United States Attorney
District of Minnesota
September 02, 2010
Minnesota Man Pleads Guilty to Operating a $80 Million Ponzi Scheme With Bank Money
MINNEAPOLIS – A 40-year-old Lakeville, Minn., man pleaded guilty today in federal court in Minneapolis to operating a Ponzi scheme that defrauded at least 17 lenders in Minnesota and several other states. According to the government’s investigation, the lenders suffered losses in excess of $79 million.
Earlier this afternoon, Corey N. Johnston appeared before U.S. District Court Judge David S. Doty and entered a plea of guilty to one count of bank fraud and one count of filing a false income tax return in connection to this crime. Johnston was charged on Aug. 6, 2010.
In his plea agreement, Johnston admitted that from 2005 through March 2009, he oversold participation in large commercial and personal loans arranged by him through his company, First United Funding (FUF). Loan participation is a common banking practice in which a bank pays an original lender all or a portion of a particular loan and then assumes that loan, along with its associated risk. From that point on, the bank receives the loan payments from the borrower, as if the bank had made the loan in the first place.
Johnston’s scheme involved selling more than 100 percent participation in at least 10 different loans arranged through FUF. In other words, he purportedly sold loan participation to banks after already selling that same participation to other banks. In each instance, Johnston failed to disclose that the total participation exceeded 100 percent of the original loan, making it impossible for the participating bank to receive the money expected.
For example, Johnston oversold loan participation for a project known as White Out Way Investments. The original White Out Way loan, arranged through FUF, was for $7 million. Johnston sold 100 percent participation in that loan to Western National Bank. At the same time, however, he convinced several other banks to participate in the loan, including 100 percent participation by The National Bank in Bettendorf, Iowa, as well as partial participation by four other lending institutions. In all, Johnston solicited and received $23.65 million from six banks for the $7 million loan.
In addition, Johnston oversold loan participation for a project known as JM Land Development II. The original JM Land Development loan was for $8 million, and once again, Johnston sold 100 percent participation in the loan to Western National Bank. However, he simultaneously obtained full loan participation from Choice Financial, The National Bank and Hillcrest Bank, along with partial participation from four other banks. Johnston solicited a total of $38.65 million for an $8 million loan. Six additional lenders also were defrauded during the course of this scheme by overselling participation in other loans.
Johnston used some of the proceeds of the fraud to repay other loans and perpetuate the scheme. He also diverted fraud proceeds for his personal use as well as for use by family members. Furthermore, Johnston failed to report the fraudulent income on his 2005 federal income tax return. That failure resulted in an underpayment of taxes to the United States of approximately $508,905.
For his crimes, Johnston faces a potential maximum penalty of 30 years in prison on the bank fraud charge and three years on the charge of filing a false income tax return. Judge Doty will determine his sentence at a future hearing, yet to be scheduled.
This case is the result of an investigation by the FBI, the Internal Revenue Service-Criminal Investigation Division and the Federal Deposit Insurance Corporation. A receiver also was appointed by the Hennepin County District Court. The case is being prosecuted by Assistant U.S. Attorney Robert M. Lewis.
This law enforcement action is part of President Barack Obama’s Financial Fraud Enforcement Task Force. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.