Did Marion's Mayor Wayne Seybold Gamble The City's And His Future On A Ponzi Schemer?

Larry Polhill (Left) with Gov. Mitch Daniels and Mayor Wayne Seybold

Marion Mayor Wayne Seybold, along with Gov. Mitch Daniels and other state and local economic development leaders, stood shoulder to shoulder with a San Bernardino, California businessman, Larry Polhill, in December, 2012 to announce economic development incentives to lure Cafe' Valley, a Phoenix-based baked goods supplier, to build a $48 million facility at the site of the former Thomson plant in Marion to anchor its eastern U.S. operations. The terms of local economic development incentives were not made known at that time, but Gov. Daniels pledged $5.8 million in conditional tax credits on behalf of the Indiana Economic Development Corporation based on the company's investment plans and more than 100 new jobs the company promised to create when the facility opened in the spring of 2014 and at least 400 jobs by 2018. The new jobs will pay only about $12 an hour. Seybold told the Chronicle Tribune that he was very excited about what he described as a "sweet deal" for the city and a project that Café Valley's Polhill described as being "well underway.":

 “We’re excited that they’re taking one of the most blighted areas in the city and really enhancing it,” he said.

City officials hope the project could be the catalyst for further development at the former television and electronics factory. With one notable exception, it has been largely empty since it was closed in 2004.

Café Valley plans to demolish part of the building’s southwest portion, near the corner of South Adams and 38th streets, ultimately utilizing one-third of the 60-acre property. The exact configuration is still being determined, as is the final cost.

Larry Polhill, Café Valley principal partner and board of directors member, said the company was “well underway” with designs for the new facility and securing food processing equipment.

He said the company hoped to have its financials finalized by early next year in order to break ground by March 2013.

“We’re on a very tight timeline,” he said.

Polhill said the company hoped to receive New Markets Tax Credits from the federal government in order to secure financing for the project. If they do not receive them, it could derail the project.

These credits incentivize investors who build in low-income communities and are allocated once per year.

“Hopefully there will be some new allocation after the first of the year,” Polhill said.

What neither Mayor Seybold nor Gov. Daniels mentioned to the public was that Café Valley's Polhill, an officer and one of the company's three directors, was embroiled in a bankruptcy of his San Bernardino-based private equity real estate firm, American Pacific Financial Corp., in a Las Vegas federal bankruptcy court and an investigation by the Securities & Exchange Commission looking into allegations that he had defrauded nearly 500 investors out of $160 million through a Ponzi-like scheme that closely resembled the one run by Indianapolis' Tim Durham through his Ohio-based Fair Finance Company. Concerns raised by a member of Marion's common council were brushed aside months later when a complex local TIF financing deal that puts Marion taxpayers on the hook for tens of million of dollars raised questions about Polhill's bankrupt private equity firm and an ongoing SEC investigation. As Councilwoman Joselyn Whitticker expressed her concerns according to the council's minutes from a special meeting of the council on February 25, 2013:

There is not a person in this room, nor on this Council, who does not believe in the growth of the City of Marion and they want it to prosper, but, based on some things that have happened in the immediate past and some things that have been put with the Café Valley deal, it puts us in limbo. And based on some information she has regarding one of the principals, she has deep concerns and those deep concerns regard the whole issue of a primary principal who has been repeatedly and is, at this point, in the SEC and it is on the grounds of fraudulent misrepresentation and omitting of facts and that’s Mr. Larry Polhill. This is public knowledge and this came from the SEC. She also has concerns because with somebody and that case is ongoing.

Whitticker was expressing doubts about a plan by the financially-pressed city to provide $4.2 million to Café Valley to acquire the Thomson property and perform demolition work, and to issue two separate bond issues totaling up to $26.5 million for distinct purposes. An initial Series A bond issue in the amount of $14.5 million was described to council members as the "meat" of the deal. The first bond issue included the $4.2 million to allow Marion's Growth Council to purchase the property, $5 million for Café Valley for site preparation, $2 million to refinance old debt and the balance for a built-in reserve fund and fees associated with the bond issue.

