Whether local businessman Julius Everett “Bud” Johnson is a Ponzi schemer or not remains a toss-up, depending on which side of the case you ask.
In levying a $37 million penalty this week against Johnson, his associate Walter Ray Reinhardt of North Carolina and about a dozen business entities, the Virginia State Corporation Commission made its point clear.
Debra Bollinger, senior counsel at the SCC who worked the case, said that although the term Ponzi scheme carries no legal basis, the actions by Johnson and his partner match the classic definition of such a scheme “in a big way.”
“They used new investors’ money to pay old investors,” Bollinger said. Investors’ money was also commingled between the various entities, the SCC concluded.
Michael Unti, an attorney in Raleigh who represented Johnson and some of the entities, isn’t sold on that argument.
“Mr. Johnson is not a Ponzi schemer,” said Unti. “The clear implication of the State Corporation Commission’s order is that he was knowingly involved in a Ponzi scheme, and I do not believe that’s true.”
The problem, according to Unti and SCC case files, is that Johnson was limited in how he could defend himself during the SCC hearings because of an ongoing federal investigation.
“Any time you have several levels of government looking at something, you have to recognize anything you say or do on the public record can be used against you.” Unti said.
Neither Unti nor Bollinger discussed any details related to any federal investigation against Johnson or the others.
The SCC’s case against Johnson, who is also a licensed insurance agent, began in 2009, Bollinger said, after a complaint from an individual who invested in one of the entities owned by Johnson.
Securities and promissory notes related to entities such as a cleaning service and an awning company, many of which were located in Richmond, were sold to investors.
“It didn’t pass the smell test almost from the jump,” Bollinger said, in regards to the SCC’s initial investigation.
One thing that was peculiar was the type of companies that investors were buying into, such as River City Cleaners and Norvell Awning.
“That’s not a normal way for these types of companies to raise money,” Bollinger said.
Gathering evidence took some time, she said, but the case was ultimately heard in the SCC’s special court last July. The court is a civil court of record in Virginia and has no criminal authority.
“It takes a while when you have this many violations and this many investors,” Bollinger said. “It was a big mess. It was very difficult to track the money.”
Those securities were unregistered, the SCC concluded in its ruling, and those selling the securities were also not registered to do so. Both instances violated state securities laws.
In all, there 169 people who invested in these entities, most of whom were in North Carolina and Virginia, Bollinger said. There were also investors in Florida, South Carolina, Oklahoma and Nevada.
The SCC, upon announcing its huge penalty against Johnson and the other defendants, said they were “able to convince many conservative, risk averse, elderly investors to invest millions of dollars by cloaking themselves in respectability.”
Bollinger said it’s unclear whether elderly investors were purposely targeted.
“Senior citizens are the ones that have cash,” Bollinger said, and they were looking for a better interest rate than what they could get elsewhere.
Investing in Johnson’s companies offered rates of interest from 6 to 9 percent, Bollinger said, not quite as high as the usual pie-in-the-sky returns promised in many investment schemes.
“But in 2007 and 2008, that looked pretty good,” Bollinger said. “Mr. Johnson was a legitimate businessman living in Richmond, and they assumed it was all good.”
And for a while the investment paid off.
“He paid interest for quite a period of time,” Bollinger said. “But in the last couple of years, before it all fell apart, his companies were not making money, so he had to get more investors to pay the interest [due to previous investors].”
That’s the point where Bollinger wishes the story had ended.
“If he had stopped and just admitted he screwed up, he would have saved a lot of people a lot of money,” she said.
Johnson’s attorney Unti maintains that although Johnson owns the companies in question, he was not involved in selling the securities or interacting with investors. That part of the business was carried out by others who were involved.
“Mr. Johnson is the owner and president of these companies and was not involved in the day-to-day issuance of these notes and contact with investors,” Unti said.
“His companies were involved in this investment program that ended up in very bad results for a lot of investors. And as owner he certainly does feel responsibility for it. But I think it’s based on the fact that he was the owner of the companies that he is shouldering the blame.”
Unti said he had just received a copy of the SCC’s penalty order and he and his client are still considering their options.
The SCC’s order would allow Johnson and the other defendants to avoid paying the $37 million fine if they pay $11 million in restitution to investors within a year.
Bollinger said it’s highly unlikely that will happen.
Johnson filed Chapter 11 bankruptcy in October claiming assets of between $10 million to $50 million and liabilities in the same range owed 233 creditors, the largest of which are holders of promissory notes.
Whether the scheme the SCC says Johnson was part of was carried out purposely or was the result of business problems that snowballed, is a question left to ponder.
“I don’t think he went into this business with the intent to take people’s money,” Bollinger said. “It’s hard to know because he didn’t provide any defense at all. I don’t know what was in his head.”
“What’s important is the investors’ money is gone and it’s not likely going to go back to them, and that’s what’s heartbreaking.”
Unti said he has not yet discussed with Johnson whether paying investors back the $11 million is an option.
“I know that Mr. Johnson, if he could, he would repay all these investors.”
Michael Schwartz is a BizSense reporter. Please send news tips to [email protected].
