted Mitchell, the latter replied: "The Alps is talking to you." Topiwala then tried to contact Bank Vontobel, but they were no help. Going back to Mitchell and Wessell, Topiwala was told that all was hunky-dory and his funds were safe.
This brings us to March, 2010, when Topiwala sought his $5.5 million back to pay his taxes. Instead, he only got back $3 million, an excuse from Mitchell that The Alps was short on cash (never a good sign), and a promissory note for $1.8 million that ultimately went into default. It turned out that Topiwala's moneys had gone into investments in Washington state real estate too.
Victim #3 was Neil Vacchiano, himself a real estate investor. With the real estate markets crashing in 2008, Vacchiano also decided to put some money in a safe place, and he also found the Companies Incorporated website and called 1-800-COMPANIES.
Vacchiano dealt with the same Lawrence with whom Alexander had been involved with, along with another Companies Incorporated representative named Richard Guiterrez, and also Wessell. Guiterrez and Lawrence talked Vacchiano into depositing $318,000 with The Alps.
Later, when Vacchiano wanted a mere $90,000 from The Alps wired back to him, Lawrence started dodging his calls, but eventually Vacchiano got through to her, and was referred to Mitchell -- who further referred Vacchiano to Marshall Hann.
Hann told Vacchiano that "the real estate market in Stockhold and Sweden had gone south, and affected the monies". Nevermind that Vacchiano's monies were never put into real estate in Europe, but were instead invested (apparently very badly) in Washington state.
Suffice it to say that Vachhiano also lost his $318,000.
Who is behind Companies Incorporated anyway?
Companies Incorporated was really Incway Corporation, which set up offshore companies and foreign bank accounts from 2000 to 2009. Later, Incway Corporation d/b/a Companies Incorporated became known as "Worldwide Education Services", and at some point filed a bankruptcy petition and obtained an automatic stay to try to stop the instant litigation.
Wessell was a director and manager of Incway, but claimed -- apparently with a straight face -- not to know who the identities of the other directors. [Note: That must have made for some pretty interesting board meetings.] When asked whether he had an interest in Incway, Wessell, who it will be recalled makes a living setting up offshore companies, said that he didn't know what an "interest" was.
Wessell did admit to being a director, president, secretary and treasurer of Companies Incorporated. Despite these roles, Wessell testified that he didn't know anything about Incway's or Companies Incorporated's operations.
Supposedly, Wessell sold Incway/Companies Incorporated to "a business associate and CI client, David Tan", according to a 2010 agreement. The company "had no assets and zero worth". But this sale was suspect, since Wessell changed the name to Worldwide Education Services, moved the company to the British Virgin Islands -- and promptly filed for bankruptcy there. All the while, Wessell acted as the voluntary liquidator for Worldwide Education Services.
Suffice it to say that the Court found that:
Wessell's testimony is not credible.
Casey Lawrence was a paid employee of Incway, who became the company's Bank and Trust Administrator after leaving her previous job of running a daycare center for seven years. Suffice it to say that though her role was to set up offshore corporations and accounts, "Lawrence knew little about Swiss banks and less about Swedish banks."
This brings us to Paul Matthew Hesse a/k/a Matt Mitchell. He had studied business management at Antelope Valley College (never obtaining a degree), after learning sign graphics at L.A. Trade Tech. Mitchell never had any training in asset protection, but held himself out as an "asset protection specialist".
Mitchell's job was to talk with clients over the phone, after Incway had been branded 1-800-COMPANY, but he disclaimed knowing much about it, such as who owned or managed it, and was unable to identify other people who worked for 1-800-COMPANY.
You will recall that Victim #1, Alexander, received Companies Incorporated documents that said it was a division of Presidential Services Incorporated (called "PSI"). How did this company fit in?
The Court was not sure, stating that:
Given the interconnectedness of Wessell and the corporate defendants, and the fraudulent purposes for which these entities were designed, the exact relationship between the entities involved is unclear. CI, PSI, and 1–800–COMPANY; however, all were operated out of 28015 Smyth Drive, Santa Clarita, California.
While Wessell managed PSI, was a director of PSI as well as its President, Secretary and Treasurer, he claimed "not to know if he was still an officer", nor could he identify a single person who served such a role for PSI. The Court found Wessell's claims "not credible".
All of which brings us to The Alps
The Alps was founded by Wessell, Mitchell, and Filip Strebl (who apparently also goes by the name of Philip Strebl). When Wessell formed The Alps, he gave a London street address on the company's registration, although he was unfamiliar with that address. The Alps held its first board meeting not in Sweden, but instead in Santa Clarita, California. Incway loaned The Alps money to get it going. Wessell was The Alp's managing director, and Mitchell was also a director. Lawrence promoted The Alps to clients.
