Published January 4, 2009 by

Guilty pleas in Rate Search Ponzi scheme

Ever hear of misprision of a felony? Neither have I. But it’s in this Dec. 19 article in the St. Louis Post-Dispatch titled Prosecutors: St. Louis investment house ran $4.5 million fraud.

The City of Northfield’s missing millions are at the heart of the case.

A securities firm in St. Louis defrauded customers of more than $4.5 million and used some of the proceeds for the owner’s personal expenses, a federal prosecutor said Thursday. Rate Search Inc. billed itself as able to find the best return on certificates of deposit by searching financial institutions across the country; it made its money by taking a slice of the interest earned.

But for years, the company and its president and owner, Scott Luster, falsified account statements and other documents to hide missing money, Assistant U.S. Attorney Hal Goldsmith said in federal court in St. Louis. Goldsmith said the company never bought some of the CDs customers thought they owned, redeemed customer CDs before their maturity dates and sent money to customers to lull them into believing nothing was wrong.

Missouri regulators have described it as a Ponzi, or pyramid, scheme. Goldsmith’s accusations came in a hearing where former Rate Search employee Clark Schultz pleaded guilty of misprision of a felony, which means that he knew about a crime and concealed it. He faces about two years or less in federal prison and possibly a fine.

Here’s a cropped photo of Rate Search president and owner, Scott Luster, which I found on this non-profit fundraising event page.

Rate Search president and owner, Scott Luster

Griff Wigley

Griff Wigley

Gov't & Policy

Rate Search

13 Comments

  1. Ray Cox said:

    While it is good that someone is being held accountable for the theft of these funds, I’m more interested in what this holds for Northfield. Are we ever going to see any of these funds returned? And did city staff follow all policies and procedures for investing public funds with this firm? I always thought that any investment firm, including chartered banks, had to post US bonds equal to a significant portion of the public funds accepted.
    And, if no funds come back to the city, is the city just able to ‘absorb’ this $3.7 million loss?

    January 4, 2009
  3. Ray Cox said:

    Curt, when you say ‘written off’ what are you meaning? Has the city given up any hope of getting the funds back? I know there are insurance products that may come into play, but obviously not if you give up on the matter.

    But I’m still interested in how all this happened, and if all laws were complied with. Frankly, it boggles my mind to think that supposedly competent city employees could end up costing the city $2.3 million. I do not understand how there wasn’t some collateral that should have been pledged to accept public funds like this.

    And I also am curious…can the city just absorb this $2.3 million loss and go on with business as usual?

    January 6, 2009
  4. Griff Wigley said:

    Good questions, Ray. In today’s Nfld News: City seeking payback for lost millions.

    City leaders first learned about the possible loss of its CDs in September 2007, when McBride asked the city council to terminate its relationship with Rate Search. The firm never placed approximately $4.5 million in CDs for clients, including the city of Northfield.

    The city covered its losses by using a standard bookkeeping practice and writing off the losses to its insurance fund, which created a deficit in that fund. The deficit will be reduced annually by transferring other monies into the fund.

    January 7, 2009
  5. Griff Wigley said:

    In yesterday’s ‘Friday memo’ Northfield Finance Director Submitted by Kathleen McBride has an update on the Rate Search investment loss:

    Last month, Clark Schultz, head of Clayton Analytics, pled guilty to misprision of a felony – which means he had knowledge of a crime but didn’t report it. It is clearly a plea deal as it is reported that he will receive only a one to two year prison sentence. The Probation Office (of the Eastern District of Missouri, United States District Court) and the U.S. Attorney’s Office in St. Louis has notified the City of the option to file a statement of victim losses and a victim impact statement. Staff is working with legal counsel on both documents and will file within the next week.

    Legal counsel has spoken with the U.S. Attorney’s Office and has learned that Mr. Schultz does have assets of about $500,000 against which the City can seek restitution. Granted – there are 28 other victims involved, but it is good news nonetheless. The other good news is that with Schultz’s plea, is the pressure put on Scott Luster to plead guilty as well since Schultz could testify against him.

    Schultz’s sentencing hearing will be held on March 5th. The Court determines if (any) restitution is to be made. The U.S. Attorney has the burden for demonstrating victims’ losses, which is why they’ve requested the victim statements.

    If you wish to see the correspondence received from the Probation Office or the U.S. Attorney’s Office, please contact Kathleen.

    January 10, 2009
  6. Griff Wigley said:

    In today’s St. Louis Business Journal: Clayton investor pleads guilty to Ponzi scheme.

    Scott Luster, president of Rate Search Inc., an investment firm in Clayton, Mo., pleaded guilty to fraud and tax charges involving a $4.5 million Ponzi scheme, U.S. Attorney Catherine Hanaway said Tuesday… Luster pleaded guilty to one felony count of mail fraud and one felony count of filing a false tax return. Luster now faces a maximum penalty of 20 years in prison and fines up to $250,000 on the mail fraud charge. The tax charge carries a maximum penalty of three years in prison and fines up to $100,000. He will be sentenced April 21.

