401(k) Woes When a Company Goes Bankrupt — Fair Game

The following is an excerpt from an article in 

The New York Times
Sunday, August 26, 2012

401(k) Woes When a Company Goes Bankrupt — Fair Game

By GRETCHEN MORGENSON EVERYONE with a 401(k) knows that bad investments and high fees can threaten their retirement. But what if the company that sponsors your plan goes bankrupt?

As the employees of one small company have learned, it can wreak financial havoc. They’ve gone nearly four years without access to their retirement savings.

It isn’t supposed to be this way. When a company collapses, the assets of its 401(k) are to be transferred to account holders — promptly.

But that’s not what happened at Penn Specialty Chemicals in Memphis. In July 2008, the company sold most of its assets to a French chemicals concern. Its employees — there were fewer than 100 — were given the choice of shifting their retirement plans to the acquirer or keeping them with Vanguard, the fund giant that is the record keeper of Penn Specialty’s 401(k). Many people in the plan, especially those close to retirement, chose the path of least resistance: they stayed with Vanguard.

Then, that December, Penn Specialty filed for Chapter 7 bankruptcy — liquidation. The court appointed George L. Miller, a certified public accountant at Miller Coffey Tate in Philadelphia, as trustee. In these cases, the trustee must advise the Internal Revenue Service why the 401(k) was terminated and await I.R.S. approval that the plan had not run afoul of tax laws.

Such a determination should have been relatively simple in Penn Specialty’s case because, as the I.R.S. manual says, bankruptcy is usually sufficient evidence to support a plan’s termination. In such a circumstance, the I.R.S. says, participants should receive their share of the plan’s assets “as soon as administratively feasible,” or within one year.

The people with 401(k)’s at Penn Specialty haven’t even come close. Although they can switch among various Vanguard funds, they can’t touch their money. While they wait, they’ve had to pay high administrative fees on their accounts. Older account holders could become subject to substantial tax penalties because they can’t take distributions, as required by law. Inability to gain access to their funds has put some of the company’s retirees under significant financial strain.

For more, visit www.nytimes.com.

The Bankruptcy Cliff

Excerpt from the The New York Times
Sunday, February 19, 2012

Jefferson County, Ala., Falls Off the Bankruptcy Cliff


By MARY WILLIAMS WALSH

ONE county jail here is so crowded that some inmates sleep on the floor, while the other county jail, a few miles down the road, sits empty.

There is no money for the second one anymore.

The county roads here need paving, and the tax collector needs help.

There is no money for them, either.

There is no money for a lot of things around here, not since Jefferson County, population 658,000, went bankrupt last fall. There is no money for holiday D.U.I. checkpoints, litter patrols or overtime pay at the courthouse. None for crews to pull weeds or pick up road kill — not even when, as happened recently, an unlucky cow was hit near the town of Wylam.

“We don’t do that any more,” E. Wayne Sullivan, director of the roads and transportation department, said of such roadside cleanup.

This is life today in Jefferson County — Bankrupt, U.S.A. For all the talk in Washington about taxes and deficits, here is a place where government finances, and government itself, have simply broken down. The county, which includes the city of Birmingham, is drowning under $4 billion in debt, the legacy of a big sewer project and corrupt financial dealings that sent 17 people to prison.

If you want to take a broad view, the trouble really began with the Constitutional Convention of the State of Alabama in 1901. The document that emerged there — written to empower business interests and disenfranchise African-Americans and poor whites — gives towns and counties little authority over local issues. Local taxing power rests with the state, though state lawmakers are loath to wield it today, in an age of anti-tax populism. Last summer, the Supreme Court of Alabama struck down a tax that was a crucial source of revenue for Jefferson County, finally pushing the county over the brink.

Officials here have only begun to grapple with the implications of life under Chapter 9 of the federal bankruptcy code, a municipal form of debt adjustment, rather than reorganization or liquidation. Until now, the most famous example was Orange County, Calif., which filed for Chapter 9 in 1994, after risky investments went horribly wrong. Many local governments are struggling to pay their bills these days, but hardly any have filed for bankruptcy. Notable exceptions include Harrisburg, the capital of Pennsylvania, Vallejo, Calif., and Central Falls, R.I.

