The get-rich plan, which operated out of an office in Linden, about 60 kilometres northeast of Calgary, harvested millions of dollars from investors throughout North America, but it was doomed to fail.
HMS Financial Inc. wrote its clients in 2004 - three years after it started business - that it was winding down due to "new banking and finance regulations" stemming from "the terrorist threat.”
Investors' demands for refunds fell on deaf ears.
The collapse has left a continuing RCMP commercial crime investigation in its wake.
Despite the fact that they sold stock to the public, HMS Financial owners Harold Stark and Robert (Colonel) Fyn did not register the enterprise with any securities commission.
They portrayed HMS Financial as a rock-solid institution that gave returns of 120 per cent to 240 per cent per year - rates of interest that, by expert opinion obtained in the police investigation, are impossible.
Fyn and Stark, both of Linden, did not return Business Edge calls for comment.
Last year, the Calgary RCMP commercial crime section raided HMS. In his search-warrant application, Garth Jesperson - an RCMP corporal at the time - alleged that the enterprise was a prime bank instrument (PBI) fraud and Ponzi scheme.
A PBI fraud, also known as a high-yield investment fraud, offers fantastic rates of return based on the yields of mythical banking instruments supposedly traded in secret markets among the world's leading banking organizations.
A Ponzi scheme is a fraud in which investors are paid impossibly high rates of interest. Word spreads like wildfire and the promoters keep the scheme afloat by using money from new investors to pay interest to the existing investors.
No criminal charges have been laid against HMS Financial and its affiliates, so the police information remains unproven.
But rob-Peter-to-pay-Paul enterprises inevitably collapse when they default on their interest payments.
Last year, Thomas Matkin, a Cardston lawyer acting for an elderly investor, tape-recorded a meeting with HMS Financial's "Colonel" Fyn, who attempted to explain how the investment achieved its extraordinary rates of return.
A transcript, attached to an affidavit that Matkin provided to the Alberta Securities Commission (ASC), shows Fyn talking about "factoring" and "London high-yield bonds" and "night trading" and "leveraging."
However, the transcripts indicate Fyn failed to connect this lexicon of trading with any credible accounting practices.
Instead, he talked about the financing of a $1,000 cow to convince the skeptical lawyer.
You have $100 and you go to the bank to borrow the remaining $900 to buy the cow, Fyn explained.
In all likelihood, the cow will have a calf. You spend $300 on feed while raising the calf. "If you have $100 invested, now you have a $900 debt," the financier said. "Well we all know that a debt is not a debt until it's due.
"Correct?" he persisted. "It's a liability. It's not a debt."
"OK," replied Matkin. "You're losin' me, but keep going."
"If you take $100 and leverage it to $1,000 which you're ... doing when you go to the bank and borrow money - because the bank's gonna give you $900 because you have $1,000.
"You're gonna buy a cow who's going to have a calf," Fyn persisted.
"Right," replied Matkin.
"You're gonna have a calf to sell at 600 bucks that only cost you $300 to get your cow. You're gonna have $300 net to expenses. Now you have $100 invested. Did you make 300 per cent ... on it?" This is about as clear as it gets. After failing to enlighten Matkin, Fyn tried other lines of persuasion.
"You've really made up your mind that this is a scam ...”
he exclaimed.
Though the investors may be poorer through their fliers in HMS Financial stock, the company managed to put tiny Linden on the map among North America's law-enforcement agencies.
First, the securities watchdog Saskatchewan Financial Services Commission did some sniffing around in 2001 when it received information that HMS was trolling for funding there.
In December that year, the SFSC issued a temporary cease-trading order and followed the order up two weeks later with an extending order - to remain in effect indefinitely - after the company did not defend itself against the commission's allegation that it was running an unregistered securities scheme.
Two years later, the Manitoba Securities Commission (MSC) got in on the act with an investor alert about two investment companies - Skyward Management Inc. and Commonwealth Marketing Group Ltd. - and two Airdrie residents alleged to be affiliated with HMS Financial.