In other words, The Alps was basically just another Wessell company. As the Court would explain in no uncertain terms, "The Alps was a sham".
While The Alps website displayed the World Trade Center building in Stockholm on its website, thus representing to clients that The Alps had an office there, it in fact had no office there but instead used the same P.O. Box as the rest of the Companies Incorporated entities.
While The Alps was represented to be a Swedish Credit Union, it in fact performed no business at all in Sweden, and doesn't appear to have actually done business anywhere other than investing in real estate in Washington state. Nonetheless, Mitchell admitted to telling clients that The Alps was safer than U.S. banks, though he knew almost nothing about it.
The Court held that Mitchell and Lawrence were "not credible" in regard to their excuses as t why they recommended The Alps as a "bank" they actually knew nothing about. As for Wessell:
Wessell's deposition testimony was the most evasive the Court has experienced in thirty-three years. Wessell's explanation for his admittedly poor performance at his deposition was that he had watched a videotape explaining how to be deposed. The Court finds his explanation to be absurd—and inconsistent with his actual deposition performance. Where Wessell refused to answer a direct question about which he obviously had knowledge, the Court concludes that he did so to avoid admitting the fact asserted. The Court concludes the fact was true. Wessell also consistently was evasive, or simply lied, at trial.
Moving on to is Conclusions of Law, the Court first considered whether the defendants had made intentional misrepresentations to Alexander, and of course they had done exactly that. While Alexander was led to believe that his money was safely deposited in a Swedish bank with a Swiss-sounding name, the truth is that it was simply in Wessell's undercapitalized and unregulated shell company, and being used to speculated in property in Washington state.
Though Alexander's brother had raised a red flag about The Alps, this did not defeat Alexander's right to recover, since that information would simply have led to Alexander making more inquiries of the defendants, and the "evidence shows that futther questioning would have likely led to more misrepresentations.
Thus, Alexander was entitled to recover $524,785 from defendants for their misrepresentations, plus punitive damages as we shall discuss below.
Next, the Court considered fraud and deceit -- the latter is essentially a cause of action for intentionally telling a "half-truth". The analysis here was pretty easy too, since:
Defendants represented themselves to be experts in the field of asset protection. Alexander was a client of Defendants such that the parties had a confidential relationship. A duty to disclose also arose as a result of Defendants' conduct. Defendants led Alexander to believe that he was depositing his funds with a safe financial institution in Sweden when, in fact, his money was being used to speculate on real estate in Washington.
Thus, Alexander was able to recover his $524,785 on this count also, plus again punitive damages.
This was the same result for Alexander's claim for negligent misrepresentation, where the Court noted in particular that:
Mitchell held himself out as an “asset protection specialist,” but he had no such specialized knowledge.
Again, the Court awarded Alexander his missing $524,785 on this count, but punitive damages are not awardable for negligent misrepresentation.
Directly addressing the topic of punitive damages, the Court decided that Mitchell and Lawrence were not sufficiently culpable to merit an award of punitive damages, and so they escaped what was about to befall Wessell:
Alexander has shown by clear and convincing evidence that Wessell, and through him, the corporate entities, engaged in this conduct repeatedly, that the conduct was the result of deliberate deceit and trickery, and that punitive damages in the amount of $2,000,000 is appropriate.
But wait, there's more! The Court next addressed Alexander's claim that defendants should be hit with an award for Civil RICO. Here, the Court commented at length on how Alexander had proved up his Civil RICO claim, including how the defendants had used multiple entities, had transactions crossing state lines, and had used the U.S. mail and telephone communications to defraud Alexander -- all elements of a Civil RICO claim.
And thus:
All three individual Defendants knowingly and willfully participated in the enterprise's affairs to varying degrees. Wessell was the mastermind behind the scheme. Mitchell acted as the “asset protection specialist” and served on The Alps board of directors. Lawrence, although a “lower rung” participant in the enterprise under Wessell's direction, also played a key role by interfacing with clients about The Alps and assisting with the operation of its affairs by, among other things, arranging for the transfer of funds to The Alps.
Alexander lost funds as a result of Defendants' fraudulent investment scheme. Alexander's financial loss was a direct result of the fraudulent investment scheme and Wessell, Mitchell, and Lawrence's RICO violations. Alexander suffered damages in the amount of $524,785.
A plaintiff who prevails on a RICO claim is also entitled to recover treble damages, plus attorneys' fees and costs. 18 U.S.C. sec. 1964(c). Under RICO's mandatory treble damages provisions, Alexander is entitled to a damages award of $1,574.355.00 ($524,785 x 3). Alexander is also entitled to recover attorney's fees and costs.