In 2012, the city backed a $2 million loan for Earthbound Recreational Vehicles with county economic development income tax (EDIT) revenues. Earthbound Recreational Vehicles closed down a short time later, leaving taxpayers holding the bag to repay the $2 million loan. The city's financial advisers insisted that the old debt needed to be refinanced with the new debt. Council members were told that taxes generated from the new facility would be recycled to pay off the newly-issued bond debt.

City officials agreed to move forward with the issuance of the Series A bonds payable over 25 years without knowing whether Café Valley would succeed in obtaining the additional funding it needed for the project, which it intended to obtain from New Markets Tax Credits made available through the federal government as part of President Obama's economic stimulus plan. A second Series B bond issue of up to $12 million was described as the "carrot" to entice Café Valley to remain and expand in Marion after the City acquired the needed land and expended millions for the new improvements. Polhill attempted to explain to council members how his company would obtain financing using federal tax credits at its February 19, 2013 meeting in a way only a snake oil salesman could do it:

Larry Polhill told the Council he heard a lot of definitions of things today that have been a lot different than reality, he believes. Federal tax credits are, in fact, tax credits, not tax dollars. They are federal dollars which are credits against somebody’s income taxes. Not Café Valley. Somebody in the country will buy those tax credits and that generates cash for them to bring to this community. President Obama signed $7,000,000,000 of additional federal tax credits just in January which is why this project is going forward. They can bring $40,000,000, maybe $50,000,000 of those tax credits to Marion or they could end up somewhere else. Those credits, that $7,000,000,000, there are people standing in line for it. We’re at the head of the line at this point and they want to bring those credits to Marion. And this is not a handout by any stretch. People have asked, well (inaudible), and he’s really getting frustrated answering answering those questions so he apologizes for his tone but, you know, this is a $50,000,000 project. It’s a $25,000,000 bank loan. It’s personally guaranteed by him and the other principals of the company so he thinks they’ve got a lot of skin in this game. They backstopped the city’s tax bonds to the extent that the city is signing on that. He doesn’t know what more they expect them to do, Polhill said. Now they got a $25,000,000 bank loan to start with, they have state tax credits for $5,000,000, they got the TIF contribution for (inaudible) $5,000,000, which is, by the way, limited at $10,000,000. So if the city’s counsel is good and sells those credits for more, that’s a benefit to the city. They don’t get another penny over that amount.

In other words, it's just free money waiting to be claimed by someone, even business owners under investigation by the SEC for defrauding innocent investors. Council members were equally confused about the lease on the property the city was acquiring on Café Valley's behalf as it was the source of the company's personal financing for the project. Polhill told them that city taxpayers aren't paying for the lease; rather, this was just a mechanism "in order to get the bonds." Nobody seemed to understand or be able to explain the lease of the property to Café Valley, let alone who was actually going to wind up owning the property after all was done and said so the council turned to its TIF lawyer on the project, Barnes & Thornburg's Bruce Donaldson, to explain:

Bruce Donaldson with Barnes & Thornburg told the Council essentially the company is going to own the site. It’s going to lease it to the Growth Council and then the Growth Council is going to lease it right back to them. Each side is $1.00 and then the Redevelopment Commission joins the lease for purposes of making the payments on the bonds. And so the lease is a mechanism to get the Redevelopment Commission’s TIF, which is the primary source, the project TIF, the primary source of repaying the bonds into the transaction. So the lease is really just a, like Larry said, a mechanical, it’s an accommodation by the company to allow them to have an asset to lease, to access the Redevelopment Commission TIF money, Donaldson said. Thompson asked, is this a lease to own? Donaldson replied, the company will own the project and it will continue to own it throughout the lease and then when the lease is over, the company will own the project. Thompson stated, okay, not that he really understands but he appreciates what he’s said because it’s helped him a little bit.

So did you get that since the council member who asked the question obviously didn't understand after Donaldson got through explaining it? The use of the term "lease" is all smoke and mirrors to put the taxpayers on the hook for the debt incurred to build Polhill's $50 million facility as a TIF-funded project. Polhill's Café Valley will own the property from the get-go, throughout the term of the 25-year lease and after the bonds are retired, assuming the company is still around at that point.