Whether local businessman Julius Everett “Bud” Johnson is a Ponzi schemer or not remains a toss-up, depending on which side of the case you ask.
In levying a $37 million penalty this week against Johnson, his associate Walter Ray Reinhardt of North Carolina and about a dozen business entities, the Virginia State Corporation Commission made its point clear.
Debra Bollinger, senior counsel at the SCC who worked the case, said that although the term Ponzi scheme carries no legal basis, the actions by Johnson and his partner match the classic definition of such a scheme “in a big way.”
“They used new investors’ money to pay old investors,” Bollinger said. Investors’ money was also commingled between the various entities, the SCC concluded.
Michael Unti, an attorney in Raleigh who represented Johnson and some of the entities, isn’t sold on that argument.
“Mr. Johnson is not a Ponzi schemer,” said Unti. “The clear implication of the State Corporation Commission’s order is that he was knowingly involved in a Ponzi scheme, and I do not believe that’s true.”
The problem, according to Unti and SCC case files, is that Johnson was limited in how he could defend himself during the SCC hearings because of an ongoing federal investigation.
“Any time you have several levels of government looking at something, you have to recognize anything you say or do on the public record can be used against you.” Unti said.
Neither Unti nor Bollinger discussed any details related to any federal investigation against Johnson or the others.
The SCC’s case against Johnson, who is also a licensed insurance agent, began in 2009, Bollinger said, after a complaint from an individual who invested in one of the entities owned by Johnson.
Securities and promissory notes related to entities such as a cleaning service and an awning company, many of which were located in Richmond, were sold to investors.
“It didn’t pass the smell test almost from the jump,” Bollinger said, in regards to the SCC’s initial investigation.
One thing that was peculiar was the type of companies that investors were buying into, such as River City Cleaners and Norvell Awning.
“That’s not a normal way for these types of companies to raise money,” Bollinger said.
Gathering evidence took some time, she said, but the case was ultimately heard in the SCC’s special court last July. The court is a civil court of record in Virginia and has no criminal authority.
“It takes a while when you have this many violations and this many investors,” Bollinger said. “It was a big mess. It was very difficult to track the money.”
Those securities were unregistered, the SCC concluded in its ruling, and those selling the securities were also not registered to do so. Both instances violated state securities laws.
In all, there 169 people who invested in these entities, most of whom were in North Carolina and Virginia, Bollinger said. There were also investors in Florida, South Carolina, Oklahoma and Nevada.
The SCC, upon announcing its huge penalty against Johnson and the other defendants, said they were “able to convince many conservative, risk averse, elderly investors to invest millions of dollars by cloaking themselves in respectability.”
Bollinger said it’s unclear whether elderly investors were purposely targeted.
“Senior citizens are the ones that have cash,” Bollinger said, and they were looking for a better interest rate than what they could get elsewhere.
Investing in Johnson’s companies offered rates of interest from 6 to 9 percent, Bollinger said, not quite as high as the usual pie-in-the-sky returns promised in many investment schemes.
“But in 2007 and 2008, that looked pretty good,” Bollinger said. “Mr. Johnson was a legitimate businessman living in Richmond, and they assumed it was all good.”
And for a while the investment paid off.
“He paid interest for quite a period of time,” Bollinger said. “But in the last couple of years, before it all fell apart, his companies were not making money, so he had to get more investors to pay the interest [due to previous investors].”
That’s the point where Bollinger wishes the story had ended.
“If he had stopped and just admitted he screwed up, he would have saved a lot of people a lot of money,” she said.
Johnson’s attorney Unti maintains that although Johnson owns the companies in question, he was not involved in selling the securities or interacting with investors. That part of the business was carried out by others who were involved.
“Mr. Johnson is the owner and president of these companies and was not involved in the day-to-day issuance of these notes and contact with investors,” Unti said.
“His companies were involved in this investment program that ended up in very bad results for a lot of investors. And as owner he certainly does feel responsibility for it. But I think it’s based on the fact that he was the owner of the companies that he is shouldering the blame.”
Unti said he had just received a copy of the SCC’s penalty order and he and his client are still considering their options.
The SCC’s order would allow Johnson and the other defendants to avoid paying the $37 million fine if they pay $11 million in restitution to investors within a year.
Bollinger said it’s highly unlikely that will happen.
Johnson filed Chapter 11 bankruptcy in October claiming assets of between $10 million to $50 million and liabilities in the same range owed 233 creditors, the largest of which are holders of promissory notes.
Whether the scheme the SCC says Johnson was part of was carried out purposely or was the result of business problems that snowballed, is a question left to ponder.
“I don’t think he went into this business with the intent to take people’s money,” Bollinger said. “It’s hard to know because he didn’t provide any defense at all. I don’t know what was in his head.”
“What’s important is the investors’ money is gone and it’s not likely going to go back to them, and that’s what’s heartbreaking.”
Unti said he has not yet discussed with Johnson whether paying investors back the $11 million is an option.
“I know that Mr. Johnson, if he could, he would repay all these investors.”
Michael Schwartz is a BizSense reporter. Please send news tips to [email protected].
Regardless of criminality, there is the question of economic sustainability, which applies to much of business and government these days.