Lawsuits Reveal Alleged Ponzi Scheme

May 22--Long before Lawrence Paul "Larry" Stephens of Riverside was arrested April 30 on suspicion of running a yearslong Ponzi scheme, some of the people he's accused of defrauding had been fighting him in civil court to get back millions of dollars they gave him to invest.

The investment opportunities he brought them, promising lucrative returns with little or no risk, were shams, according to documents filed by prosecutors and in two Riverside County Superior Court lawsuits. Those documents detail how his accusers say he misled investors to keep the operation going for years.

One of the lawsuits, filed by a former Riverside police officer, said he and others invested more than $3 million in a contractor Stephens claimed was building a toll road in Orange County -- but no such project ever existed, transportation officials say.

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PREVIOUSLY

FRAUD CASE: $4.5 million investing scam uncovered, DA says (May 2, 2016)

FRAUD CASE: Suspect could owe $13.4 million, if convicted (May 3, 2016)

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Stephens avoided an investor who raised concerns, saying his brother had died -- but he didn't have a brother, a colleague told the investor.

He persuaded a Riverside County couple to invest $200,000 in a company's initial public offering -- but, contrary to what he told them, when it didn't go public, they never got their money back. Instead, an investigator found Stephens used their money to pay other investors.

And when civil judgments started coming in against Stephens in 2012, he filed for bankruptcy -- but the U.S. Bankruptcy Court found his filing was based on fraudulent claims.

Plaintiffs in both civil cases said they had known Stephens for years through his Chino Hills accounting business, Brylaw Accounting Firm, which is on probation unrelated to Stephens' criminal case.

Default judgments granted

Neither lawsuit went to trial, court records show. Stephens was not represented by an attorney and did not appear at court hearings. In both cases, judges granted default judgments in favor of the plaintiffs and ordered Stephens to pay their money back.

But years later, they have yet to receive their principal investments back, court records show. None who could be reached wanted to comment for this report.

After the Riverside County District Attorney's Office began investigating the investments as potentially criminal matters, the 52-year-old Stephens went from a lifestyle that afforded him a 2015 Porsche Panamera and a $1.3 million home in Riverside's affluent Overlook Parkway neighborhood to sitting behind bars facing a 17-year prison term and $13.4 million in fines if convicted as charged.

Stephens has pleaded not guilty to five felony charges each of grand theft and securities fraud. His bail has been set at $4.475 million -- the amount he is accused of stealing from six victims between 2008 and 2011.

His assets, including his home, his cars and his bank accounts, have been frozen.

San Diego attorney Kerry Steigerwalt is representing Stephens in the criminal case. Three messages seeking comment left with Steigerwalt's receptionists since Stephens' arrest have not been returned.

Representatives of Brylaw Accounting have twice declined to call back or comment about the charges against Stephens.

Since Stephens was charged, court records show that at least one more couple has accused him of defrauding them. Investigators are "reviewing records and additional evidence" to determine if there are more victims, District Attorney's Office spokesman John Hall said.

The district attorney's investigator who first looked into Stephens' actions soon began to suspect he was running a Ponzi scheme. Hall said one or two such scams a year are prosecuted in Riverside County.

The amount Stephens is accused of stealing is not out of the ordinary for these types of cases.

Chuck Gallagher, who went to federal prison in the 1990s for running a Ponzi scheme, said the basic formula involves a scammer promising "investors" a lucrative and rare opportunity that isn't actually legitimate.

Because there's nothing to generate real profits, the scammer has to keep bringing in new investors and using their money to make payments to previous investors, making them believe they are generating good returns on their principal -- until the scam collapses.

TOLL ROAD TO NOWHERE

Kelly Bangert -- a former Riverside police officer named as a victim in the criminal case against Stephens -- sued him in 2012 after investing $2.4 million into the Black Canyon Project. Co-plaintiff Craig Neil invested $500,000, and Bangert said he knew of at least four other people who invested smaller amounts.

In a declaration filed along with the lawsuit, Bangert said he and other investors were led to believe that a toll road was being built between I-15 and the 241 in Orange County. A "hundred millionaire" named "Chris Cooper" was said to be running the project and needed to show Caltrans that he had enough cash available to make payroll until Caltrans started paying him.

