DENVER – 1 September – LAWFUEL – The Law News Network – Bill Leone, United States Attorney for the District of Colorado, Richard C. Powers, Special Agent in Charge of the Federal Bureau of Investigation’s Denver Office, Terry Stuart, Special Agent In Charge of the IRS-Criminal Investigation, Denver Field Office, and Patricia M. Black, Acting Inspector General for the FDIC, announced today that a federal jury in Denver has returned guilty verdicts on 63 felony counts against two Florida businessmen, DOUGLAS R. BAETZ, age 54, of Key West, Florida, and GLENN M GALLANT, age 48, of Ft. Lauderdale, Florida, involving fraud in connection with the 1998 failure of BestBank, located in Boulder, Colorado.
Today’s jury verdict found BAETZ and GALLANT guilty of bank fraud, false bank reports, wire fraud, and operating a continuing financial crimes enterprise. Those convictions carry possible penalties of up to 30 years imprisonment for bank and wire fraud, and 10 years to life for operating a continuing financial crimes enterprise.
“This case involved the exploitation of a national bank to perpetrate an extensive fraud,”said United States Attorney Bill Leone. “This type of scheme diminishes confidence in our national banking system. The defendants in this case personally made a tremendous amount of money at the expense of Americans who rely on our banking system.”
BestBank was declared insolvent by the Colorado State Banking Commission and the FDIC in July of 1998, making it one of the largest bank failures in the United States in the last 10
years. Depositors’ losses exceeded $200,000,000. The FDIC’s bank insurance fund covered all depositors’ losses except for $27,000,000 of deposits which exceeded the $100,000 per account insurance limit.
GLENN GALLANT was an owner and operator of CENTURY FINANCIAL, along with DOUGLAS R. BAETZ. GALLANT and BAETZ operated a portfolio of subprime credit cards issued by BestBank from 1994 through 1998.
When BestBank was closed in July of 1998, its largest asset was the portfolio of subprime credit card accounts with a reported value of more than $200,000,000. Subprime credit card borrowers are high risk borrowers with poor credit histories. The credit card accounts were funded by BestBank using money from depositors. BestBank attracted depositors by offering above market interest rates.
From 1994 through July 1998, the defendants engaged in a business operation that made more than 500,000 BestBank credit card loans to subprime borrowers. In July of 1998, the Colorado State Banking Commissioner and the FDIC determined that the value of the subprime credit card loans maintained as an asset on the books of BestBank was overstated because delinquent loans were fraudulently made to appear non-delinquent. BestBank’s liability to its depositors exceeded the value of its other assets, making it insolvent.
BestBank entered into agreements with CENTURY FINANCIAL and BAETZ and GALLANT to market BestBank credit cards to subprime borrowers. CENTURY FINANCIAL sold $498 travel club memberships, marketed first through Universal Tour Travel Club and later through All Around Travel Club (AATC).
In almost every instance, those who signed up for the travel club did not pay cash for their membership. Instead, BestBank and CENTURY FINANCIAL offered to finance a travel club membership for subprime borrowers using a newly issued BestBank VISA credit card. The credit limit for the subprime borrowers as provided by the bank was $600. BestBank also charged fees, which immediately brought the borrowers close to the credit limit. Less than half of those who signed up for the travel club received their membership materials.
The jury found that the defendants carried out a fraudulent scheme in several ways. Most people did not pay the mandatory $20 fee required before the account was funded. Over 50 percent of the subprime borrowers’ accounts were non-performing. BAETZ, GALLANT, and CENTURY FINANCIAL fraudulently concealed the subprime borrowers’ non-performance and delinquency rates by reporting non-performing accounts as performing. BAETZ and GALLANT paid $20 to some accounts so they would appear to be performing when in fact they were not.
Also named charged in the BestBank failure are EDWARD P. MATTAR, III, of Deerfield Beach, Florida, THOMAS ALAN BOYD, of Niwot, Colorado, and JACK O. GRACE, JR., of Hermosa Beach, California. The case against these three defendants is pending.
GALLANT and BAETZ each received more than $5,000,000 during the course of the fraudulent scheme. Each of them faces a possible mandatory minimum sentence of 10 years to life in federal prison and fines of up to twice the amount it gained from committing the offense.
The case was investigated by the Federal Bureau of Investigation (FBI), the Criminal Investigative Division of the Internal Revenue Service and the Federal Deposit Insurance Corporation (FDIC).
The case is being prosecuted by Assistant United States Attorneys John Haried and Michael Carey, along with Department of Justice Trial Attorney Dorothy McCuaig.