Seybold still insisted the complicated financing arrangement did not represent any long-term debt for the city. “That doesn’t become debt of the city,” Seybold told the Chronicle-Tribune. “It’s not like we go out and take a bond to build something. This is all based on the property tax and the ability of the company to pay their property taxes. …“If the project were not to happen, then the company would cover those bond payments until someone else came along. As long as the taxes are paid, then the bond gets paid. If they don’t get paid — if there’s a shortfall — then the company covers that.”

Needless to say, the city went forward with the Café Valley project and broke ground on the project on March 31, 2013, even after the Chronicle-Tribune brought to Seybold's attention the fact that the company had previously purchased land in Spartanburg, South Carolina where it had planned to base its eastern U.S. operations until the company scrapped the project in 2011. Polhill told the newspaper that the company had purchased a former pie plant in Spartanburg and discussed economic development incentives with officials there but that it was a lower priority than a new facility it built in Phoenix that year. Marion's development director, Darren Reese, dismissed the concern: "People buy and sell facilities all the time." The company is still projecting an opening date this spring and has hired its first employees to assist in the hiring of full-time workers for the facility. See a timeline of events for the project as detailed quite nicely by Frank Stahl at Indiana Policy Review here.

Meanwhile, the SEC concludes its investigation of Polhill's American Pacific Financial Corp. last September and concludes that "he falsely presented investment opportunities that were safe and reliable based on collateral that didn’t always exist, and his fraudulent misrepresentations left investors with nothing to show for their investments when APFC declared bankruptcy.” The SEC found that Polhill had issued promissory notes to nearly 500 investors under the false premise that they were secured by specific properties or other collateral. The notes offered investors interest payments of between five and seventeen percent per year. According to the SEC, Polhill had used money raised from investors to buy and sell real estate, and to acquire distressed assets, including Café Valley with the company he started back in the last 1970s. Polhill's company consistently paid interest on the investors' notes until it ceased making payments in 2008. By 2010, investors suspicions grew when APFC filed for Chapter 11 bankruptcy protection in the U.S. bankruptcy court in Las Vegas, listing debts of $152 million owed to nearly 500 creditors.

According to the San Bernardino Sun, the court-appointed bankruptcy trustee, Christopher Barclay, described what he found as a "number of failed investments and poor management decisions" made by APFC's president, Larry Polhill. Barclay described Polhill's management of the company as "Byzantine." Based on his recommendation, the bankruptcy was converted to a Chapter 7 liquidation proceeding "in an effort to find the most beneficial resolution for the company's many creditors." Polhill told the newspaper that he had made a settlement offer to the investors, but the investors complained that it was only for a fraction of what they had invested with APFC. "My parents lost their life savings," said Derick, who did not want his last name used for fear of retaliation against his parents. "They're in their 80s now and they can't really recover that money. They lost $100,000." At the urging of defrauded investors, State Rep. Joe Baca (D-San Bernardino) asked the district attorney, Michael Ramos, to investigate the investors' allegations of fraud. The DA's office told them their best recourse was to pursue a remedy in civil court. Ramos' office later told investors it was "looking into the matter and to be patient," but nothing ever became of that investigation.

The SEC's investigation found that, although some of Polhill's businesses were successful, most had failed, a fact never disclosed to APFC's investors. In the complaint announcing a settlement reached with Polhill under which he agreed to be barred from acting as the officer or director of any public company, the SEC laid out the fraud claims against Polhill and the securities law violations that he committed:

The SEC alleges that Polhill made several material misrepresentations to investors. Specifically, he told investors that the notes were secured by collateral when no such security interest existed. He failed to disclose that the collateral securing some investors' notes already had been pledged to other lenders. Polhill represented that he would notify investors if their collateral went into default when that was often not the case. For instance, one investor's note specifically stated it was secured by property located in Hesperia, Calif., that was owned by APFC and pledged as collateral. However, APFC sold the collateral in 2004, and neither Polhill nor APFC informed the investor that his collateral had been sold and there was no longer any asset securing the note.

The SEC's complaint charges Polhill with violating Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act. Polhill has consented to the entry of an order that permanently enjoins him from violating these laws and permanently bars him from acting as an officer or director of any public company.