But there was no Black Canyon Project, and Chris Cooper was not a real person, Bangert said.

Sarah King, spokeswoman for Transportation Corridor Agencies, the authority that operates Orange County's toll roads, said she had never heard of such a project.

Eventually Bangert started questioning Stephens about the money and asking for his principal back.

One of the excuses Stephens offered was that "his brother was gravely ill and then had died," according to Bangert's declaration.

"I talked with someone from Stephens' office who informed me that Stephens does not even have a brother," Bangert wrote.

The judge in that case ordered Stephens to pay the plaintiffs just over $3 million, including almost $17,500 in attorney's fees.

FRAUDULENT BANKRUPTCY

Todd Hartog invested $1.5 million in the Black Canyon Project, Riverside County district attorney's investigator Paul Edwards wrote in an affidavit. Hartog received some monthly payments, but when they stopped, Stephens started making excuses.

"Stephens disappeared and then filed for bankruptcy," Edwards wrote.

That was in 2012. The United States Bankruptcy Court granted Stephens a discharge, meaning he was no longer legally required to pay certain debts.

A year later, however, the discharge was revoked after investigators found that he "made false oaths and accounts" when filing, according to the Bankruptcy Court's complaint for revocation.

A person filing for bankruptcy is required to disclose all of his or her assets, but the complaint says Stephens neglected to disclose his connections with two businesses: CBBJ Group and Infinite Partners. Infinite Partners is named as a defendant in Bangert's suit against Stephens as an "alter-ego," meaning it's a business name under which Stephens operated. Lawsuit documents say the business had an office in Orange.

The court also found Stephens failed to disclose transfers out of his bank accounts totaling $117,500 within two years of filing for bankruptcy.

ACCOUNTING FIRM TIES

Stephens' dealings were brought to Edwards' attention in January by Harina and Biren Shukla, who gave Stephens $200,000 in December 2011 to invest in a company he told them was about to go public but never did.

The Shuklas said Stephens promised them "there would be no risk involved" and they would get their money back if the IPO never happened.

When he didn't return the funds, the couple sued Stephens in 2012. They were granted a $213,107 judgment within a year, but they have received their money, court records show.

In declarations attached to the suit, the couple said they had known Stephens for about four years. He had done their taxes and handled their bookkeeping.

However, Stephens was not licensed in California as a certified public accountant.

In February 2015 the California Board of Accountancy found that Stephens was using somebody else's CPA license to operate Brylaw Accounting, records show. The company, licensed in 2006, was placed on probation in September.

At the Chino Hills Parkway address listed on the firm's website and Facebook page, and at another Fairfield Ranch Road address listed in some court documents, no storefronts could be found with a Brylaw Accounting sign.

Posts continue to go up regularly on Brylaw's Facebook page, mostly providing tips about taxes and personal finances. One, posted May 11, reads: "Your small business might be a target for insurance scams. Find out how to avoid them here," with a link to a July 2015 story on CNBC.com. Accompanying the post was a picture of a man swimming toward a hundred-dollar bill on a fishing hook, over the words "DON'T GET SCAMMED."

SIGNS OF A PONZI SCHEME

When Edwards began reviewing Stephens' bank accounts, he found "several checks written to several people and companies" starting the day after the Shuklas wired him the $200,000.

The recipients of those checks? Investors in the Black Canyon Project, the affidavit said.

"The payments suggested a Ponzi scheme," Edwards wrote in his report.

A Ponzi scheme will almost inevitably fail, said Gallagher, the former Ponzi perpetrator.

"It collapses on itself when it no longer can be sustained by other people's money," he said.

Hall, the district attorney's spokesman, said that point tends to come when the fraud reaches a few million dollars.

"A scheme starts falling in on itself because there are too many 'investors' who need to be paid while there are not enough new investors coming in to make the obligations," Hall said.

In many cases Gallagher has seen, scammers create their schemes with the intention of paying most of the money back. When he came up with his, at first he only intended to generate a small amount of money.

But the schemes snowballed. Before he knew it, it was too late.

"It's like getting on a merry-go-round," Gallagher said. "You can't get off until you're swung off."

Contact the writer: 951-368-9284, [email protected], @PE_alitadayon

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