So, even if Mitchell and Lawrence dodged the punitive damages bullet, they still both got hit with treble damages for Civil RICO as did Wessell.
This brings us to the corporate defendants, which Alexander had alleged were simply the defendants' alter egos. As to Wessell, Alexander's claims scored a direct hit though made easy by the facts of the case:
There was a unity of interest between and among Wessell, Incway, CI, PSI, 1–800–COMPANIES, and The Alps such that the separate personalities of the entities and Wessell no longer existed. The evidence shows that these entities were alter egos of Wessell. There is evidence of commingling of funds and other assets, treatment by Wessell of the entities' assets as if they were his own, failure to maintain adequate corporate records, identical equitable ownership of two or more entities, inadequate capitalization, concealment of the identity of the responsible ownership, diversion of assets, and manipulation of assets and liabilities between entities.
Failure to treat Wessell as one and the same as these entities will lead to an inequitable result. Wessell has placed Incway and PSI into bankruptcy in a transparent effort to avoid liability.
There is insufficient evidence to support a claim that either Mitchell or Lawrence is an alter ego of any of these entities.
As lagniappe, the Court also awarded pre-judgment interest on the $524,785 that Alexander lost, and post-judgment interest as provided by law. The court also held all of Wessell, Mitchell, and Lawrence jointly liable for damages (except the $2 million punitive damages award against Wessell only.
ANALYSIS
This case illustrates many points, not the least of which is that any bunch of idiots can set up a flashy and sophisticated asset protection website, claim to have many years of experience in protecting assets, relationships with offshore banks, etc. -- although none of it is true.
Wessell, Mitchell and Lawrence together shipmates on this asset protection Ship of Fools. None of them had any real experience, training, or even the first clue how to lawfully protect assets, and instead all they really accomplished was the loss of these client's assets through their own fraud.
This is not, of course, anything like the first instance of asset protection fraud. To the contrary, many a client has moved money offshore to protect it from creditors, only to find that creditors were the least of their concerns as their supposed fiduciaries embezzled their money.
But at the same time, the victims willing boarded this Ship of Fools. Here are some lessons we hope they learned:
First, asset protection planning should only be done by experienced and reputable attorneys, and preferably only attorneys who have E&O insurance in case something bad happens. Clients who go to non-lawyers for asset protection just to save a few bucks are not only putting their assets at risk of loss, as here, but are also forfeiting such critical advantages as attorney-client privilege and usually even minimal competence in asset protection planning.
Second, clients should not take their advisers on blind faith, but should instead carefully vet what is proposed to them. Here, a minimal outside investigation would have revealed that The Alps was not a bank at all, but simply an unregulated company that anybody with a few hundred bucks could form.
Third, clients should seek a second opinion on what is proposed to them. If any of the victims had taken the defendants' proposals to anything like a real asset protection attorney, they would have pointed out to them numerous red flags. No good attorney should ever balk at their work being subject to a second-opinion, and in fact the best attorneys often advise their clients to do precisely that.
If an attorney -- or any adviser for that matter -- ever tells you not to seek a second opinion, giving you advice such as "this is too sophisticated for anybody else to understand", etc., then you should run, and fast.
But what happened in this case is exactly what happens when clients are cheap -- they try to save a few bucks with their "do it yourself" approach at bargain-basement prices from somebody they find on the internet, and end up losing everything they sought to protected.
The hard truth is that asset protection planning is very difficult, takes years if not decades to truly master, and requires not only substantial legal talent but the formation of trusted relationships with ancillary advisers. There is a good reason that many asset protection attorneys charge a pretty penny for their services, and that is that they are worth it.
And you can take that to a real bank.
CITE AS
Alexander v. Incway Corp., 2013 WL 5603932 (C.D. Cal., Oct. 11, 2013). Full Opinion at http://goo.gl/NNGyjH
This article at http://onforb.es/16utGLS and http://goo.gl/pZmE2c
UPDATE 21 March 2016
Alexander v. Incway Corp., 2016 WL 1085687 (9th Cir., Mar. 21, 2016).
United States Court of Appeals, Ninth Circuit.
Thomas E. ALEXANDER, Plaintiff–Appellee,
v.
INCWAY CORPORATION, a Wyoming corporation, Defendant,
and
Kevin W. Wessell, an individual; Casey Lawrence, an individual; Matt Mitchell, an individual, Defendants–Appellants.
No. 14–55171.
Argued and Submitted Feb. 11, 2016.
Filed March 21, 2016.