"The first scam involves letters of credit or mid-term notes whereby individuals are being offered 12-per-cent-per-month return on their money," the alert says. "Proceeds from this transaction are being transferred to an account in Belize."
The alert goes on to say that the second investment required that investors transfer their Registered Retirement Savings Plan (RRSP) to a trust account in British Columbia. The investments in the RRSP account then were replaced with possibly worthless second mortgage properties, the MSC alleged.
"Individuals are told that a 12-per-cent annual return will be realized on mortgage property investment. In reality, they have your cash and the individual holds a potentially worthless investment."
The ASC launched a formal investigation in April, 2004, after receiving a complaint from the Cardston investor, a woman in her late 80s who invested $35,000 US with an HMS affiliate and was unable to recover her money.
The ASC issued a cease-trading order the following month and later extended it indefinitely after determining that the enterprises and their promoters had not registered with the ASC or filed a prospectus.
Both the ASC and B.C. Securities Commission forwarded their investigative files to Jesperson. The ASC chose this route (as opposed to pursuing charges on its own) because it prefers to see the police handle alleged or potential criminal matters.
The RCMP also heard from law enforcement in other jurisdictions such as the Saskatoon RCMP commercial-crime unit, the Arizona Department of Public Safety and the Kentucky Department of Financial Institutions, which had received information about these schemes from their own locales.
In my opinion, the participation of professional practices can lend such enterprises an air of legitimacy. The Law Society of Alberta has declined to comment on what action, if any, it has taken with respect to the involvement of DeWinton lawyer Garth Bailey. Bailey declined comment.
According to Jesperson's affidavit, the FBI in San Diego is investigating the abortive January 2004 transfer of $6.1 million in U.S. bank drafts payable to "Garth S. Bailey Professional Corporation" from 240 investors "for legal services rendered."
A bank manager got suspicious when all this money suddenly flowed into the account of a San Diego lawyer who operated his law practice out of his home and whose bank balance previously never exceeded $2,500.
The banker acted swiftly, freezing the funds and then calling the feds - an encouraging sign that banking institutions and law-enforcement agencies in North America are learning to co-operate in the protection of investors.
The San Diego lawyer acknowledged in an interview with a FBI agent that he made the deposit on Garth Bailey's behalf. The San Diego bank later worked with the issuing banks to return the funds to the American investors.
Cardston lawyer Matkin told Business Edge that he contacted law-enforcement authorities as soon as he saw the HMS Financial documentation.
"They offered far more money than they could ever pay," said Matkin. "The lowest I ever saw that they offered was eight per cent per month, compounded quarterly."
"That rang alarm bells for me."
According to a projection that HMS Financial gave its investors, a $5,000 investment left to compound at such a rate over six years would make the investor a lot of money - $2,714,003.85, to be exact.
Just for fun, Matkin took this one step further. According to an affidavit he filed in May, 2004 with the ASC, he calculated what a $5,000 investment - with eight per cent interest compounded quarterly - would reap the investor in 25 years.
The total return: $11,000,000,000,000,000, give or take a nickel.
To be on the safe side, the RCMP's Jesperson consulted with University of Calgary finance expert Dr. Michael Robinson for his opinion about the probability of an investment paying the kinds of interest quoted by HMS.
Such rates are not possible, the academic averred, adding that even international experts investing large sums of money on high-risk instruments could not hope to exceed a return of 20 per cent per year.
So much for quadrillions for your retirement.
PBI WARNING SIGNS
* No economic basis for the transaction
* No credible explanation of how it can generate the returns
* Promised returns are disproportionate to the risk
* The nature of the transaction is obscure
* Returns are made from a mysterious, secretive banking instruments
* Non-disclosure agreements are common
* PBIs are clouded in gratuitous complexity and confusion
* Documentation is amateurish (contains gibberish and errors) Source: Prof. James Byrne, Director, Institute of International Banking Law & Practice, Inc., George Mason University, as quoted in Jesperson affidavit
(Brock Ketcham is a writer who specializes in consumer and public policy issues. He can be reached at brock@businessedge.ca)