Let Greece Go Bankrupt: Jim Rogers

"Let Greece go bankrupt, let all the people who are bankrupt go bankrupt, and then you can start over.  You reorganize the assets and start over," Jim Rogers, CEO of Rogers Holding told CNBC. "Until that happens, this is going to be an on-going discussion," he said.  To see a video of this and other thoughts, click the link below:

http://video.cnbc.com/gallery/?video=3000073700

Two Sentenced for Investment Fraud

News release from the FBI:

Two Former Canopy Financial Co-Founders Sentenced to 15 and 13 Years in Prison for $75 Million Investment Fraud and Raiding $18 Million from Custodial Heath Care Expense Accounts of 1,600 Customers 

U.S. Attorney’s OfficeFebruary 15, 2012

Northern District of Illinois(312) 353-5300

CHICAGO—Two co-founders of Canopy Financial, Inc., a bankrupt health care transaction software company based here, have been sentenced to 15 and 13 years in prison for defrauding investors and clients of more than $93 million. Anthony Banas, Canopy’s chief technology officer, was sentenced today to 160 months in prison, while Jeremy Blackburn, Canopy’s former president and chief operating officer, was sentenced on Jan. 24 to 180 months in prison. Both men pleaded guilty in late 2010 to one count of wire fraud, admitting they engaged in a fraud scheme that cheated investors of approximately $75 million and also misappropriated more than $18 million from customer accounts intended for health care savings and expenses.

The sentences, imposed by U.S. District Judge Ruben Castillo in Federal Court, were announced by Patrick J. Fitzgerald, United States Attorney for the Northern District of Illinois; Robert D. Grant, Special Agent in Charge of the Chicago Office of the Federal Bureau of Investigation; and James Vanderberg, Special Agent in Charge of the U.S. Department of Labor Office of Inspector General in Chicago. The Securities and Exchange Commission’s Chicago Regional Office assisted in the investigation.

In imposing sentence on both defendants, Judge Castillo noted that this case was the most aggravated financial fraud he had seen in his 18 years on the federal bench. The judge ordered both men to pay mandatory restitution and forfeiture totaling $93,125,918. Approximately $50 million has been recovered so far through Canopy’s bankruptcy proceedings, and the government anticipates that the bankruptcy trustee will pay the claims of the health savings account customers. Banas, 34, of Homer Glen, was ordered to begin serving his sentence on April 18. Blackburn, 38, of Bolingbrook, was ordered to report to prison on March 20.

According to court documents, Blackburn and Banas used false information about Canopy’s financial condition, including a bogus auditor’s report and falsified bank statements, to fraudulently obtain approximately $75 million from several private equity investors in 2009. Approximately $39 million of that money was used to redeem shares of other Canopy investors, including approximately $1.6 million that went to Blackburn and $975,000 that went to Banas, while another $29 million obtained from investors was deposited into Canopy operating accounts. Blackburn and Banas also misappropriated Canopy operating funds for their own benefit.

Blackburn alone took approximately $6 million in unauthorized withdrawals and transfers from Canopy bank accounts during 2009. Blackburn typically directed a Canopy employee, or occasionally Banas, to transfer Canopy funds to his bank accounts or to pay for his personal expenses, including credit card balances, luxury car purchases, and funding his account with a private jet company. Among Blackburn’s luxury car purchases with Canopy funds were the following: two 2010 Range Rover SUVs, a 2009 Bentley, a 2008 Lamborghini, a 2010 Lamborghini, a 2009 Rolls Royce Phantom, a 2009 Aston Martin DBS, a 2009 Bentley Continental, and a 2009 Ferrari 430. Blackburn also paid for personal home renovations, bought sports tickets and purchased jewelry and watches using misappropriated Canopy funds.

Banas used misappropriated Canopy money to invest $300,000 in a nightclub. Banas also spent $400,000 between 2007 and 2009 on other personal expenses.

Blackburn admitted that he created phony bank statements during 2009 to conceal the transfer of more than $18 million from special health care accounts in which Canopy held funds as custodian for the benefit of more than 1,600 clients and customers to make payments to medical providers. The funds were transferred to Canopy’s own operating accounts, as well as to benefit Blackburn and Banas personally.

In 2004, Blackburn, Banas and a third individual co-founded Canopy, which reportedly was one of the country’s fastest-growing privately held companies before it entered bankruptcy proceedings in November 2009. Canopy, which had offices in Chicago, Plainsboro, N.J., and San Francisco, developed and marketed software programs for banks and health care payers to administer and process payments involving health-related savings and spending accounts. Canopy’s products related to expense tracking, online bill payment and claims processing for healthcare transactions.

Beginning in March 2009, in connection with the offer and sale of Series D preferred stock by Canopy, Blackburn and Banas made materially false representations to prospective investors about Canopy’s financial condition, including its revenues, profitability and total number of client accounts, and falsely represented to prospective investors that its financial statements had been audited by KPMG, the international network of audit, tax and consulting firms.

In addition to the phony audit report, Blackburn and Banas created falsified bank statements for the months of January through June 2009, purporting to show a Canopy account at Northern Trust Bank with monthly balances ranging between $5.7 million and $8.9 million. Blackburn admitted that these misrepresentations caused certain investors, including entities affiliated with Spectrum Equity Investors, to invest a total of nearly $75 million in shares of Canopy preferred stock in July and August 2009.

The government was represented by Assistant U.S. Attorneys Stephanie Zimdahl and Manish Shah.

The prosecution falls under the umbrella of the Financial Fraud Enforcement Task Force, which 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. For more information on the task force, visit:www.StopFraud.gov.