Attorneys and Law Firms
Edward M. Bialack, Esquire, Law Offices of Errol I. Horwitz, Woodland Hills, CA, for Plaintiff–Appellee.
Gary Marshall Hann, Esquire, Law Offices of G. Marshall Hann, Valencia, CA, for Defendants–Appellants.
Casey Lawrence, An Individual, Acton, CA, pro se.
Appeal from the United States District Court for the Central District of California, Dale S. Fischer, District Judge, Presiding. D.C. No. 2:11–cv–08851–DSF–VBK.
Before McKEOWN and IKUTA, Circuit Judges and PRATT,*Senior District Judge.
MEMORANDUM**
*1 Kevin Wessell (“Wessell”) and Matt Mitchell (“Mitchell”) appeal the district court’s entry of judgment against them following a bench trial.1 We have jurisdiction under 28 U.S.C. § 1291. We review the district court’s factual findings for clear error and its legal conclusions de novo. OneBeacon Ins. Co. v. Haas Indus., Inc., 634 F.3d 1092, 1096 (9th Cir.2011). We affirm in part and reverse and remand with respect to the punitive damages calculation.
The district court determined that Wessell and Mitchell intentionally misrepresented and concealed important facts as part of a fraudulent asset protection scheme in violation of California law. Cal. Civ.Code §§ 1572, 1709, 1710. The district court also found Mitchell liable for negligently misrepresenting important facts under California law. Cal. Civ.Code § 1710. Neither Wessell nor Mitchell argues that the district court committed legal error. Because the district court’s findings were not clearly erroneous, we affirm the district court’s findings with respect to intentional misrepresentation, concealment, and negligent misrepresentation. See OneBeacon Ins. Co., 634 F.3d at 1096.
The district court also found that Wessell was the alter ego of five corporate entities. “[O]wnership in a corporation is a necessary element for the application of the alter ego doctrine under California law.” S.E.C. v. Hickey, 322 F.3d 1123, 1129 (2003). There is no evidence in the record that Wessell formally owned the related corporate entities. Thus, the district court erred in finding alter ego liability. This error is harmless, however, because it does not affect Wessell’s substantial rights: he is liable for the same amount of damages with or without an alter ego finding. See 28 U.S.C. § 2111.
The district court determined that Wessell and Mitchell violated the Racketeer Influenced and Corrupt Organizations Act (RICO). 18 U.S.C. § 1961 et seq. A civil RICO violation occurs when a person “employed by or associated with” a qualifying enterprise “conduct[s] or participate[s], directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity.” 18 U.S.C. § 1962(c). Each RICO defendant must be distinct from the alleged enterprise. See Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 162 (2001). The enterprise here is the inter-related group of corporate entities. In light of our alter ego holding, both Wessell and Mitchell were distinct from the enterprise. See id. at 163 (“The corporate owner/employee, a natural person, is distinct from the corporation itself [.]”). The district court did not clearly err in its RICO findings, including that Wessell and Mitchell enriched themselves by charging clients a fee for setting up offshore accounts and encouraging them to deposit funds in The Alps, that they knowingly and willfully committed mail and wire fraud on multiple occasions over ten years, that they were employed by the companies that constituted the enterprise, and that Alexander lost funds as a direct result of Wessell and Mitchell’s RICO violations.
*2 Finally, the district court found Wessell liable for $2,000,000 in punitive damages. Under California law, punitive damages may not “exceed[ ] the level necessary to properly punish and deter.” Neal v. Farmers Ins. Exch., 21 Cal.3d 910, 928 n. 13 (1978). To determine whether a damage award is appropriate, the court must consider “evidence of a defendant’s financial condition.” Adams v. Murakami, 54 Cal.3d 105, 112 (in bank). The record here lacks evidence about Wessell’s net worth. The amounts deposited in The Alps consisted of gross deposits and therefore shed no light on Wessell’s net worth. The district court erred by calculating punitive damages without taking Wessell’s net worth into account. See Boyle v. Lorimar Prods., Inc., 13 F.3d 1357, 1361 (9th Cir.1994) (“The rule established by lower California courts is that only net, not gross, figures are relevant.”). We reverse the punitive damages award and remand for recalculation.
Each party shall bear its own costs on appeal.
AFFIRMED IN PART AND REVERSED AND REMANDED IN PART.
Footnotes
The Honorable Robert W. Pratt, Senior District Judge for the U.S. District Court for the Southern District of Iowa, sitting by designation.
This disposition is not appropriate for publication and is not precedent except as provided by 9th Cir. R. 36–3.
The district court also entered judgment against Casey Lawrence. Lawrence appealed pro se, but failed to file any briefs in support of her appeal. We affirm the judgment as to Lawrence.
