Nik Patel
Nikesh Patel, 31, chief executive of Orlando-based First Farmers Financial is alleged to have sold loans, backed by taxpayers in 293 Illinois communities (including DeKalb) under the false pretense that the securities were guaranteed by the USDA, according to a criminal complaint filed by the FBI on Sept. 29. The FBI said fabricated loan guarantee forms and forged signatures were used in connection with the loans.
The Illinois communities on the hook were participants in the Illinois Metropolitan Investment Fund, also known as IMET, established in July, 1996 as a not-for-profit investment fund under the Illinois Municipal Code. The loss involved obscure investments known as repurchase agreements, repos for short, that IMET began buying in 2013 through Pennant Management.
Patel sold the fraudulent loans to Pennant. Under the repurchase arrangement, Pennant gave First Farmers (Patel) cash for loans with the promise First Farmers would repurchase the loans. The loans serve as collateral in the repos. The repurchase agreements were supposed to be safe, short-term investments backed by loans guaranteed by the U.S. government. But the loans are in default.
In a civil lawsuit filed in federal court in Chicago against Patel, Pennant said that Patel invented borrowers and that the loans are worthless. Patel used the loan proceeds to buy real estate, other investments and a luxury home in Florida.
Patel originated about 25 loans totaling more than $150 million. About $50.4 million of those loan funds came from the IMET Convenience Fund through Pennant. IMET notified participating communities, including DeKalb, of the fraud in a letter on October 9.
Court papers say Patel was an authorized lender in a loan program run by the U.S. Department of Agriculture. The program helps borrowers who promote economic development or conservation. In a response to inquiries, the USDA said the documents did not reference any loans that were subject to valid loan guarantees issued under USDA’s business and industry loan program.
Pennant Management was not identified in the criminal complaint. Pennant sued Patel, his wife and several of his companies to recoup $23 million from some of the fake loans, $50 million in damages and attorney fees. United States District Judge Amy St. Eve ruled that a receiver would assume control over Patel’s assets, including five Orlando hotels, houses in Orlando and Windermere, several luxury cars, jewelry and gold coins and bars in safe deposit boxes.
“Pursuing such claims could take a significant amount of time and expense to resolve and likely would result in IMET recovering less than the full principal and interest amounts owed on the loans,” said an IMET prepared statement published in the Chicago Tribune.
IMET has removed $50.4 million from the Convenience Fund and placed that amount in a trust. For members, that means a proportionate share of their investments are frozen as the fraud investigation continues and IMET seeks to recover losses.
When notified that IMET had withheld about $587,000 of Downers Grove’s money the village pulled its remaining $20 million out of the investment pool and put those funds in a separate bank account. IMET froze $436,145 of the City of DeKalb’s share until the matter is settled. The City wired $3,288,941.64 tied to the General Fund and the Motor Fuel Tax Fund out of IMET over to Castle Bank. The remaining dollars were transferred out of IMET to “Illinois Funds” which is a local government investment pool established in 1975 through the State Treasurer’s office.
As of November 7, 2014, the City had approximately $14,800,280.20 invested in IMET’s Convenience Fund.
From the Agenda for the Monday Nov, 24 Meeting of the DeKalb City Council:
In March of 2013, the City invested some of its short-term revenues with the Illinois Metropolitan Investment Fund (IMET), a not-for-profit investment fund established in 1996 under the Illinois Municipal Code. IMET was developed as a cooperative endeavor to assist Illinois municipalities with the investment of their short and intermediate-term dollars, and currently serves 293 municipalities and public entities. The fund offers two separate investment vehicles, the 1-3 Year Fund and the Convenience Fund, to meet the investment needs of public entities.
As of November 7, 2014, the City had approximately $14,800,280.20 invested in IMET’s Convenience Fund. The Convenience Fund’s portfolio is comprised of very conservative, traditionally safe investment instruments including FDIC insured CDs, collateralized CDs, liquid bank deposits collateralized by the FHLB Letter of Credit program, overnight repurchase agreements collateralized by Federally guaranteed loan pools, and liquid bank deposits collateralized at 110% with government securities. All securities pledged as collateral for IMET’s Convenience Fund are rated in one of the three highest rating categories by at least one nationally recognized statistical rating organization.