    February 3, 2009
  7. Griff Wigley said:

    Nfld News at noon today: Feds may recover city investments.

    Certificates of deposit, thought to have evaporated in a Ponzi scheme concocted by the head of a firm Northfield used to help with its investments, could soon be returned to the city. As many as four or five $100,000 CDs could still be in existence, Assistant U.S. Attorney Hal Goldsmith of the Eastern District of Missouri said Wednesday.

     

    February 4, 2009
  8. Griff Wigley said:

    Kathleen McBride, Finance Director, has a Rate Search update in yesterday’s Friday memo:

    In accordance with Scott Luster’s plea deal with the federal agencies, the City has received two checks from Mr. Luster’s attorney that represent the proceeds of three CD liquidations. Interest checks (on the CDs) have also been promised. For the status of the City’s investment loss / Insurance Fund deficit – please see the Administrator’s memo of February 6th.

    You may recall that when the City severed its relationship with Rate Search in 2007, a number of broker CDs were transferred to one of the City’s broker / dealers, UBS. I received a call this morning from Ned Sorley at UBS to advise that one of the issuing banks has gone under. FDIC insurance will provide coverage on the CD principal (interim interest is questionable). Sorley will be doing some research to see what the process is and time frame for reimbursement from the FDIC. He will also review the status of the banks that hold the remaining CDs.

    February 21, 2009
  10. Ken Creighton said:

    Scott Luster was to be sentenced today. Does anyone know the outcome?

    April 21, 2009
  12. Griff Wigley said:

    Thanks for that link, Scott. I see there’s a restitution hearing scheduled for June. I wonder if Northfield will see any of that.

    April 26, 2009
  13. Griff Wigley said:

    WOW. Finance Director Kathleen McBride has an amazing story of her trip to the sentencing hearing posted in the April 24 Friday memo:

    The trip to St. Louis, MO to attend sentencing hearings in the Rate Search case: Finance Director Kathleen McBride and Accounting Coordinator Julie Nordmeier traveled to St. Louis, MO this week to attend the sentencing hearings for Scott Luster and Clark Schultz. The U.S. Attorney’s Office had encouraged City officials to consider attending the hearings and felt that being present and providing victim impact statements in person could influence the outcome. City staff met with Assistant U.S. Attorney Hal Goldsmith and IRS Agent Travis Ardrey prior to the hearing to be provided with an overview of the proceedings and advice on what to emphasize when presenting to the court.

    While each defendant had separate hearings, both Luster and Schultz were in the courtroom (at separate tables with their legal teams) to hear the victim impact statement presentations. The City of Northfield spoke first. While presenting, we noted that the amount of the City’s loss didn’t include the cost of finance staff time nor police staff time let alone legal expense or outside investigation services. Judge Weber asked for an estimate and added the amount on to the restitution total.

    The City’s presentation was followed by the CFO of the national appraisers association and several private individuals who had also lost money to the ponzie scheme. One of the individuals had received the investment as inheritance from her mother so that she could provide care for her disabled sister. With the presentations ended, the court moved on to the sentencing.

    What we learned: Al Watkins, Luster’s attorney, presented a lengthy introduction and background on Mr. Luster and Rate Search. He noted that Luster was the salesman for the firm while Schultz ran the “back” office. Our interpretation of Mr. Watkins extensive explanation of the losses was that Luster was mostly in charge of spending at the firm – and since the late 90’s or early 2000’s spending exceeded income to the point that eventually clients’ escrow accounts were affected. Upon return from visiting with the City of Northfield (February 2007) where they learned that the City would not change its position and invest more with Rate Search, Clark Schultz abruptly quit the firm (knowing the end was near).

    Schultz contacted the feds several months later with Luster contacting them a month after that. Since then, Luster and Schultz have been pointing their fingers at one another as to who was responsible for the crimes. Mr. Watkins went on to detail Luster’s health issues (heart condition, depression, HIV positive, etc.) and long-standing drug and alcohol abuses (as a plea for consideration in sentencing?). The range in sentences ran from 58 to 72 months – Judge Weber gave him 70 months. Our impression was the victims’ statements had a bigger impact than either Luster or his attorney’s comments. Moreover, when Mr. Watkins stated that Luster had cooperated fully with federal officials, Ms. Nordmeier asked to speak again and told the court that someone had unlawfully liquidated a CD in October of 2007 – well after the federal investigation had started.

    Clark Schultz’s sentencing hearing followed and was significantly briefer than Luster’s. Schultz also had a significant number of family members and friends show up in the courtroom. We learned that the restitution check he brought with him represented his earnings from Rate Search since the time he started in 1991. Schultz’s charges were less severe than Luster’s and his sentence was reduced from ten to eight months at a camp (a type of federal facility that is less secure than the facility type where Luster will go).

    The proceedings took just over three hours. Schultz has an additional hearing in the future. He is disputing being held responsible for losses occurring after he left Rate Search in early 2007.

    Staff feels the trip was very worthwhile and a good

    April 26, 2009

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