Yeah, Polhill's scheme to defraud investors was remarkably similar to the Ponzi scheme Tim Durham ran with his Fair Finance Company that defrauded small Ohio investors out of more  than $200 million. The SEC's complaint against Polhill specifically references his use of Café Valley notes that he personally signed to defraud investors in the scheme:

As another example, over 80 investors held notes from APFC note offerings from 2004 to 2008. These notes specifically stated that the notes were secured by accounts receivable owed by Cafe Valley, a privately-held bakery, and the notes claimed this account receivable had been pledged as collateral for the notes. However, Polhill and APFC never disclosed that this collateral was already subject to a senior bank loan.

Even worse, the complaint says that Polhill continued issuing promissory notes listing as collateral for businesses that had already failed without notice to the investors. When one of Polhill's cousins who had invested in APFC learned of the fraud, Polhill substituted his collateral for him without notifying the other investors. The complaint alleged that Polhill soliticited investors across the country but never registered any of the securities he offered to investors in violation of federal securities law. Polhill also offered investors the opportunity to invest in limited partnership, which were also not registered, and comingled funds raised from those investments with APFC's funds in the form of loans to APFC that were used to pay interest on the uncollateralized promissory notes. The SEC's complaint stated, in part:

Polhill and APFC did not maintain the collateral pledged as security for the notes throughout their terms, and often sold or lost the original pledged collateral without notifying investors.  APFC and Polhill also did not notify investors when collateral went into default and did not offer investors the options of (i) reducing their loans; (ii) accepting substitute security; or (iii) placing their funds in trust pending their approval of a replacement security as required under the terms of the promissory note. Finally, APFC and Polhill did not hold the pledged collateral in safekeeping and available for inspection by the investors upon request.

In fact, APFC and Polhill had no procedures or safeguards in place to track the status of investor collateral and ensure that appropriate notice was being provided in the event of default.

Furthermore, even when Polhill was fully aware that collateral securing investor notes was impaired, he did not tell investors. For example, in one instance, Polhill's cousin held one of the APFC notes. When his cousin learned that the collateral was no longer available, the cousin asked Polhill for substitute collateral. Polhill agreed, and substituted new collateral to secure the note. However, Polhill did not inform any of the other investors holding that note that the collateral was impaired . . .

A website titled, APFC Ponzi Scheme, was created to expose Polhill as a "criminal" and a pathological liar." It should be noted that no criminal charges have been filed to date against Polhill. Information gleaned from the Internet indicates that Polhill grew up in Illinois where he first went into business in the late 1960s with his former high school business teacher, Bill Guymon, who still works for him, as a partner in buying a gas station in South Beloit, Illinois. Polhill, who describes himself as a "professional opportunist," later moved to California and began raising money for a number of business ventures, including a space launch provider, a health club, several Illinois food manufacturers, an Internet service provider, a trucking company and various real estate investments. Kelly Space & Technology in San Bernardino is one of Polhill's proudest investments. A news article from The Press-Enterprise in San Bernardino from several years ago describes a civil lawsuit that a 39-year old man, Gregory A. Letterly, filed against Polhill, a former family friend that he alleged had sexually molested him repeatedly when he was a pre-teen boy in the early 1970s during trips to the Salton Sea, Big Bear Lake and Lake Havasu. Polhill told The Press-Enterprise that he denied all of the allegations in Letterly's "unfounded" lawsuit at the time.

Earlier this year, Advance Indiana noted that Marion's financial woes were becoming a financial albatross for Seybold's statewide campaign this year for the Republican nomination for State Treasurer, which will be decided by delegates to the Republican State Convention in Fort Wayne in June. Seybold recently asked the city council for authorization to borrow $12.8 million in tax anticipation notes after the city began the calendar year with only $320,000 in its general fund. A recent State Board of Accounts audit criticized the city for having a "lack of financial controls" that led to recurring problems with  "overdrawn cash balances, bank account reconciliation concerns and questions about funds use" according to the Chronicle-Tribune. Seybold was also recently sued in Grant County Superior Court for an unpaid personal credit card bill in the amount of $5,357 owed on an American Express credit card issued by Centurion Bank. When Seybold announced his campaign last June, he said he had the support of more than 50 state lawmakers, municipal officeholders, and national and state and community leaders.