On September 29, 2014, IMET was notified of defaults on certain guaranteed loans totaling $50,442,143 caused by alleged fraud on the part of the CEO of First Farmers Financial. First Farmers Financial had received a loan through IMET, which loan is ostensibly backed by a guarantee from the United States Department of Agriculture. The fraudulent investment represented 2.8% of all assets in the IMET Convenience Fund (and therefore 2.8% of the City’s investment in IMET).
On October 9, 2014, IMET informed the City (and all other IMET participants) of the default and indicated that IMET’s agent and asset manager for the loans, Pennant Management, was in the process of making a demand on the USDA to collect on their guarantees of the loans. IMET indicated that they expected the USDA to act on the demand for them to repurchase the loans together with accrued interest within 30 days after the written demand, as required by USDA regulations, and expressed confidence that the funds would be recovered because the loans were guaranteed. In the meantime, however, IMET segregated the equivalent of $436,145 of the City’s pro rata share of this investment in a restricted account until the matter was settled.
On Wednesday October 29, 2014, the City received further communication from IMET indicating that the USDA had reviewed Pennant Management’s request to repurchase the guaranteed loans and had denied the request. The USDA stated they denied the request at this time because they indicated that IMET had not properly identified the loans. It remains possible that if IMET submits the appropriate documentation, the USDA will honor its guarantee.
On November 10, 2014, in order to protect the City’s assets, the City wired $3,288,941.64 out of IMET over to Castle Bank. Those dollars were tied to the General Fund and the Motor Fuel Tax Fund. Castle Bank pledges collateral for the City’s funds at 110%. This collateral is held with Northern Trust who has the Third Party Agreement with Castle Bank. There was sufficient collateral to be able to absorb these dollars at Castle Bank.
On November 13, 2014, the City wired the remaining dollars out of IMET to “Illinois Funds” which is a local government investment pool established in 1975 through the State Treasurer’s office. The remaining dollars, which were Tax Increment Financing (TIF) Funds, were transferred out of IMET due to a concern over a potential mass withdrawal of funds by other members. The Illinois Funds perfects collateral on investments in the aggregate and, in the case of certificates of deposit, perfected collateral is on amounts in excess of the FDIC limits.
On November 13, 2014, IMET sent another correspondence to the City updating us on their efforts to obtain what they hope will be a full recovery of the approximately $50 million in fraudulent investments. IMET has retained the law firm of Vedder Price P.C. to assist in the recovery of assets from all potentially responsible parties. According to Pennant Management, the asset manager for the fraudulent loans, Pennant purchased a total of approximately $179,000,000 in fraudulently issued loans from FFF on behalf of its clients. Pennant has already seized assets having a rough estimated value of approximately $155,490,427. IMET is in the process of seeking to intervene in the Pennant litigation against FFF in order to best protect the Convenience Fund Participants’ interests in these seized assets.
IMET goes on to state that their top priority remains delivering attractive returns to the municipalities and other public agencies across Illinois that participate as investors with IMET. Over the course of their 18-year history, IMET has provided continuing investment returns to its participants. This is the first time they have been the subject of criminal fraud, and they are taking all appropriate actions to guard against further such incidents.
As of November 13, 2014, the only funds the City has remaining in the Convenience Fund with IMET are those funds that have been segregated during this pending litigation ($456,145). As of November 17, 2014, IMET continues to be optimistic on a full recovery of all funds.
Since 2013, the City has earned over $61,000 in interest income with IMET. IMET has consistently served as a solid intermediate-term investment for its members. The enhanced rate for September 2014 provided members with an annualized rate of .40% and a 12-month return of .36%. At this point, the City is reserving all of its legal rights and remedies, pending further information on the resolution of IMET’s independent pursuit of derivative claims on the City’s behalf.
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